The latest Global Intangible Finance Tracker (GIFT) report reveals many directors, analysts, investors and other stakeholders don’t adequately understand how brand, reputation and other intangibles impact the value of their business.
The GIFT report – produced by Brand Finance, CIMA (Chartered Institute of Management Accountants) and the IPA (Institute of Practitioners in Advertising) – is an annual study assessing the intangible assets of more than 57,000 companies in more than 160 jurisdictions around the world. Intangible assets include relationships, reputation, brand, people, know-how and other intellectual property and make up more of a company’s overall value than tangible assets such as plant, machinery, stock and property.
The challenge is that global accounting standards do not recognise the intangible assets unless there has been a transaction to support intangible assets in the balance sheet. In plain English this means unless there is an original cost – buying it – there can’t be a new higher or lower value for the asset. You can’t just create or build it. Despite this appearing to defy logic and common sense it exists for a good reason to prevent ‘creative’ accounting.
Therefore as David Haigh, CEO of Brand Finance plc explains:
“While Smirnoff appears in Diageo’s balance sheet, Baileys does not. The value of Cadbury’s brands was not apparent in its balance sheet and probably not reflected in the share price prior to Kraft’s unsolicited and ultimately successful contested takeover of that once great British company.”
Brand Finance believes:
“There is a growing demand that it is time for a new form of financial reporting, whereby boards should be required to disclose their opinion of the fair value of the underlying values of all key intangible assets under their control. We believe that this exercise should be conducted annually and include explanatory notes as to the nature of each intangible asset, the key assumptions made in arriving at the values disclosed and a commentary about the health and management of each material intangible assets. They could then be held properly accountable.”
It is a view shared by the Chartered Institute of Management Accounting’s chief executive Charles Tilley:
“With continued importance being placed on the value of intangible assets, and with intangible value representing an ever-growing part of an organisation’s enterprise value, accounting for the whole of the business helps organisations to take better decisions and to tell their full value creation story.”
Tony Manwaring, CIMA executive director of external affairs said:
“Before any decision can be taken, leaders need an understanding of all factors material to their business. CIMA believes therefore that we need to account for the business and not just the balance sheet, fully recognising the value of intangibles such as reputation, brand and relationships. After all, you wouldn’t want to be in a plane where the pilot was ignoring half the instruments.”
This year’s GIFT report does show that the situation is improving as the Institute of Practitioners in Advertising recommissioned a survey of equity analysts originally undertaken in 2001 to analyse if opinions over the impact of brands has changed and whether intangible assets should be included in annual reports. The survey was extended by CIMA to include the views of chief financial officers (CFOs). The table below clearly shows for equity analysts the importance of brands in financial decisions and reporting has increased significantly since 2001. CFOs broadly agreed and in many cases feel even more strongly about the importance of providing greater information about brands in financial reporting.
An article by Noel Tagoe, executive director of CIMA Education also highlights another recent report by CIMA and Oracle. He says the Digital Finance Imperative: Measure and Manage What Matters Next report showed that the top five value drivers were all intangible values:
“The report argues that accountants must begin to develop KPIs that measure and report on these intangible drivers to enable managers to manage them to generate and preserve value for their organisations. The six capitals of integrated reporting acknowledges this trend because three of them are intangibles. It is within this context that the analysis presented in the 2016 GIFT report is incredibly valuable. It shows the continuing importance of intangible assets as a percentage of market value and how existing accounting rules have proved inadequate to report effectively on intangible assets and thus bridge the gap between market value and book value (which represents undisclosed intangibles). The GIFT 2016 report provides the basis for a call to action for accountants and regulators of the accounting profession to get to grips with this important issue. Intangible value drivers and value are not going away. They reflect the economic and technology trends in which organisations operate. If accounting is to give value it should learn to measure and report them appropriately. This will enable accountants to fulfil their mandate to inform to transform.”
What does this mean for public relations and corporate communications professionals?
The GIFT report is important for PR and corporate communications professionals because it provides yet more evidence of the importance of intangible assets such as brand, reputation and relationships. It also draws the vital link between valuing intangible assets and the emergence of integrated reporting (IR) with its emphasis on six capitals, three of which are intangible.
So while the GIFT report is useful in promoting the importance of intangible assets it also to me indicates some of the challenges that public relations professionals face:
- Brand v. reputation – this is still a distinctly grey area and too much of the focus appears to be on ‘brand’ as opposed to reputation. There are now accounting and ISO standards that are starting to value brand, even if inadequately. However, there is still far less focus on reputation. Are we to believe that there is a value on Ben and Jerry’s (an acquired brand), but no value on the reputation of Unilever (the owner that acquired it). Unilever is a global standard bearer amongst large corporates for its pioneering work on all aspects of corporate social responsibility from its Dove ‘real beauty’ campaigns to its Bright Future sustainability initiative (originally Project Sunlight), yet its ‘reputation’ isn’t valued in the same way as its brands can be.
- Relationships – the definitions of ‘relationships’ under IFRS 3 (the European accounting standard for intangible assets) is extremely limited and focused solely on workforce, customers, distributors and suppliers without regard to the myriad of other vital stakeholders which can be equally or even more important the survival and future success of businesses.
- Measurement – the International Association for the Evaluation and Measurement of Communication (AMEC) has done valuable work in development global best practice for the measurement and evaluation of communication. However, its focus is primarily on communications activity and campaigns where its measurement frameworks are invaluable rather than on the broader issue of the measurement and evaluation of overall corporate reputation.
There is scope for the public relations profession globally to do more on increasing understanding of how PR adds real financial value to the overall business or organisation, not by delivering tactical campaigns, but by enhancing and protecting overall corporate reputation including the reputation of individual brands.
You can download the Global Intangible Finance Report (GIFT) 2016 here. You can also read my analysis of the report by the Quoted Companies Alliance and BDO that values corporate reputation as being worth £1.7 trillion to the UK economy.
If you want to know more about how to use professional public relations to manage, enhance and protect your corporate and brand reputation then please get in touch.