Apple and AT&T jostle for top spot as rankings gulf prompts call for new valuation accounting 27 Jun 17
A new report has revealed that, while Apple ranks as the leading company in terms of intangible value - including brands and trademarks - it drops out of the top 100 entirely when only disclosed intangible value is assessed, with AT&T taking the number one spot. This disparity has led to calls for a “reporting revolution”, in which companies would be required to disclose their opinion of the fair value of key intangible assets. Should this become a reality, it could have a significant impact on trademark practice.
Brand Finance’s Global Intangible Finance Tracker (GIFT) analyses intangible value at over 57,000 companies. In terms of key findings, it states that, globally, intangible value continues to rise – hitting $47.6 trillion in 2016 (up from $19.8 trillion in 2001). With respect sectors, the auto manufacturing, telecommunications, and distribution & wholesale industries lead the way on intangible value reporting, boasting the highest proportion of disclosed intangibles (including goodwill) to total intangibles (at 56.4%, 46.9%, and 44.8% respectively). However, as current financial reporting regulations mean that intangible assets are only disclosed during M&A activity, the new report states that $35 trillion worth of intangible value was left off balance sheets globally in 2016. Much of the study, then, focuses on the contrast between disclosed and undisclosed intangibles, with the charge that accounting standard IFRS 3 has failed to “adequately report the current real value of both internally generated and acquired intangibles”, leading to confusion due to some intangible assets appearing in balance sheets while most do not.
David Haigh, CEO of Brand Finance, explains that the phenomenon of ‘undisclosed intangibles’ has arisen because “accounting standards do not recognise intangible assets unless there has been a transaction to support intangible asset values in the balance sheet”. He adds that the result is many valuable intangible assets never appear on balance sheets (by way of example, he points out that , while Smirnoff appears in Diageo’s balance sheet, Baileys does not), resulting in a “lopsided” view of a company’s value. David Tweedie, chairman of the International Valuation Standards Council, concurs, arguing: “If purchased brands can be put on the balance sheet, there is no logic in banning internally generated brands being shown as assets.”
Analysis of the top ten companies by disclosed and undisclosed income clearly reveals the differences that can occur when the accounting approach is different. The top 10 companies by intangible value are as follows:
- Apple: $455bn
- Microsoft: $442bn
- Amazon.Com: $410bn
- Alphabet: $378bn
- AT&T: $347bn
- Facebook: $344bn
- Anheuser-Busch InBev: $333bn
- Verizon Communications: $300bn
- Johnson & Johnson: $294bn
- General Electric Co: $272bn
The report notes that the majority of these companies’ intangible value is related to technological patents, customer relationships and brands, and hence are not reported in financial statements (unless an acquisition takes place). The top ten of companies by disclosed intangible value, then, makes for very different reading. Just three companies (Anheuser-Busch InBev, Verizon and AT&T) appear in both top tens. Apple, Amazon, Alphabet (owner of Google), and Facebook – all in the top ten of the world’s most intangible companies – do not make the top 100 by disclosed intangible value. The top ten by disclosed intangible value are:
- AT&T: $222bn
- Anheuser-Busch Inbev: $181bn
- Verizon Communications: $123bn
- Berkshire Hathaway: $114bn
- Comcast Corp: $113bn
- Charter Communications: $111bn
- Allergan: $109bn
- Pfizer: $107bn
- Kraft Heinz: $103bn
- Softbank Group: $97bn
The GIFT report will likely reignite the tension between Brand Finance and Markables, which offers a database of published valuations from acquisitions. We recently reported on a white paper from Markables which hit out at the rankings tables produced by valuation companies, and the company has long argued that that ‘purchase accounting’ provides a more robust valuation figure, with the transaction figure reflecting a managerial willingness to pay and noting that purchase accounting has to fit into the 100% cap of the purchase price. However, Haigh contends that it becomes “unwise” to rely on comparable market transactions to value brands and other intangibles for all purposes, as “IFRS 3 asset valuations tend to be very conservative”. He argues: “Purchase price allocations are just that... allocations. They are not actual transaction values. They are not stand alone arm’s length valuations. Mis-describing them as transaction values creates the risk that conservative allocations of value to specific intangibles will indicate lower values than the subject assets would command in standalone arm’s length transactions for the assets alone, separate from an enterprise valuation.”
Reflecting on the ‘missing’ value, Haigh is calling for a new form of financial reporting, whereby boards would be required to disclose their opinion of the fair value of the underlying values of all key intangible assets under their control. He adds: “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.”
Whether this transpires remains to be seen, and these (often emotive) debates will continue in accounting circles. But they are worth trademark counsel observing. First, however they are arrived at, valuation figures can have a positive benefit for the legal team charged with protecting brands (speaking at a World Trademark Review event in 2015, Patrick Flaherty of Verizon Communications – which appears in both of the above tables – noted: “While it doesn’t impact our transactional work, we certainly keep track of third-party valuations and awards for internal reporting purposes”). More crucially, should the valuation of intangibles be formally required it may mean that more and more board level executives are exposed to the trademark message and are able to truly understand the important work their legal colleagues and partners undertake. In short, a shift in the accounting world could have tangible, practical payback for legal brand professionals.
Strategies for communicating the trademark message to the wider business is the focus of a session at this year’s Managing Trademark Assets, held in Chicago on October 17. For more information, visit the event website here.
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