Financial Information and Brand Value E-Book

Yves-Alain Ach

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 219

Veröffentlichungsjahr: 2020

Beschreibung

The brand is the company s most important asset. In their financial statements, companies are faced with a lack of accounting recognition for the brands they have created, and value recognition for the brands they have acquired. This book studies the nature, characteristics and determinants of brand information published in companies annual and financial reports. It presents case studies on the methods of evaluating and developing brands, and analyzes annual reports published by listed companies, whose brands appear in international rankings. It reflects on the inadequacy of information and disclosed data to demonstrate the value of brands and the need to ensure that more reliable and relevant financial information is available to investors. Financial Information and Brand Value goes beyond the simple application of conceptual frameworks in order for the reader to master the practices related to brand valuation.

Leseprobe

Table of Contents

Cover

Title page

Copyright

Introduction

1 The Brand as a Source of Value Creation

1.1. The historical, legal and economic character of the concept of a brand

1.2. Brand value and brand equity

2 Brand Development

2.1. The brand, an intangible asset

2.2. The valuation of brands: presentation of the different standards and methods

3 Value Review and the Acquisition of the GUCCI Brand

3.1. The GUCCI brand

3.2. Analysis of the financial information disclosed by the Pinault-Printemps-Redoute Group during the transaction

3.3. Conclusion

4 Analysis of the Practices of Thirty-Seven International Companies

4.1. Dissemination of financial information on real assets

4.2. Empirical analysis

4.3. Determining a typology of information offer in relation to brands

5 Determinants of Brand Disclosure

5.1. The offer of information related to brands

5.2. Processing the data collected: measuring correlations

5.3. Presentation of results

5.4. Conclusion

Conclusion

Glossary

References

Index

End User License Agreement

List of Illustrations

Chapter 1

Figure 1.1.

Definition of brand equity (based on Aaker (1994))

Chapter 4

Figure 4.1.

Mandatory and voluntary information sequences (Pourtier 2004)

Figure 4.2.

Nature of information communicated in relation to brands

List of Tables

Chapter 3

Table 3.1.

Goodwill; consolidated balance sheets – assets (in millions of euros)...

Table 3.2.

Other intangible assets; consolidated balance sheets – assets (in mil...

Table 3.3.

Discount rates and growth rates applied to cash flows in 2003 and 200...

Chapter 4

Table 4.1.

Presentation of the companies owning the 37 brands in our sample

Table 4.2.

Descriptive and non-financial information: list of items

Table 4.3.

Determination of categories

Table 4.4.

Number and percentage of responses of our sample for the year 2011

Table 4.5.

Number and percentage of responses of our sample for the year 2012

Table 4.6.

Test results

Table 4.7.

Results of principal component analysis after factor reprocessing

Chapter 5

Table 5.1.

Codification of audit and accounting firms

Table 5.2.

International and domestic dimensions of companies

Table 5.3.

Coding by industry

Table 5.4.

Correlation matrix for the year 2011

Table 5.5.

Correlation matrix for the year 2012

Table 5.6.

Results of the multiple regression without constant for the year 2011

Table 5.7.

Multiple linear regression results for the year 2011

Table 5.8.

Summary of validated assumptions

Table 5.9.

Multiple regression result without constant for the year 2012

Table 5.10.

Multiple linear regression results for the year 2012

Glossary

Table G.1.

The 17 most powerful brands in the world (based on Interbrand 2019)

Guide

Cover

Table of Contents

Title page

Copyright

Introduction

Begin Reading

Conclusion

Glossary

References

Index

End User License Agreement

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Series EditorRégine Teulier

Financial Information and Brand Value

Reflections, Challenges and Limitations

Yves-Alain Ach

Sandra Rmadi-Saïd

First published 2020 in Great Britain and the United States by ISTE Ltd and John Wiley & Sons, Inc.

Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licenses issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned address:

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UK

www.iste.co.uk

John Wiley & Sons, Inc.

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USA

www.wiley.com

© ISTE Ltd 2020

The rights of Yves-Alain Ach and Sandra Rmadi-Saïd to be identified as the author of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.

Library of Congress Control Number: 2020943918

British Library Cataloguing-in-Publication Data

A CIP record for this book is available from the British Library

ISBN 978-1-78630-567-1

Introduction

For many years now, brands have become increasingly important in the lives of companies. Yet nothing is more difficult than defining what a brand is, as there are so many different aspects to the concept. The brand is a company’s most important asset. It enables it to build up a customer base, to develop customer loyalty and to promote the distribution of products, by means of a distinctive sign capable of reaching the consumer. Brands can be found everywhere and become an integral part of our living environment.

Brand valuation requires knowledge of the legal, commercial, marketing, accounting, financial and tax environment surrounding them. These elements cannot be taken into account individually, unless a partial and inaccurate estimate is made.

Perceived by investors as a source of value, the brand is, however, not always recognized as a company asset. Indeed, faced with the non-recognition of internally generated brands as an asset, from an accounting perspective, companies resort to the dissemination of additional information as an alternative to inform investors about the value of these intangible assets. This difference in the accounting recognition of brands, depending on whether they are acquired or internally generated, is not accurately reflected in the company’s assets and liabilities and visible to its stakeholders, particularly to investors.

As a result, the financial statements relating to brands provide little information on these items. With this in mind, companies are led to propose a global offer of standardized and voluntary information in their annual reports with regard to the valuation of the brands they own and operate.

A review of the literature and works on brands has shown the value of looking at the nature, characteristics and determinants of the information disclosed by companies regarding the brands they own and use.

The aim of this book is, on the one hand, to characterize the nature of the information communicated by companies in terms of estimating brand value and, on the other hand, to identify the determinants of this information according to companies’ characteristics.

This book is therefore divided into five chapters. Chapters 1 and 2 look at different perspectives of the brand and how to create brand value. We examine the growing role of the intangible in our economy, as well as the nature and determination of brand value and brand equity.

In Chapter 3, we review the acquisition of the GUCCI brand by the Pinault-Printemps-Redoute (PPR) Group (now Kering), focusing primarily on the financial information disclosed during this transaction and the valuation method used for the acquisition of Gucci. This case study provides an opportunity to discuss the disclosure of brand information and the valuation of the brand as part of the PPR Group’s strategic refocusing on luxury brands.

In Chapters 4 and 5, based on a sample of international brands identified from the Brand Finance and Interbrand databases, we explain the nature, characteristics and determinants of the information disclosed by companies in relation to the brands they own and operate.

Our study will highlight the inadequacy of financial communication and the need to take into account the financial reporting of brands in supplementary parts of annual reports. More specifically, we will discuss the need to provide investors with more reliable, relevant and detailed brand information. We will propose clear recommendations to companies based on the discussion of our results.

1The Brand as a Source of Value Creation

The purpose of this first chapter is to define the concept of a brand and to describe its fundamental features. This chapter also deals with the value companies’ use of brands. We define the brand according to an economic perspective and also describe its evolution through the centuries; we will also establish the link between the market and the brand. We will see whether the use of brands creates value and whether the mechanics developed by economic theory are sufficient to ensure brand use. Brands have a limited lifespan, and we will assess whether the means of preserving brands are sufficient to ensure the maintenance of brand ownership.

1.1. The historical, legal and economic character of the concept of a brand

Before studying the contemporary nature of the concept of a brand, it is useful to consider the origin of brands. The brand is a perennial tool for trade. Whatever the reasons for the use of a brand, it has always been used to indicate an origin and a source. In the Middle Ages, craftsmen “marked” or “branded” their products in order to identify their production. It is therefore a simple transition from “branding” to “brand” (or, in the French, “marquage” or “marking” to “marque”), and thus legislators were able to take into account the property associated with brands.

The first laws that clarified brand ownership appeared in the 18th Century. Thus, these laws highlighted the rights of individuals and companies in terms of industrial property. The first nation to understand this need and recognize this right was the United States, enacting a law in 1790. It was quickly followed by France, which followed suit on January 7, 1791, enacting a law signed by King Louis XVI. The use of a brand attached to the product by entrepreneurs was clear. Entrepreneurs, for their part, very quickly understood that the brand could give them an advantage, which today would be described as “competitive”.

Brand use indirectly accompanied industrial development, as entrepreneurs indirectly felt the need to develop by being recognized by their brand. This evolution leads us to understand that, contemporarily, the brand allows companies to develop by creating value.

Farjaudon (2007) distinguishes two categories of brand value, weak brands and strong brands. Awareness of brand value makes it possible to dissociate the category the brand belongs to from the brand itself. The strong/weak association is defined in relation to the market shares that can be conquered by the brand. The strategy implemented by the manager in charge of brand development will depend on this categorization. Thus, it has been shown that when the brand is strong, the consumer becomes more important than the distributor in terms of the attention paid by the managers. The attention is then directed towards marketing, but not only that. Indeed, in the case of strong brands, which are recorded as assets on balance sheets, the shareholder becomes an essential player.

In this book, we will focus on brands accounted for by all types of companies. Brands are not just a name on the product; the nature of strength is a central point in determining their value to both the consumer and the shareholder. The measurement of brand awareness, the mental evocations associated with it, the perceived quality and the ability to build loyalty are the four most commonly accepted criteria for defining brand strength (Aaker 1994). This approach is based on an understanding of consumer behavior and suggests that creating a strong brand requires creating a strong emotional bond with the consumer, building consumer loyalty and promoting the distribution of products through a distinctive sign capable of winning them over. However, when certain brands become too strong, they become synonymous with the goods adjacent to them. Thus, for example, “Google” for search engines, “Caddie” for shopping carts and “Kleenex” for paper tissues. In short, whether they are strong or weak, it is necessary to understand how brands appear and how they evolve.

We will follow this evolution in this first chapter, which aims to define the different foundations of the “brand” concept. We emphasize that the brand is a complex concept whose materiality is composite and that, once created, it acquires an economic role. However, it is also not easy to create, it requires imagination, and this gestation leads to the acquisition of a right that must be legally protected. On the basis of these observations, we will examine the fundamental characteristics of the brand and the possible links between the historical, economic and legal character that the brand encompasses.

1.1.1. The brand’s historical character

The brand and branding, depending on the period, did not serve the same purpose. We have already pointed out that as far back as Antiquity, potters used to mark their pottery in order to allow a better identification of the pots coming out of their workshop. The basis of this marking was not intended for commercial purposes, but was used to prevent theft of the pots made and stored around the factory. This phenomenon has been perpetuated through the ages. The branding of animals is one of its extensions. In the Middle Ages, brands found another function. Corporations, in turn, used them. There was, on the one hand, the artisan’s individual brand and, on the other hand, the collective brand of the corporation. One was used to individualize the work, the other to delimit the corporation’s territory. The corporation could thus sanction the craftsman who jeopardized their reputation. In the end, the craftsman’s mark was guaranteed by his corporation. The brand had no defined use; it could “reach customers or identify products to protect against theft” (Pollaud-Dulian 2010, p. 721), provided that corporate brands guaranteed a certain quality and the fact that a brand belonging to a corporation had to ensure its own protection and respectability. In addition to this principle, royal decrees already punished counterfeiting.

The revolution of 1789 in France challenged the practices established by corporations, trades and foremen and completely abolished them. Article 44 of the texts enacted on March 2 and 17, 1791 (the Le Chapelier Act) established the principle of freedom, “any person shall be free to engage in such trade or to exercise such profession, art or trade as he shall see fit, but he shall first be required to obtain a patent.” Thus, the first principle of “annuity” was established. The consequence of this principle was the end of the distinctive signs attached to corporations and all individual brands of craftsmen. The acts of competition that followed this period of anarchy caused abuses that led craftsmen and industrialists to demand the implementation of laws that could regulate this situation. The search for equality among citizens led the legislator of the time to enact a law putting an end to acts of unfair competition; the law of 22 Germinal year XI (April 12, 1803), in article 16, went too far by providing for a “hellish” penalty for offenders. Burst and Chavanne (1993, p. 455) compare this position to situations found in sociology and consider that “[…] it is a law of judicial sociology, where the law provides for penalties that are manifestly too severe and disproportionate to the gravity of the offence prosecuted, judges do not apply it in practice.” The replacement of an organized and hierarchical economic system by a system based on freedoms and equality was the real detonator of the use of brands as a commercial instrument. The 18th Century saw the birth of the brand as we know it today.

The Industrial Revolution facilitated a new development for brands. It should be remembered that the term Industrial Revolution refers to three major changes in economic life. These three major changes were highlighted by John Stuart Mill (1965) (originally published in 1848), Karl Marx (1904) (originally published 1867) and Arnold Toynbee (1884). These concern the agricultural revolution, the demographic revolution and, finally, the manufacturing revolution. The latter evokes, in particular, the creation of the steam engine, textile machines and blast furnaces. This period of change led to a fragmentation of tasks, an increase in working time, in the pace of work and in productivity gains. Lévy-Leboyer (1968), in an article on economic growth in the 19th Century, concludes that “the French economy was dominated by the growth of industry, which eventually led to the development of all activities […], industry accounted for a quarter of total output from 1810 to 1840, a third in the intermediate period between 1850 and 1880, and half between 1890 and 1910” (Lévy-Leboyer 1968, p. 800). As the Industrial Revolution allowed for higher production than before, industrialists were faced with the problem of the flow of manufactured goods. They had to think of ways to make it easier for them to sell consumer goods. For them, brands were one of these ways.

This intellectual reflection, in fact, had an ideological foundation that was described by one of the masters of the doctrine of free trade, in his treatise on political economy, Jean-Baptiste Say. In the first book of his treatise on economics, he explains that producers must find what in terms of trade are called “outcomes” (Say 1972, p. 87) (originally published in 1803), means of exchanging the products they have created for those they need. Jean-Baptiste Say puts producers and consumers at the center of his economic description, while considering that the consumer is, depending on the situation, the beneficiary of modernization or the one who loses, if he is subject to a monopoly or to taxes that would raise the price of the product. Indeed, in Chapter X of his treatise on political economy, concerning the different ways in which taxes are based and on which classes of taxpayers they are levied, Jean-Baptiste Say notes that “the government requires a commodity to bear a particular mark, for which it makes a charge, as in the case of the assay-mark of silver, and stamp on newspapers” (Say 1972, p. 244). This is where the essential principles of liberal theory come into play. In the operation of the overall system, the entrepreneur is at the center of the system, since, on the one hand, they receive impetus from the market and, on the other hand, they choose the optimal combination by putting the various factors together. This simply means that the entrepreneur, by distributing profits, pensions and salaries, the amount of which is equal to what they have produced, generates purchasing power.

Liberal capitalism has allowed the remarkable rise of Western societies; in the clarity of its proof, the “liberal” model has long masked imperfections in the real functioning of economic systems, such as the domination of monopolistic firms. But the pressure of facts and social necessities has forged the appearance of a mixed system, in which the action of the State has become increasingly significant. Concretely, all products are not equal; they can be differentiated. The product differentiation strategy aims to introduce a distinction between the products manufactured and sold by the firm and the products of its competitors. Branding helps to highlight this differentiation and the relative advantages, perceived as unique by consumers. The brand makes it possible to distinguish products; this distinction is important in the specification of a product and makes it possible to determine its added value. In this vein, Kapferer and Thoenig (1989) point out that the brand makes it possible to globalize all the information related to the differences between products. The brand indicates the differences between suppliers. Thus, the consumer buys the product according to the specific characteristics conveyed by the brand and pays the corresponding price, which allows the company offering the product to make an additional profit. The usefulness of the product for the consumer is thus defined. Brand value depends on the consumer’s interest in the elements of difference and specificities conveyed by the brand that lead to the purchasing act.

1.1.2. The brand’s legal character

The first text that applied to the protection of brands was so harsh that the law was hardly applied at all. Indeed, this text provided for heavy penalties against counterfeiters (Title IV of the law of 22 Germinal year XI (April 12, 1803)). The following text (the law of July 28, 1824) followed the same path and proposed criminal sanctions for any use and affixing of another person’s trade name to products. The repeal of this text was obviously proposed. The law of June 23, 1857 was the first modern text, or at least the text which is at the origin of modern brand law. It laid the foundations for the major principles attached to brands and defined the property rights at the first act of using a brand.

During the 19th Century, the law followed the logical mechanism developed by economic theory by enacting a law intended to ensure the protection of the trade name when it was affixed to products. But this was not enough, since the protection of a name could not be assimilated to the protection of a brand. This was all the more true since economic necessities and trade exchanges prompted the enactment of a brand law to supplement the trade name law.

The idea was, as Burst and Chavanne (1993, p. 456) pointed out, to ensure that “brand ownership is acquired by first use”, although analysis of this principle revealed that it was particularly unfair.

Legislators also reconsidered their position on this subject and, during the 20th Century and the development of advertising, felt the need to enact a new law. The law of December 31, 1964 provides that the rights attached to a brand are acquired exclusively by registration in the context of a brand application and no longer by use, and requires the administration to examine the application before filing. This law also introduces a possibility of revocation of the rights to a brand linked to failure to use it for five years. Following the drafting of this law, four other laws and two implementing decrees were enacted. It is understandable that the legislative arsenal became complex to ensure brand protection. The pace at which the laws were enacted was thus accelerated. Interest in brand protection grew and became a real economic issue that needed to be legally regulated.

Returning to the modalities of filing and for more details, Law No. 64-1360 of December 31, 1964 established the principle that the filing date was the starting point for brand ownership by an individual or a company, and also made it possible to solve the problem of bottlenecks due to the large number of filings. The resulting property deed thus became verifiable, indisputable and perishable. A special right was introduced by law, the principle of brand revocation, which is still valid today and which requires the use of the brand in order to retain ownership. Thus, under the terms of Article L. 711-1 of the French Intellectual Property Code, “a brand or service mark is a sign capable of being represented graphically to distinguish the goods or services of a natural or legal person.” It is thus part, alongside the trade name, sign or appellations of origin1, of the distinctive signs that make it possible to attract and retain customers.

The constant changes in the law lead us to assess an unavoidable evolution of brand law from national law to European law and even to international law, insofar as the Singapore Treaty was adopted by the WIPO (World Intellectual Property Office). This text made it possible to globalize brand law, in particular, for the monitoring of the registration and renewal procedures of property titles, in an electronic format, bearing in mind that the international registration of brands has been governed since 1891 by the Madrid Agreement and since 1989 by the Madrid Protocol and allows for the centralized registration of formalities for the acquisition of a property title in several countries.

The evolution of trade and the accompanying legislation was taken into account by the European Community, which issued a Community directive on December 21, 1988 (No. 89/104/EEC), which was, in turn, translated into French national law by the law of January 4, 1991 (No. 91-07), which finally came into force 11 months later, on December 28, 1991.

It was about time, as this was the deadline set by the European directive. However, in order to harmonize national legislation and in view of the difficulties in transposing the directive into national law, the Council decided, on December 19, 1991, to postpone the date of application until December 31, 1992. This law made it possible to clarify and distinguish the concepts of “brand degeneration” and “revocation of the brand for lack of exploitation” and laid down the procedural rules for acquiring or maintaining the right of use.