Is it enough to invest money in a brand to create value

Is it enough to invest money in a brand to create value?

Author: Dana Ababei, Executive director, CMF Consulting According to Brand Finance market report Romania 50 of 2017, the most valuable ten Romanian brands amount to about 2.6 billion euros. This top includes companies from various fields such as auto, retail, banks, IT or telecom. Therefore, is it enough to invest money in a brand to create value? It depends from which perspective you look at the answer. The word value has different meanings: promising and fulfilling an experience (from a marketing perspective), securing future gains (from a management perspective), or being a distinct component of a company’s intellectual property (from a legal perspective). Adina Even though the explanatory dictionary of the Romanian language very laconically defines the term brand as: BRAND2, brands, n. Trademark of a famous company. In fact, this word, which got imported and entered the current speech in our country means much more, as follows: an ensemble of tangible and intangible attributes, symbolized by a trademark (name, logo, etc.) which, when correctly used, creates influence and value. Thus, a very important factor in creating the value of a brand is to value it. It is not enough to own a brand in which you have invested time and money to have value. The brand needs to generate benefits to have value. Of course, it's a quantifiable value in money, not a symbolic value. In some industries such as IT, business consulting and financial services, the brand value may be higher than the value of all the other assets, but the brand is first losing the value if the customers trust is lost. The main sources of brand value creation are consumers’ loyalty to brand and consumer perceived quality, which facilitates higher sales prices and profitability. As a result, for a brand to create value, it is important that the investment is made to create value for the consumer, customer centricity being the winning approach. Any other approaches may incur opportunity costs. * * * About the author DANA ABABEI is the executive director of CMF CONSULTING S.A. valuation company that provide valuation services in Romania and abroad. Dana Ababei has over 20 years of experience in business, intangible assets, real estate and movable goods valuation, being certified as the valuation report reviewer. She is an authorized valuer, Recognized European Valuer and 2018-2019 Elected President of the National Association of Authorized Valuers in Romania  - ANEVAR.
News regarding the measurement of fair value for financial reporting according to IFRS
In the meeting held on March 2013 IASB discussed about measuring the fair value, and also about other bases of value measurement, namely measuring the value using cash flows. Fair value measurement - about the reporting unit IASB discussed about the reporting unit regarding  investments in subsidiaries, joint ventures and associated entities. IASB has received two letters in which the question is whether the reporting unit for such investments is considered to be an investment as a whole, or individual financial instruments that make up the investment. IASB also discussed the interaction with the unit reporting these investments and their fair value measurement. IASB decided provisionally that reporting unit for investments in subsidiaries, joint ventures and associates is investment as a whole. New members IASB agreed. IASB decided provisionally that the fair value measurement of financial instruments comprised of quoted investments should be equal with the offer price of the financial instrument (P) and quantity (Q) of securities held (i.e. P × Q). IASB noted that the prices quoted in an active market provides the most reliable evidence of fair value. Eight members of the IASB agreed. In the same way, the IASB has also decided provisionally that the fair value measurement of cash-generating units (CGUs) for impairment testing when these CGUs corresponds to a listed entity must be equal to the product of their price quoted (P ) and quantity (Q) of securities held (ie P × Q). Eight members of the IASB agreed. Although eight IASB members supported this decision for measuring fair value, and the IASB two members expressed their intention to present an alternative view in future exposure draft project which will include such proposals. Other bases of measurement value - cash flows The IASB tentatively agreed that the Conceptual Framework discussion paper includes an analysis of the factors that should be considered when building a measurement technique based on the value of cash flows. IASB suggested that these questions should be considered:
  1. Measuring value based on cash flows should reflect uncertainty about the amount and while achieving cash flow, or a single amount?
  2. Measurement obligations should reflect the possibility that an entity may not be able to pay its debts when they are due to its?
  3. Cash flows should be updated and, if so, at what rate or rates?
  4. Measurement value based on cash flows should reflect the amount that market participants would
require it to incur the risk posed by uncertain cash flows?
  1. Measurement value based on cash flows should reflect the effects of other factors, such as discounts for illiquidity or other discounts if they are identified?
  2. Estimates and assumptions underlying the estimate of cash flows should reflect the viewpoint of the reporting entity or prospects of market participants?
  3. All the above estimates should be updated at each reporting date or should some or all of them may not be current?
IASB Update (PDF) *Hyperlink to:
Educational material on fair value measurement
The IFRS Foundation Education Initiative  is developing, with the assistance of a valuation experts group, educational materials in order to support the IFRS 13 Fair Value Measurement. The material refers to the applying of the principles in IFRS 13 across a number of topics. During the development of IFRS 13 entities in emerging and transition economies expressed their concerns about applying fair value measurement principles in their jurisdictions. Those concerns were reiterated by some members and staff of the IASB at a meeting held with the Emerging Economies Group (EEG) in Beijing in July 2011. However, the IASB noted that entities in developed economies faced similar challenges during the global financial crisis that started in 2007. This is the context that triggered IASB’s decision to develop educational material on fair value measurement for an audience that includes not only entities in emerging and transition economies but also entities in developed economies. Because the fair value measurement project was a joint project with the FASB, the FASB staff will also be involved in the development of the educational materials. The first chapter of this educational material entitled Measuring the fair value of unquoted equity instruments according to IFRS 9 Financial Instruments was published by IFRS Foundation and IASB on 20 December 2012 and updated on 12 February 2013.   Measuring the fair value of unquoted equity instruments according to IFRS 9 Financial Instruments (PDF)
Valuation uncertainty
IVSC is currently analyzing how uncertainty can be identified in the evaluation, how it can be explained and presented in a way that is useful for the valuation reports users. The purpose is to assist professional valuers in providing appropriate information on factors that may have led to a significant uncertainty in estimated valuation. Uncertainty definition according to IVSC: The possibility that the estimated value may differ from the price that could be obtained in a transfer of the same asset or liability taking place at the same time under the same terms and within the same market environment. The effect of limiting conditions or restrictions that affect the investigations undertaken in preparing a valuation estimate are outside the definition of valuation uncertainty in this TIP, but should be separately disclosed under IVS 103 Reporting. Causes of Uncertainty:
  • Market Uncertainty
  • Model Uncertainty
  • Input Uncertainty
Model and input uncertainty arise from the valuation process, are closely related and may be measureable. Market uncertainty arises because of events external from the valuation process and is not normally measureable. Market Uncertainty Market uncertainty arises when a market is disrupted at the valuation date by current or very recent events such as sudden economic or political crises. Such events create valuation uncertainty, because the only inputs and metrics available for the valuation are likely to relate to the market before the event occurred and the impact of the event on prices will not be known until the market has stabilized. Market uncertainty should not be confused with market risk. Market risk is the risk that an asset may lose value over time due to changes in market conditions that occur after the valuation date and usually it is something that is considered by market participants when negotiating a transaction and will be reflected in market prices.                 Model Uncertainty Model uncertainty arises from characteristics of either the valuation model, or method, used. For certain asset types, more than one method may be customarily used to estimate value. However, those models may not always produce the same outcome and therefore the selection of the most appropriate method may of itself be a source of uncertainty. Model uncertainty can be measured by observing the effect on the valuation of using different models or methods.                 Input Uncertainty Input uncertainty arises where there are a number of equally reasonable or feasible inputs or assumptions that can be used from the degree of veracity that can be attached to the data inputs used in the valuation and their impact on the outcome Input uncertainty can be measured by the effect on the valuation of using reasonably possible alternative inputs. In some situations the effect of input uncertainty may be ameliorated by the use of statistical sampling techniques to analyze and weight the range of available data before it is applied in the valuation model. However, input uncertainty can also arise where reduced liquidity or reduced market activity result in a reduction in the relevant data available to provide empirical support for valuations. Materiality IVS 103 Reporting second paragraph requires the valuation report to set out a clear and accurate description of any material uncertainty that directly affects the valuation.  As indicated in the sixth paragraph most valuations contain an element of uncertainty but it is only to be disclosed when it is “material” and has a direct effect on the valuation. It is therefore necessary to consider whether uncertainty is material. Materiality should be considered from two aspects:
  • whether the impact on the valuation figure is significant and
  • whether it is of concern to a user of the valuation having regard to the purpose for which it is required
Measuring Uncertainty Model and input uncertainty may be measureable by observing the effect on the valuation of using either an alternative model or input. The value of an asset is dependent upon the amount, timing and security of future cash flows between the counter parties. Variations in these mainly numeric inputs over a fixed time horizon are more readily measureable than those that might be involved in the valuation of other types of tangible or intangible assets held for an indefinite period, such as the comparative quality or utility of the asset or its potential for an alternative use. Where the value of asset is uncertain because there is no market data available for an identical or similar instrument it is necessary to make an estimate of certain inputs into the valuation based on the assumptions that a market participant might make. In these circumstances it is more likely that two or more alternative figures that could be reasonably be chosen for a key input into the calculation. Where this occurs it is recommended that the reported valuation is based on the most likely of these outcomes, but a sensitivity analysis is provided showing the effect of the range possible outcomes on the reported value. Valuation Uncertainty – Exposure draft IVSC (PDF)