Brand Accounting and IAS 38

Keywords: Brand Recognition and Accounting Standards, Brand Treatment under IAS, Internally Developed vs. Acquired Brands, Accounting Assignment Writing

Introduction – Brand Accounting

Sinclair and Keller (2014) assert that brands are recognised as intangible assets which are either internally generated or acquired. In order to classify as an asset, brand must meet three requirements that are, 1) it must have future benefits associated, 2) it must be in control of the organisation to produce benefits and, 3) benefits received must be associated with past transaction.

Moreover, international accounting standards (IAS 38) enclosed information on how to deal with intangible assets such as patents, goodwill, and brands.

Antal, Hutter and Stark (2015) point out that there is the difference between internally generated brand and acquired brands. Both IFRS 3 as well as IAS 38 recognised the acquired brand as an asset but prohibited the internally generated brand recognition on the balance sheet.

Therefore, the difference in the treatment of recognizing ‘internally generated brand’ and ‘acquired brand’ has raised question whether internally generated brand should be included on balance sheet and whether organizations current treatment for internally generated brands is consistent with the IASB’s Conceptual Framework.

Recognition and Measurement of Brands

According to Cotter (2012), an intangible asset is one without any physical substance and lack identifiable non-monetary value. In order to recognise an item as an intangible asset, it needs to meet the two criteria’s which are; 1) definition of the intangible asset and; 2) recognition criteria set for the intangible assets recognition. Therefore, an asset is identifiable if, 1) it can be separable from the entity and sold or exchanged or rented and 2) raise the contractual or legal rights regardless of these right are separable or not.

Furthermore, Abeysekera (2012) added that after identification of intangible asset, it should be recognised only if it has expected a future economic benefit, as well as the cost of the asset, can be measured reliably. Besides, an intangible asset is measured at a cost which includes the purchase price and any directly attributed cost incurred to getting an asset ready for use. At last, not least, the useful life of intangible asset is the period over which it is expected to deliver economic benefits.

IAS 38 approach to internally generated brands

According to Gelb and Gregory (2011), IAS 38 approach for the internally generated brand is that ‘brand should be included in balance sheet’ and ‘research and development (R&D) expenses’ should be treated as an expense income statement. Nevertheless, firstly, it is arguable that brands are expected to provide expected future benefits because people are expected to buy product compare to actual worth for the customers. Secondly, company has control of the asset as well as the patent of the brand-name. Therefore, the two elements of brand recognition are met which are expected future economic benefit and control of assets.

Moreover, Jones and Morgan (2014) argued that it is separable from patents and the third criteria of future benefit based on the past event are not met because the internally generated brand does not involve any cash outlay or can reliably predict future benefit or purchase price. For example, examination of the annual financial statement of TESCO, it recognized the intangible resulted because of a business combination only but it does not include any internally generated brands.

Argument in favor of IAS 38 – Brand Accounting Treatment

Gregory and Moore (2013) commented that IAS 38 approach to the internally generated brand is consistent with brand recognition as it same as if the company has brought the brand, it would have incurred cash outflows. This would have attached the value to the brand and there is the cost of the asset can be measured reliably. Therefore, asset presented on the balance of the company based on cash outlay above the ‘fair market value (FMV)’ will be attributed to the internal value of the brand. Therefore, the past transaction is important criteria to certainty measure the value of the assets.

Sacui and Sala (2012) discuss the aspect of quality of earning in the case of recognition of the internally generated brands. The fundamental problem is that internally generated brand could compromise the reliability of the balance sheet. The three problems associated with intangible asset estimation are expected future economic benefits; the cost of the asset can be measured reliably as well as the purchase price.

Nevertheless, Vetoshkina and Tukhvatullin (2014) elaborated that in case of internally generated brand it would involve subjective judgment and estimation of the management which could jeopardize the balance sheet reliability. Therefore, management could manipulate the earning based on the subjective assessment made by the management. Moreover, lack of past event in terms of value associated with the brand will give management opportunity to make their best estimate. The lack of past event and unreliable estimation could lead to the tendency of overvaluing internally generated brands. This gives the opportunity to write-off the large value of the good to reduce the earning.

Walton, Haller and Raffournier (2003) added that the two-folded problem associated recognition of the internally generated brand is a lack of reliable estimations and valuation of the brand which could jeopardize the balance sheet. Likewise, the management discretion over the valuation of the internally generated brand would result in large impairments which reduce the earning of the company.

Gelb and Gregory (2011) explained that companies have large intangibles, but these assets are attached to past transaction which has helped the company to determine the purchase price in a reliable way. The company has not capitalised the internally generated brand but business combinations are capitalised on the balance. The research and development have been included in the expenses because of lack of future expected benefit and purchase price uncertainty.

According to Clifton (2010), the IAS 38 approach to capitalise the assets is more consistent as history companies’ with weak performance companies have capitalised their assets. The reason behind this overvalued capitalization is a lack of reliable estimation and past transaction which has led to biased and overvalued judgments. Moreover, the value of the brand is not fixed and in the case of heavy advertising campaign value of brand may change. The period of time value may decline because of new product coming to market. Therefore, it is difficult to make reliable estimation which leads to unreliable estimation.

In addition, the internally generated brand will result in unreliable intangible assets estimation on the balance sheet. It is difficult to agree on the actual value of the intangible without the real transaction (Grube, 2010). Therefore, IAS 38 is consistent with capitalization of the internally generated brand.

Problems of IAS 38 — Brand Accounting Treatment

Basu and Saha (2013) point out that brand value of Coca-Cola is estimated at $81.6 but it does not enclose good news for the investors and senior management. Because of lack of recognition by IAS 38, this value does not appear on the balance of the company. The IAS 38 prohibits the companies to recognise the brand on the balance sheet which is internally generated.  Thus, the lack of recognition has resulted in undervaluation of the many companies as brand development cost and time is not recognised.

Monks and Lajoux (2011) Highlight that research and development cost and marketing expenses result in immediate cash outflow for the companies and benefits are achieved over the long period. But, research and development cost is offset in current period and it reduces the profit of the company. The lack of capitalization does not encourage the innovation in companies because of dilemma to money spent on the research and development and the amount of profitability reduced.

Beke (2013) point out that IAS 38 recognizes the brand after cash outflow rather the amount spends to develop the brand has raised concerned among the business for their spending on research and development. IAS 38 have adopted extreme approach due to the difference of internally generated brand and acquired brands. There are serious concerns for companies because companies have a long history of success and their brand success is spanned over a long period of time.

For example, Toyota has high brand value and company invest large of money on research and development. Nevertheless, the company does not have any brand value listed as intangible assets on the balance sheet. The company can predict the future economic benefits from the brand as well as control over the resources to generate the sales. But the lack of past transaction in relation to brand value has resulted in zero value of the brand.


The IAS 38 approach to internally generated brand and acquired varied considerably. The brands which have past transaction attached in terms of cash outlay can be put on the balance sheet. The internally generated brands are not allowed to be capitalised and expenses are written off as expenses. The problems associated with the classification of them as asset involve three perspectives which are a future economic benefit, control and past transaction. Therefore, lack of past transaction does not list them as assets on the balance sheet. The problems such as reliable measure and purchase price as well as any directly attributed cost estimation represent significant problems for brand recognition of internally developed brands.

The advantage of IAS 38 is that it ensures the integrity of balance through eliminating the items which are subjective in estimation. On the negative side, big brand fails to realize the true value of the brand.

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