This entails the analysis of the price tag of a company’s brand. This is usually measured by the financial benefits derived from the brand. The brand value is mostly related to the sales made and the profit generated. Accurate valuing of a brand name is very fundamental in making various strategic decisions such as mergers, brand licensing and decisions related to brand management. (Bainbridge and Paul 1986, P. 64)Auditing of the brand carrying value is also very useful especially when an organisation is being assessed for lending by banks and other financial institutions.
It also reveals the loss or damage worth a brand and also in making licensing agreement decisions. It also justifies the value for partial disposal of assets and in mergers and acquisitions. There are various methods of ascertaining the brand value. These include Cost approach; Market based approach and financial approach. Cost ApproachIn this approach the auditor will assess the cost of replicating the brand in the market. The auditor will be interested in ascertaining the amount of money that can be used to replace a brand in the market.
This will include analysing all advertising and promotion costs. The auditor will also be interested with costs related with product development both in monetary terms and in time basis. However when using this method, the auditor will face the challenge of quantifying historical costs that have accrued over the years. (Kirkos and Spathis 2007, P. 189)Market based approachIn this method, the auditor will be required to establish the profits that would have been made if the product was not branded at all. The auditor will also calculate the additional expenditure required to build the brand.
In a case scenario it has been noted that a branded product may sell few products but the value of the brand permits it to sell at a higher price. (Bainbridge and Paul 1986, P. 65)The auditor using this method will be required to gather information on prices and sales of branded and generic products and their respective branding costs. The auditor will at times be required to use a prototype product without brand, calculate its cost-benefit analysis and compare the same with brand name in question. Financial approachThis is one of the reliable methods as recommended by Generally Accepted accounting Principles (GAAPS). In this method, the auditor is required to do a lot of financial analysis on both existing and future costs and cash flows.
The auditor will use discounted value methods to predict the future out flow of a brand. The following procedure is used: (Kirkos and Spathis 2007, P. 190)The overall estimation of returns from intangibles. This is done by estimating the various costs in the brand sales, marketing costs, product overheads and deducting the same from the brand earnings. Estimation of the proportion which is attributable to the brand value. The auditor will come up with brand contribution index which is approximated from various customer mind set parameters.
These include brand image, awareness and brand recognition. The auditor will finally come up with a discounting rate which will be used to calculate the expected future flows attributable to the brand.