ACCOUNTING FOR BRANDS IN IAS 38 OF IASC

(INTANGIBLE ASSETS) COMPARED WITH FRENCH AND

GERMAN PRACTICES

AN ILLUSTRATION OF THE DIFFICULTY OF

INTERNATIONAL HARMONIZATION

Hervé Stolowy Axel Haller

HEC School of Management (Groupe HEC) Johannes Kepler University of Linz

Department of Accounting and Management Control Chair of Accounting and Auditing (Institut für
1, rue de la Libération Revisions-, Treuhand- und Rechnungswesen)
78351 - Jouy en Josas Cedex Altenberger Strasse 69
France A-4040 Linz - Austria

Tel: +33 1 39 67 94 42 Tel: +43 732 2468 9488

Fax : +33 1 39 67 70 86 Fax : +43 732 2468 9495
E-mail: stolowy@hec.fr E-mail: axel.haller@urwip.uni-linz.ac.at

Volker Klockhaus

University of Cologne
Chair of Accounting and Auditing
(Treuhandseminar)
50923 Cologne
Germany

Tel: +49 221 470 2725

Fax : +49 221 470 5165
E-mail: volker.klockhaus@uni-koeln.de

For Presentation at the Conference on

EMERGING ISSUES IN INTERNATIONAL ACCOUNTING

Center for International Center for International

Accounting Education Education & Research
& Research in Accounting
Niagara University University of Illinois at
Urbana-Champaign

August 5-7, 1999

Second draft – March 4, 1999

May not be quoted or used without permission. Comments welcome. Please contact Hervé Stolowy
(corresponding author).
 ABSTRACT

It is often stressed that the process of IASC standard setting and its output are very much influenced by the
Anglo-American accounting approach. This is considered to be one of the major reasons for the obvious
reluctance of countries with other accounting approaches to adopt the international accounting standards. The
importance given to the two accounting characteristics of “reliability” and “relevance” and their mutual
relationship is one of the dominant reasons for the differences between the Continental-European and the
Anglo-American accounting philosophy. Thus “reliability” dominates “relevance” in most of the Continental
European countries whereas in the Anglo-American accounting approach “relevance” is regarded in some
contexts as more important. The IASC has not decided clearly which of the two characteristics it regards as the
more important, but a tendency to a shift towards relevance can be perceived.

An area where this competing relationship between relevance and reliability becomes highly obvious is in
accounting for intangible assets. This domain is made even more interesting by changes in the financial and
economic environment which have caused intangibles, and among them brands, to become increasingly
important elements of corporate wealth and success. In this context, brand accounting has been a matter of
debate and controversy in many countries, such as Australia and the United Kingdom for instance. The
accounting consequence of intangible assets is a “hot issue” with great practical relevance because of the relative
significance which these assets, and quite often brand names, may have on the presentation of the balance sheet
of certain companies.

Because of the above stated dominant impact of the Anglo-American accounting conception, it is highly
interesting to study in detail whether the treatment developed by the IASC (IAS 38) differs from the accounting
practice in Continental European countries and to consider if the content of IAS 38 could be adopted easily by
enterprises in those countries. That is the main objective of this paper, which compares the positions adopted in
IAS 38 concerning brands and the related practices in two countries, not often studied together: France and
Germany. Issues which will be dealt with are the recognition of brands as an asset, which covers such
fundamental problems as the definition of intangible assets and recognition principles of brands (acquired or
self-generated), initial measurement of brands, subsequent measurement (amortization, revaluation and value
recovery) and disclosure requirements.

Despite the existence of numerous points of convergence in France and Germany, due to the fact that the rules
have a common European origin, the 4th and 7th Directives, the paper shows some differences especially in the
definition of intangible assets, the recognition of self-generated brands and the amortization of brands. As some
fundamental differences exist between two countries supposed to follow relatively similar rules, it tends to draw
our attention on the difficulty of international harmonization.

3
Intangibles have become more and more important in economic life and for the success of
corporate activities (Ochs 1996; Duizabo and Guillaume 1996). For the majority of companies
intangibles are essential factors for their progress and a considerable part of their corporate
value. One type of the very broad spectrum of corporate intangibles are brands. Brands can be
defined as any word, tone, symbol or design to identify and distinguish one product or a group
of products from other products (see Plasseraud, Plasseraud and Dehaut 1994). But brands are
more than just the name or sign. In a broader sense they create an unique image of the branded
product or service, of its quality and attributes in the perception of the customers (Meffert and
Burmann 1998, 81; Smith 1997, 38-44; see also Kapferer 1998). Especially in the consumer
product industry they are regarded as a key competetive factor which influences the consumer
preferences for a product and therefore the sales of the company.

Because of this importance of brands for the economic development of certain businesses, the
accounting treatment of brands has been a matter of debate and controversy in many countries,
such as Australia and the United Kingdom for instance, where companies, such as Grand
Metropolitan and Rank Hovis McDougall, decided in 1988 to include the value of brand names,
either purchased or internally developed, in their consolidated balance sheets (among others see
Barwise, Higson, Likierman and Marsh 1989; Power 1992). In France, as well, the
consequence of accounting for intangible assets is important for certain companies because of
relative significance that these assets, including brands, may have on the presentation of the
balance sheet: for example, in 1997, brands represented 20.7% of the balance sheet total for
Rémy Cointreau or 14.2% for Pernod Ricard (X 1998). The most remarkable transaction
concerning brands in Germany was in 1998 the acquisition of the brands “Rolls-Royce” and
“Bentley” by BMW and VW. For Beiersdorf there is an assumption that the brand “Nivea” is
more valuable than the balance sheet total (Breit 1997).

Against this background, the International Accounting Standards Committee (IASC) has
adopted in July 1998 the International Accounting Standard 38 (IAS 38 – “Intangible Assets” –
see Bonnet Bernard 1998; Gélard 1998), following the publication of two Exposure Drafts
(E50, June 1995 – see Gélard 1995; Xa 1995 and Xb 1995) and E60 (August 1997) and setting
out proposals for the recognition, measurement, amortization and disclosure of intangible
assets. Accounting treatment of brands is included in the scope of this text.

Having in mind that the process and outcome of IASC standard setting are very much
influenced by the Anglo-American accounting approach and that the Continental European
conception which stresses reliability, objectivity and prudence of income calculation is often
underpresented, it is highly interesting to study in detail whether the treatment developed by the

4
IASC (IAS 38) differs from the accounting practice in Continental European countries and to
consider if the content of IAS 38 could be adopted easily by enterprises in those countries. That
is the main objective of this paper, which compares the positions adopted in the international
standard IAS 38 concerning brands and the related practices in two countries, not often studied
together: France and Germany.

We propose to treat this subject under the following headings: (1) recognition of brands as an
asset, which covers such fundamental problems as the definition of intangible assets, and the
principles governing the recognition of brands (acquired or self-generated), (2) initial
measurement of brands, (3) subsequent measurement (amortization, revaluation and value
recovery) and (4) disclosure requirements.

RECOGNITION OF BRANDS AS AN ASSET

The characterization of intangibles as assets is a necessary preliminary step leading to the

examination whether brands can be recognized in the balance sheet.

Definition of Intangible Assets

Brands are intangible assets. They can only be recognized if they comply with the asset
definition. For that reason we firstly study the definitions applying to intangible assets before
dealing with questions relating to the inclusion of brands in that classification.

IAS 38 (Para. 7) defines an intangible asset as an “identifiable, non-monetary asset without

physical substance held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes”. An asset “is a resource (a) controlled by an enterprise
as a result of past events; and (b) from which future economic benefits are expected to flow to
the enterprise”.

The standard indicates that “enterprises frequently expend resources, or incur liabilities, on the
acquisition, development, maintenance or enhancement of intangible resources such as (...)
trademarks (including brand names and publishing titles)”. Not all intangibles items meet the
characteristics of an intangible asset, that is, identifiability, control over the resource and
existence of future economic benefits.

IAS 38 requires, in that respect, that an intangible asset is identifiable to distinguish it clearly
from goodwill, which is the case if the asset is separable. Separability is given if the specific

5
future economic benefits arising from the asset can be used by renting, selling, exchanging or
distributing them without also disposing of future economic benefits of other assets used in the
same revenue earning activity. But it may also be possible to proof the identifiability of an asset
in some other way (IAS 38, Para. 11, 12). IAS 38 defines “control over a resource” as the
power to dispose of the future economic benefits of the resource and to exclude others from
the exploitation of these benefits. Future economic benefits may result from the sale of products
or services as well as from cost savings or “other benefits resulting from the use of the asset by
the enterprise” (IAS 38, Para. 17).

The definition and the explanations given by IAS 38 are much more detailed than the German
and, above all, French texts on the subject. Effectively, in Germany, intangible assets, like
tangible assets, are not legally defined. The general definition of an asset which is derived in
German accounting tradition from the “principles of proper accounting” (Grundsätze
ordnungsmäßiger Buchführung, GoB) and from the purposes of financial accounting, does
apply to tangibles as well as intangibles. Thus as intangible assets are regarded all items which
apply to the general asset definition and which are fixed but not tangible (so without physical
substance) or financial (Haller 1998, 564). The major formal difference to the IASC definition
is that the German definition does not explicitly stress the characteristic of a “future economic
benefit”. It speaks about an “economic value” which an item incorporates, which mostly but not
necessarily implicitly incorporates the idea of a future economic benefit (Moxter 1986, 246-
247; Hommel 1997, 352). The predominant two components of the German asset definition
are, quite comparable to the IASC approach, that an asset must be identifiable and
independently as well as reliably measurable (Haller 1998, 575; Hommel 1997; Baetge 1996,
148-155). Identifiability means that the item can be separated from the business and its
economic benefits can be disposed of separately in any form. Thus in respect of separability of
the item from the enterprise and its independent and reliable measurability the definition of
intangible assets in Germany is quite comparable to that of the IASC (see Haller 1998, 575;
Hommel 1997, 363).

By contrast, in France, the General Accounting Plan (Plan comptable général - PCG) 1982
(CNC 1986, I.33; Orsini, Gould, Mc Allister, and Parikh 1998; Walton, Haller and Raffournier
1998) defines intangible assets as being fixed assets other than tangible or financial assets while
a fixed asset being defined as an asset acquired for long term use in the operation of the
business. The general definition of an asset is “...an element of patrimony which has a positive
economic value for the firm”. (The concepts of “identifiability” and “separability” are not dealt
with). Therefore, intangible assets are only recognized by comparison with tangible assets,
which correspond to real rights over tangible objects.

6
In this context, we can claim that the German and French definitions of intangible assets are not
in contradiction with the IASC standard but are less specific. Nevertheless they are not totally
comparable because of the differences in the general asset definition regarding the characteristic
of “future economic benefits”.

Principles of Recognition of Brands

According to IAS 38 (brands are mentioned on several occasions, most importantly in the
overall definition of intangible assets) as well as to the accounting rules in France and Germany,
brands are regarded as a type of intangible items where recognition could become possible and
even necessary.

Before looking into the possibilities for recognizing brands, we should remember in this respect
that articles 9 and 10 of the Fourth Directive n° 78/660/EEC of 25 July 1978 foresee that, in
order to be included in balance sheet assets, brands should be:

• either “acquired for valuable consideration and need not be shown under goodwill”:
• or “created by the undertaking itself, in so far as national law permits their being shown as
assets” (EEC 1978, art. 9 C.).

The European text lacks precision and, therefore leaves wide scope for initiative to the
countries in the European Union. This prescription of the Directive was transformed in France
and Germany as a pure rule concerning the format of the balance sheet. While France even cites
brands in the enumeration of the balance sheet position for intangible assets (“concessions and
similar rights, patents, licenses, brands, processes, rights and similar assets”) they are not
explicitly mentioned in the correspondent balance sheet position according to German rules
(Para. 266 (2) HGB (Handelsgesetzbuch – Commercial Code), but they are covered as they
belong to the term “gewerbliche Schutzrechte”, which are mentioned in the rule).

IAS 38 has made a considerable effort of clarification by indicating (Para. 18-19) that an
intangible asset should be recognized as an asset if it meets the definition of an intangible asset
above mentioned plus some additional recognition criteria set out in the Standard:

(a) it is probable that future economic benefits that are attributable to the asset will flow to the
enterprise; and
(b) the cost of the asset to the enterprise can be measured reliably.

7
Although the codified rulings do not include rules on the recognition, in France, the National
Accounting Council (Conseil national de la comptabilité - CNC, the standard-setting body
attached to the Ministry of Economy and Finance), has passed a report on brands (CNC 1992)
(see later), according to which a tangible or intangible object developed internally by an
enterprise should be included in the balance sheet fixed assets:

• if it is possible to demonstrate, with reasonable probability, that the object is capable of

generating future economic benefits in favor of the enterprise;
• if it is intended to be used durably in the enterprise;
• and if its cost can be calculated in a reliable way, with the help of a specific individual
project.

The conditions cited in France are very similar to those proposed by IAS 38. A comparable
specific statement is missing in Germany. According to literature and jurisdiction an item should
be recognized in the balance-sheet (Haller 1998, 574; Baetge 1996, 155-160),

• if it meets the criteria for an (intangible) asset and

• if it is controlled by the enterprise.
• For non-current assets it is a material prerequisite to the recognition of an intangible asset,
that this asset was acquired for consideration (Para. 248 HGB). The major reason for this is
the opinion, that the acquisition transaction and the price of it is the only proof of an
objectively justifiable reliable value of an intangible asset (Keitz 1997, 35-39; Moxter
1987).

Looking at these characteristics and conditions of a recognition in more detail, differences

between the three regarded sets of rules become obvious.

Probability of Future Economic Benefits

According to IAS 38, future economic benefits should be estimated by using “reasonable and
supportable assumptions that represent management’s best estimate”. To external factors
should be attached greater importance than to internal factors. In Germany and France, as
already mentioned, future economic benefits are not an explicit characteristic of the intangible
asset definition.

8
Reliable Measurement of Cost

In practice, the accounting policy respected with regard to brand recognition and, in particular,
of cost measurement depends on the way in which the brands have been obtained by the
enterprise: separate acquisition (including acquisition without charge or by exchange),
acquisition as part of a business combination (mergers as well as an acquisition of subsidiaries),
and internally generated brands.

Separate acquisition

According to IAS 38 (Para. 23), if an intangible asset is acquired separately, the cost of the
intangible asset can usually be measured reliably. This is particularly so when the purchase
consideration is in form of cash or other monetary assets. In the case that the brand is acquired
by an exchange (or part of an exchange) with an other (tangible or intangible) asset it has to be
measured at its fair value, which is supposed to be equivalent to the fair value of the asset given
up adjusted by the amount of any cash or cash equivalents transferred (IAS 38, Para. 34). If the
brand is achieved free of charge or for nominal consideration, by way of government grant, it
should also be recognized at its fair value or at the nominal consideration.

In France, the National Accounting Council report (CNC 1992) mentions acquired brands
without treating their recognition and measurement. Viale and Lafay (1990) as well as the
Accounting Dictionary (La Villeguérin 1997, under the heading “Marques”) deal with this
topic. Brands, which are acquired for consideration, are intangible fixed assets and as such are
accounted for in the account “Concessions and similar rights, patents, licenses, brands,
processes, rights and similar assets” like all other assets at its acquisition cost paid. An asset
which is acquired by way of an exchange or free of charge should be recognized at its market
value, which is the price that would have been paid under normal market conditions (which
means at an arm’s length relationship). Thus the measures of acquired brands under IAS 38 and
French rules are similar.

According to the prior Act of the Markengesetz (MarkenG, Brands Act of October 25, 1994)
in Germany it was not possible to sell a brand separately, but only with the whole enterprise or
with the business of an enterprise possessing the brand. Now a brand itself can be sold
separately without any connection to the sale of the whole enterprise or parts of it (MarkenG,
Para. 27). As the characteristic of reliable measurement of cost is the predominant precondition
to recognize an intangible asset, the recognition depends on an acquisition for consideration,
which gives a reliable clue for measurement. Therefore a brand, like all other intangible assets,

9
must be recognized at acquisition cost if it has been acquired for consideration (Keitz 1997, 66-
68; Coenenberg 1996, 83). Brands which are acquired by way of exchange can be initially
measured either at the fair value of the asset given up or at its carrying amount (Knop and
Küting 1995, 1047-1048). If an intangible asset is acquired free of charge, it must not been
recognized because of the uncertainty of the value of this asset (Adler, Düring andSchmaltz
1995, No. 17 to Para. 248).

Acquisition as Part of a Business Combination (Merger or Consolidated Financial

Statements)

The Fourth and Seventh Directive do not include any explicit advice of how to treat intangible
assets which are acquired through a merger or an acquisition of a subsidiary. However,
implicitly it can be concluded that those assets - if identifiable - should be recognized and
measured separatly. IAS 38 covers the treatment of acquired intangibles as part of a business
combination in the consolidated statements as well as part of a merger (IAS 38, Scope).

According to IAS 38 (Para. 27), an intangible asset should be recognized in a consolidated

financial statement at its fair value at the date of acquisition, if the intangible asset was part of
an acquisition of an enterprise. As reliable measurement is one precondition of recognition for
an intangible asset, it becomes necessary to judge whether the fair value of the intangible asset
can be ascertained with sufficient reliability. In the case of an active market for the intangible,
quoted market prices provide the best reliable measurement of fair value. Otherwise the fair
value may be estimated by the amount that the enterprise would have paid, at the date of the
acquisition, for the asset in an arm’s length transaction between knowledgeable, informed and
willing parties. Additionally, IAS 38 cites several other methods to estimate the fair value, e. g.
multiplicators or discounted cash flows (IAS 38, Para. 30). If there is no separable reliable
measure for the intangible asset as part of the acquisition, that asset has to be included in
goodwill (IAS 38, Para. 31).

As it is usually difficult to make separate evaluations of brands acquired as part of a business

combination, according to our interpretation of IAS 38, the first consolidation will quite seldom
lead to a separate recognition of one brand. This interpretation is confirmed by the position
taken by Harding (1995, 9), based on E50: “In many cases this [the determination of the cost of
brands acquired in a business combination] may not be possible, and the cost of brands will be
subsumed within goodwill”. In the context of the prohibition to recognize internally generated
brands, IAS states in Para. 52 that “brands ... cannot be distinguished form the cost of
developing the business as a whole”. However, in fact, IAS 38 seems to leave an option

10
whether to separate the brand or to include it in goodwill: The Basis for Conclusions for IAS
38, Para. 37 b) explicitly does not require an active market for an intangible asset to be
separated from goodwill in a business combination and to be measured at fair value. Anyway,
as the treatment of goodwill is consistent with that of intangible assets (the exceptions
mentioned in Basis for Conclusions, Para. 58 are not valid for brands), this is only a question of
disclosure and additional information and has no material impact on net income (at least as long
as amortization is the same of goodwill and brands) (IASC: Basis for Conclusion, Para. 57-59).

This position differs a bit from French doctrine and practice. Under these, brands may be
incorporated within the framework of the analysis of the difference between the consideration
for an acquired company and its net assets in case of a merger or another form of business
combination. Regarding a business combination it has to be recalled that the difference arising
on first consolidation, at the time that an enterprise first comes within the scope of consolidated
accounts, corresponds to the difference between the cost of acquiring its share and the
proportion of the net assets acquired, including profits for the accounting year to date.

This difference arising on first consolidation comprises two elements:

• firstly, the positive and negative valuation differences relating to certain identifiable assets
which are accordingly reestimated to bring them to the value retained in the calculation of
the overall value of the acquired company;
• secondly, a remainder, which cannot be allocated, called the “acquisition difference”.

With respect to valuation differences, the National Accounting Council specifies, in an Opinion
Dated January 15, 1990 (CNC 1990), that elements are considered to be identifiable once their
method of evaluation is defined with sufficient precision and it is possible to follow the
evolution of their value over the passage of time. The opinion states that “among these
identifiable elements should be included intangible assets, which have not been included in the
single company accounts: commercial networks, market shares, databases...”. In this context,
the CNC opinion does not mention brands specifically, but commentators (and French
Companies) made two remarks following publication of this text:

• logically, it is possible to argue that brands are more easily identifiable than market shares;
• the presence of suspension dots at the end of the sentence leaves the list open to additional
items.

11
Consequently, in practice, a certain number of French companies allocate a part of the
difference on first consolidation to brands. In fact, according to the annual review of 1997
published annual reports made by a group of accounting firms (X 1998), 52 of the hundred
groups reviewed allocate a part of the consolidation difference to brands, in some cases the so
recognized brands amount to 20.7 % of the balance sheet total.

We can, of course, point out that if brands are progressively added to assets as they are created,
this will have the effect of reducing the difference of first consolidation in any future purchase
of the enterprise.

French commentaries on E50 (Giot 1996, 10) considered that an identification as wide as
possible of intangibles, distinguishing them from the acquisition difference, better describes the
reality of a company and improves financial reporting while leaving complete liberty to the user
to interpret the accounts after making any reclassifications which he considers necessary.
Furthermore, the notion of separability seems to be too restrictive as a criterion compared with
identifiability. This above French specific argumentation does not only lead to recognized
brands on first consideration of business combinations but also in case of mergers (CNC 1986).

In Germany, if the acquisition cost is higher than the proportional net asset value of the
acquired subsidiary, the difference on first consolidation must be allocated to the various asset
accounts or be compensated with certain liability accounts of the acquired company (HGB,
Para. 301 al. 1, s. 3). The part of the consolidation difference which cannot be allocated to
specific assets, has to be treated as goodwill (“Geschäfts- und Firmenwert”, HGB, Para. 268 al.
2) which is disclosed under the balance sheet heading of intangible assets.

One of the causes for the existence of a difference on first consolidation may be the amount of
intangible assets (including brands, for example) which are not recognized as assets in the
subsidiaries balance sheet (because of self generation), but which were included in the
acquisition price. According to the generally accepted principles, there is certainly no option
relating to their separate recognition, since either such an inclusion is obligatory (HGB, Para.
246, al. 1) or it is forbidden (HGB, Para. 248 al. 2). As mentioned above, reliable measurement
is a precondition for recognizing an asset in Germany similar to IAS 38. Because of the above
mentioned difficulties to determine identifiable intangibles, and to measure them reliably, the
majority of German companies record the vague amount of intangibles acquired with a
subsidiary as goodwill. Nevertheless, literature and jurisdiction require to separate all items
which meet the preconditions for assets, tangible ones as well as intangible ones, from the
goodwill in the case of a merger or in the consolidated financial statement of the parent

12
company (Richter 1990, 23; Schnicke and Reichmann 1995, 175-177; Moxter 1996, 29). This
would mean that if the purchased company possesses brands, the acquiring company has the
obligation to recognize and to measure the brand in its balance sheet (Stein and Ortmann 1996,
788; Rohnke 1992). Thus, it is treated in the same way as if it were bought individually. But
neither jurisdiction nor the literature precisely explain how to value the brand.

Internally Generated Brands

As IAS 38 (Para. 39) points out, it is sometimes difficult to decide whether an internally
generated intangible asset meets the general requirements for recognition. Therefore, the
standard adds other conditions for recognition, such as the technical feasibility and the
availability of adequate resources in order to complete the intangible asset so that it will be
available for use or sale, the intention and ability to use or sell it, the demonstration of probable
future economic benefits and the ability of the enterprise to measure the expenditure
attributable to the intangible asset reliably. Intangible assets arising from development (or from
the development phase of an internal project) which comply with those explicitly mentioned
conditions should be recognized (IAS 38, Para. 45)

Most surprisingly - without taking into account whether the concrete conditions are met or not
- IAS 38 (Para. 51) states specifically that “internally generated brands (… ) should not be
recognized as intangible assets”. This because IASC believes “that expenditure on internally
generated brands ... cannot be distinguished from the cost of developing the business as a
whole” (IAS 38, Para. 52). With this concrete prohibition the IASC takes a very prudent point
of view.

On principle, the French viewpoint is opposed to the IAS, but, in practice, conforms to it. As a
matter of fact, the General Accounting Plan (PCG) includes a specific account to record
“expenses made to obtain the advantage that comes from the protection afforded (...) to the
beneficiary of the operating rights (...) to a brand” (CNC 1986, I.25). As a result of this broad
interpretation of the content of this account of the PCG, enterprises may include selfgenerated
brands in their balance sheets. However, there is a high degree of uncertainty as to the nature of
expenses, which can be so capitalized. This explains why, in practice, French enterprises do
usually not recognize internally generated brands as assets.

Against this background, the National Accounting Council (CNC), set up a committee which
worked in 1990-1991 on internally generated brands. This committee issued a report in April
1992 (CNC, 1992; Kerviller and Obert 1992) modeled on that which had been adopted in the

13
CNC opinion on computer software (CNC 1987). It makes an in-depth study of the process of
brand creation and proposes progressive solutions for recording a brand as an asset, based on
the different steps of this process.

All the reasoning is based on the concept of a “project”, in which seven criteria are needed to
record the output (brand) as an asset:

1. Specification of the output (brand) (answer to the question: what?)

2. Identification of the process to develop this output (brand) (answer to the question: how?)
3. Affectation of human, financial, commercial... means (resources) to the project (answer to
the question: with what resources?)
4. Implementation of management tools to control the process in order to (a) measure the cost
of the brand created, (b) match the expenses to the different steps of the project, (c)
evaluate, at each step, the probability of commercial success or failure (answer to the
question: with what control tools?)
5. Explicit commitment to produce the output (use the brand) whose development is under
process.
6. Reasonable probability to generate future advantages (commercial profitability).
7. Long-term use of the output produced (brand created).

If the criteria 1 to 5 are satisfied, we face a real “project”. If the criteria 1 to 5 plus 6 and 7 are
satisfied, the output (brand) can be capitalized.

Then the report describes the different phases of development of a brand and explains when (at
which phase) the brand can be recorded as an asset.

Unfortunately, this report has never been transformed into a standard and the internally
generated brands are usually not recorded in practice. (The main counter argument is that the
profit generated by the capitalization of the brand would be taxable). Nevertheless, the ideas
contained in the report are very interesting and show that, contrary to what is affirmed in IAS
38, solutions exist to calculate the cost of internally generated brands.

We have not discovered official indications in Germany of a similar reflection to that

undertaken in France concerning the recognition of selfgenerated brands. On the contrary, in
Germany, the inclusion of internally generated brands in the assets is forbidden because of the
lack of sufficient reliability of measurement (HGB, Para. 248, al. 2). In the case of an intangible
asset shown as current asset (which seems at least theoretically possible), on the contrary,

14
internally generated intangible assets have to be recognized at their cost (Coenenberg 1996, 87,
106). But for brands this is a rather uncommon case.

INITIAL MEASUREMENT

Overall Presentation of Valuation Methods for Brands

The evaluation of brands is important for many tasks: for the evaluation of marketing and brand
management, for the “shareholder value management”, in the context of mergers and
acquisitions to estimate the value of a company, for determination of royalties for brands or for
accounting purposes. There are several methods which are discussed and proposed in literature
to lead to a reliable estimation of the value of a brand. In general the mentioned methods can be
separated into three approaches: the cost approach, the income approach and the market
approach (see among others Reilly and Schweihs 1998, 426-433; Smith 1997; Barwise, Higson,
Likierman and Marsh 1989, 53-76; Roeb 1994, 80-133; Sattler 1995; Haigh and Perrier 1997;
La Villeguérin 1997; Kahn 1997; Viale 1991; Nussenbaum 1991; Nussenbaum 1990; Mazars
1990; Medus 1990) which are shortly described as far as they are relevant for financial
accounting purposes.

Cost Approaches

Two distinct methods based of cost calculation can generally refer to brands.

Historical cost method: This is the basic method retained in accordance with different
accounting texts. It can be used both for acquisitions and for internally generated brands. The
cost approach may either include all costs which were paid in the context of an acquisition of a
brand or the costs which were necessary to build up the brand. Problems by using this method
result from the difficulties of detecting the necessary information if a brand is in use for several
years, or from the cost allocation between the creation of a brand and other items e.g. the
development of products. Additionally, this method is only based on data from the past and
therefore does not take into account the future development of the market.

Replacement cost method: This method, which is also called cost of reconstruction method,
comprises valuing the existing brand by adding together the costs, which would be necessary to
bear today to bring it up to its current celebrity and pulling power for customers. In particular it
includes the cost of creating the brand and the expenses for the upkeep and development of it,
notably the commitment in publicity budgets. The problems of this method are similar to those

15
mentioned above and, above all, it will be rather difficult to define an adequate replication of
the evaluated brand. This method is authorized under French law only in consolidated accounts
and exclusively for tangible fixed assets, which are depreciated, and inventories. In Germany,
the method is allowed for inventories (if the replacement cost are less than the historical cost
minus depreciation) and for the valuation of tangible and intangible assets separated from
goodwill in case of a business combination.

Income Approach (Approach by the Capacity to Generate Future Cash Flows)

This approach is based on the current value of the future economic benefits that arise from the
use of the trademark. In clear, this approach tries to give an answer to the question: to what
extent does the brand increase the profits of the enterprise? There are several methods
proposed to compute the value.

It can be measured by comparing prices or profit margins of a product sold under the brand
with those of a product sold without branding (premium price method or profit contribution
method). The main problem of the comparison is the identification of an adequate product
without branding, as differences between the prices or earnings may also be caused by quality
of the product, by cost efficiency, market conditions or other factors. Additionally the
advantages of branding may have other effects such as stabilizing future demands for the
products or permitting the production factors to be fully loaded. It may also be possible to
calculate directly the future economic benefits from the brand itself, e.g. by estimating the
revenues and/or cash flows of a single branded product less cost to maintain the brand power
(e.g. advertising). This again would cause allocation problems. Marketing-oriented approaches
use customer evaluations (conjoint-analysis) or detailed analysis of criteria that influence brand
power (scoring models) to determine the value of a brand. Critics of these approaches arise
from the choice of key factors, the weight of the factors and the relation between the factors
and the income.

The royalty-relief method is based on the consideration that an owner of a brand does not have
to rent one and therefore is relieved from paying royalties. The sum of economized royalties
represents the income from the brand. The necessary royalties are usually taken from similar
products which are licensed.

Some methods of the income approach only use historical and current data, sometimes
multiplicators. However, the calculation should not only be based upon present data. Therefore
the methods of the income approach depend on the forecast of the amount of future cash or

16
fund flows, the determination of future discount rates, and the estimation of probable useful
lives. The value of the brand is estimated then by discounted cash flows.

Market Approach

A basis for valuing brands which is both simple and convincing derives from the comparison of
other transactions made by the same sort of brand, particularly the purchase of separate brands
by the enterprise. It will be difficult to find recent market transactions with similar conditions
concerning the brand, the products and the company envolved. But as the number of brand
transactions increases, this approach may become more relevant.

Others try to extract the value of the brand from the market value of the company by deducting
the values of tangible assets and then dividing the residual value among the intangible assets.

Separate Acquisition

In case of a separate acquisition of a brand, IAS 38 as well as French and German accounting
rules require an initial measurement of the brand based on the cost of acquisition. Therefore,
only the historical cost approach is appropriate. If the brand is acquired by way of exchange or
free of charge, other evaluations may take place, especially it might be necessary to determine
the fair value of the brand. To estimate the fair value of a brand, IAS 38 accepts a range of
methods.

According to IASC (Para. 24), the cost of an intangible asset comprises its purchase price less
trade discounts and rebates. The purchase price includes non-refundable purchase taxes, “and
any directly attributable expenditure on preparing the asset for its intended use”. As example
IAS 38 mentions professional fees for legal services, which may be relevant for brands.
Subsequent expenditure for purchased brands is always recognized as an expense (IAS 38,
Para. 62).

The French definition of acquisition costs is close to that retained in the IASC standard
(purchase price less trade discounts and rebates – see La Villeguérin 1997, 470). However,
transfer dues, professional fees and legal costs are excluded from the asset value and are
accounted for as charges (possibly spread over several financial years). The acquisition cost
method can only be considered objective if the brand is the subject of an individual transaction.

17
According to the definition in German law, the acquisition cost generally comprises the
expenses necessary for the acquisition of an asset and its preparation for use to the extent that
these expenses can be directly attributed to it (Coenenberg 1996, 83-87, Baetge 1996, 210-
219). The cost of acquisition also include the accessory costs or posterior acquisition costs.
Price reductions are to be deducted (HGB, Para. 255 al. 1). This definition is close to the IASC
text because, different to French position, the acquisition costs following the German rules

• are reduced by discounts obtained and

• are increased by the accessory costs of acquiring the asset, e.g. transfer dues, professional
fees and legal charges.

Differences between the German rules and IAS 38 may arise from the treatment of subsequent
expenses.

Internal Generation

The principles developed in IAS 38 related to internally generated intangible assets should not
be applied to brands because, as we pointed out earlier, internally generated brands cannot be
recognized.

Concerning the production cost of the brand produced by the enterprise for itself, against the
background of the accounting discussion in France, this method is:

• reliable, through the expedient of the project concept applied to the process of creating a
brand (see above)
• relevant, according to the National Accounting Council (CNC 1992), particularly for
valuing a recent brand having a serious chance of commercial profitability and which has
not yet attained its full maturity.

So, the production cost method leads to a separate valuation of the brand, relatively objective
in the way it is determined (project) and consistent with the classical accounting measurement
approach based on costs.

Because of the general prohibition to recognize an internally generated brand there is no need in
Germany to think about the valuation problem. Only in the exceptional case of a brand as
current asset the internally generated brand has to be recognized at production costs (Adler,
Düring and Schmaltz 1995, No. 23 to HGB, Para. 248). These include according to HGB,

18
Para. 255 all direct costs, appropriate portions of indirect costs and overhead costs (optional)
and capital cost under certain conditions (optional). In general only few costs will be directly
attributable to the brand production, e.g. the legal fees or some costs in the development stage
as the creation of the brand or a preliminary consumer testing (Smith 1997, 131-132). Many
other costs, particularly advertising costs, usually belong to indirect or overhead costs. If the
option of recognizing them is exercised, they had to be allocated.

Acquisition as Part of a Business Combination

According to IAS 38, the cost of an intangible asset acquired in a business combination, which
is an acquisition, is measured by reference to its fair value at the date of the acquisition (Para.
27). As mentioned above, in our opinion IAS 38 will quite seldom lead to the separate
recognition of a brand which was part of an acquisition of a company because of the lack of
sufficient reliability in measurement. If the brand is recognized, nevertheless, the standard does
supply further precision relating to the methods for valuing brands at fair value obtained
through a business combination. These include, where appropriate, recently quoted market
prices, the amount that would have been paid in an arm´s length transaction, multiples of
“indicators driving the profitability of the asset” and discounted cash flows from the asset. They
may be used if “they reflect current transactions and practices in the industry to which the asset
belongs”. According to this statement, all of the approaches for valuing brands which were
mentioned above, could be used. In particular the methods of the income approach and of the
market approach seem to be in accordance with IAS 38.

In France, several methods exist side by side and are presented in literature and above all in the
report of the National Accounting Council (CNC 1992). Methods based on the capacity to
generate future cash flows (or profitability methods) can be used to value a brand in the context
of a merger or the first consolidation of an acquisition to separate the valuation difference in its
identifiable parts. The royalty-relief-method is the most classical and often used approach to the
valuation of brands in France (La Villeguérin 1997).

As mentioned above, according to German accounting rules and related literature, it is not
clear, whether a brand as part of the acquisition of a company or a merger has to be recognized
in the consolidated financial statement because of the reliability of measurement. If a
recognition is favored, the brand has to be valued at acquisition costs until they do not exceed
the difference on first consolidation. The fair value is regarded to be the best estimation for
acquisition costs. Literature refers to a possible price arrangement for specific items in the
contract of sale or in the underlying valuations which might be an indication (Richter 1990, 23)

19
or they enumerate some of the methods for brand valuation described above (see above) and
give some practical advice for their use (Rohnke 1992). Therefore all the methods of brand
valuation could take place.

MEASUREMENT AFTER INITIAL RECOGNITION

At the end of the financial year, when brands are separately recognized, it is necessary to
examine their value at the balance sheet date. This may result in (1) an amortization, (2) a
revaluation or (3) a possible write down or write-up.

General Reflections About Amortization of Brands

There is a considerable discussion about the question whether a brand is subject to amortization
at all and how to determine its useful life. The main arguments against a definite useful life and
therefore against an amortization of brands are:

• In many countries the legal protection of brands is unlimited, at least renewable indefinitely
(e.g. for Community Trademarks within the European Community, in France, Germany,
USA). Hence, from a legal point of view, the use of a brand is not limited for its owner.

• Some brands have a very long economic useful life, sometimes reaching 150 years in certain
sectors: - 150 years for champagnes such as “Moët”, or cognacs like “Martell” and “Rémy
Martin”; - from 100 to 150 years for mustard – “Olida” - and Mineral Water – “Evian”,
“Vittel”, “Badoit”...; from 50 to 100 years for spaghettis – “Lustucru”, powdered milk –
“Gloria”, chocolate – “Lanvin” and “Lindt”, and Pastis – “Ricard”... (CNC 1992). Other
examples of rather “old” brand names are “The Times”, “Coca-Cola” and “Walt Disney”.

• Some authors argue that the value of a brand is maintained or even increased by huge
advertising expenses which are recognized as expenses and therefore does not justify
amortization or a limitation of the useful life. Useful life of tangible assets would be
estimated in the same matter on the assumption of regular maintenance. In addition an
amortization of the brand would charge the profit margins twice (amortization and
maintaining) (Harding 1997, 81-84; Pizzey 1991, 26).

• Not the possibility of declining value of a brand is doubted, but its regularity. Consequently,
brands should be subject to write-downs if necessary but not to a regular amortization (Wild
and Scicluna 1997, 94-96). Smith analyses some aspects that might result in a reduction of

20
 the value of a brand, but generally suggests that trademarks do have an indefinite life unless
any of the factors proof to be true in a special case. Anyway, he accepts that there is a
convention for a limited useful life for purposes of financial accounting (1997, 104-123).

The promoters of an amortization and a limited useful life of brands answer to these arguments:

• For the purposes of financial accounting the economic approach is more relevant than a legal
point of view (Barth and Kneisel 1997, 474). Hence, although the right to use the brand
might last indefinitely, the ability of achieving future economic benefits from this brand has
to determine the question of amortization and useful life. It is not the legal part of a brand
which creates future economic benefits but the higher sales of products, the stabilized
connections between customers and the branded products or the economizing of advertising
expenses (Gold 1998, 958; Stein and Ortmann 1996, 790; Meffert and Burmann 1998, 87;
Barwise, Higson, Likierman and Marsh 1989, 29-32). Brands are closely connected with the
product which is sold under the brand. But products, their technology, the customer
expectations or the market conditions change steadily. So if the brand is not supported by
management action to anticipate or to oppose these changes the value of the brand
diminishes quickly (this result can be reached from several perspectives, see Meffert and
Burmann 1998, Barwise, Higson, Likierman and Marsh 1989, 32-38). The question with this
argumentation is whether under this point of view the brand is still an identifiable and
separable asset or whether it is not too much connected to the products or services, which
would not allow separable recognition.

• The expenses to maintain the brand e.g. advertising costs are not an argument in favor of a
indefinite life. The value of a brand is a certain customer connection which leads to higher
sales. With time this connection looses strength. The publicity creates new customer
connections. So even in the case that the sales keep the same, they are a different matter
than they were at the beginning. By this way, according to this argumentation, the purchased
brand is replaced by an internally generated brand which should not to be recognized as an
asset (Barth and Kneisel 1997, 476-477, Boorberg, Strüngmann and Wendelin 1998, 1115).

• As there seem to be examples of brands always keeping their values, there are also brands
which have vanished, like “Steinhäger”, “Simca” or “Triumph” (Harding 1997, 82, Stein and
Ortmann 1996, 791).

As a matter of fact, it can be stated, that the discussion about brand amortization is based on
the understanding of the function of amortization. If amortization should reflect current

21
valuation there seem to be more reasons against amortization; if amortization is to distribute the
recognized amount over a limited time there are more arguments in favour of a regular
amortization (Barth and Kneisel 1997, 474). The rules of IASC, France and Germany and the
jurisdiction clearly reflect this discrepancy.

Amortization of Brands under IAS, French and German Accounting Rules

Article 35 of the European Fourth Directive of 1978 (Para. 1. b) stipulates that “the purchase
price or production cost of fixed assets with limited useful economic lives must be reduced by
value adjustments calculated to write off the value of such assets systematically over their
useful economic lives”. This article gives a general definition of depreciation. But it should be
noted that the Directive does not provide any special measure for brands as opposed to
formation expenses (article 34) and costs of research and development (article 37, Para. 2). So
member states enjoy once again the widest latitude in dealing with brand amortization.

According to IAS 38 (Para. 63), after initial recognition, “an intangible asset should be carried
at its cost less any accumulated amortization and any accumulated impairment losses”. Later,
the standard states (Para. 79) that “the depreciable amount of an intangible asset should be
allocated on a systematic basis over the best estimate of its useful life”. In general, IASC
supposes that the useful life of an intangible asset is not longer than twenty years. The period of
the legal protection of a right usually limits the amortization period (IAS 38, Para. 85), but as
long as a renewal for brands is possible and certain, this limit is not relevant for brands. If the
period of legal protection and the duration of future economic benefits differ, the shorter period
is relevant for estimating the useful life (IAS 38, Para. 86).

Only in rare cases, if it can be reliably demonstrated that the amortization period is longer than
twenty years such a longer period is accepted. In these circumstances, several conditions must
be met: (a) the enterprise estimates the recoverable amount of the intangible asset at least
annually in order to identify any impairment loss; (b) discloses the reasons why a longer useful
life better meets the requirements of fair presentation and the factor(s) that played a significant
role in determining the useful life of the asset.

The idea that the asset could never be amortized is discussed explicitly as the standard adds that
“the useful life of an intangible asset may be very long but it is always finite” (Para. 84).
Consequently, IAS 38 does not take into account the existence of assets whose useful life is
indeterminate (Giot 1996, 10).

22
In France, in the report on brands mentioned above (CNC 1992), the depreciable character of a
brand has been the subject of considerable debate within the committee, which illustrates that
the answer does not appear to be evident. As a matter of fact, the General Accounting Plan
seems (implicitly) to exclude the amortization of the acquired brands (which can be recorded as
assets): the title of the account “Amortization of concessions, patents...” excludes “brands”
which, however, are recorded under the account “Concessions, patents... brands...”. At the
same time, a write down expense is allowed, if necessary: the account “Write down (provision)
expense for intangible assets: concessions...” includes brands.

From a conceptual point of view, the committee added that there is no irreversible depletion of
a brand. For that reason the committee concluded that a brand (acquired or internally
generated) should not be amortized. French comments on E50 underline that for certain
intangible assets with indeterminate useful lives, systematic amortization is not a relevant
method. It should be replaced by a regular test of impairment (Giot 1996, 10). The problem
with such an argumentation is that such an impairment cannot usually be measured reliably due
to the restrictive definition given to the active market for assets (see below). This excludes
nearly any practical application of an extra-ordinary write-down for brands.

In Germany, recognized intangible assets - with exception of the acquired goodwill - have to be
amortized over the useful life. The company is free in the choice of amortization method
between straight-line or declining balance. In this country almost recently rose a discussion
whether a brand has a determined useful life and if, which period is adequate for financial
accounting purposes. In 1996 the federal court for tax affairs (Bundesfinanzhof - BFH) decided
that there is no reliable estimation for a specific limitation of the useful life and the amortization
of brands. Therefore brands should not be subject to an amortization. As a reaction, the
ministry of finance in opposition declared in 1998, that it generally supposes a useful life for
brands of 15 years (same as for goodwill) if the owner can not proof a shorter period. As in
Germany accounting for tax purposes and the financial accounting are closely connected
through the so-called “Maßgeblichkeitsprinzip” (see Haller 1992), these statements gain
relevance for financial accounting, too.

Since the decision of 1996 several comments in literature were published (see among others
Barth and Kneisel 1997; Boorberg, Strüngmann and Wendelin 1998). Nearly all authors
critisize the decision of the federal court with changing arguments (the main of them included in
the list above) and prefer an amortization of brands (exception: Fick 1997). Even the
presumption of 15 years is considered to be too long. Instead, a useful life between three and
five years is proposed. This shorter period is justified by the prudence principle as reliable

23
measurement is missing or with reference to life cycles (Meffert and Burmann 1998, 96-118,
Stein and Ortmann 1996). Only for extremely strong brands, a longer useful life may be used
(Boorberg, Strüngmann and Wendelin 1998, 1114-1116). These arguments correspond to the
general opinion before the decision of the court in 1996 (Richter 1990). Because of those
different opinions, the amortization is not clear in both, financial and tax accounting.

A brand which has been acquired in an acquisition of a whole enterprise (in a merger as well as
in a business combination) and which is not separately reliably identifiable is - as mentioned
above - included in the goodwill. This goodwill (and so the brand as part of it) can, in
Germany, be either amortized over a maximum of four years or the longer useful life or treated
directly as expense. Due to a corresponding fiscal regulation a useful life of 15 years is usually
also applied in financial accounts if intangible assets are amortized not over four years but
according to the useful life. In case of a goodwill arising from a business combination the
goodwill can additionally be set off against reserves. This high amount of options how to treat a
goodwill arising from consolidation show that it is not at all unmaterial in Germany whether a
brand value is separated from the goodwill and recognized as an identifiable asset or
incorporated in the goodwill. While in the first case it must be amortized over the useful life, in
the other case it can be either amortized in between four years, amortized over the useful life of
the goodwill, directly expensed or set off against reserves. Thus it really matters how an
acquired brand through consolidation is taken into account.

Regarding the amortization of brands a general divergence between the German and French
accounting conceptions can be recognized which result - as mentioned above - from a different
perception of the function of depreciation. According to HGB, Para. 253, al. 2, s. 2 the
dominant objective of normal depreciation in Germany is not to take account of a fall in value
but to spread the cost over the useful life (Döring 1995, 926-928; Coenenberg 1996, 130;
Moxter 1996, 215-217). Its finality is therefore clearly defined, whilst the amortization in the
French General Accounting Plan “hesitates between the objective of assessing depreciation and
that of spreading costs” (Klee 1992, 50).

Thus, with respect to both the principle and the period of amortization of brands, important
differences between Germany and France have to be noted. Whilst in Germany brands are
treated as amortizable assets having relatively short lives, in France, brands are non amortizable
intangible fixed assets. IAS 38 with its rebuttable presumption of a useful life no longer than 20
years lies somewhere in between these positions.

24
Revaluation

For the evaluation of intangible assets at the end of the financial year, IAS 38 defines a
benchmark treatment and an allowed alternative treatment (Para. 63 - 64). The benchmark
treatment has been presented under the heading “Amortization” which means initial
measurement minus periodic amortization. According to the allowed alternative treatment, an
intangible asset should be carried at a revalued amount, which is “its fair value at the date of the
revaluation less any subsequent accumulated amortization and any subsequent accumulated
impairment losses”. Fair value should be estimated by reference to an active market. But as IAS
38, Para. 67 specifies, an active market cannot exist for brands - as for other intangible assets,
like newspapers, mastheads, publishing rights etc. - because the transactions are relatively
infrequent and individual. Therefore, the prices for recent transactions do not provide a
sufficient evidence for the fair value of other brands. Due to this lack of a reliable measurement
basis IAS 38 seems not to allow revaluation of brands.

The situation is absolutely clear in Germany and France. There, in accordance with the Fourth
European Directive (article 33, Para. 1), the revaluation of intangible assets is generally not
allowed. In Germany, because - due to the strong principle of prudence - revaluation is not
accepted for any asset, and in France, because the general revaluation option is limited (as it is
in art. 33 Para. 1 of the Fourth Directive) to tangible fixed and financial assets.

Practically, therefore, the positions taken by IAS 38 and the French and German laws lead to
the same result of not allowing revaluation of brands.

Recovery of the Carrying Amount

Brands may be subject to a write-down because of extraordinary conditions which lead to an

unexpected decline of value. Examples for such conditions are a loss of customer confidence
because of an event such as the “Elch-Test” for Daimler-Benz or a loss of image such as “Brent
Spar” was for Shell (Meffert and Burmann 1998, 118-119).

To determine whether an intangible asset is impaired, an enterprise applies IAS 36

(“Impairment of Assets”). In addition to the requirement included in this standard, IAS 38 adds
that an enterprise should estimate the recoverable amount of the following intangible assets at
least at each financial year-end, even if there is no indication that the asset is impaired:

(a) an intangible asset that is not yet available for use; and

25
(b) an intangible asset that is amortized over a period exceeding twenty years from the date
when the asset is available for use.

This mandatory write-down is a direct consequence of the worldwide applied principle of

“lower of cost or market”. Therefore it is compatible with the French and German rules.

In France, the Commission des Opérations de Bourse (COB - French equivalent of the
Securities and Exchange Commission) indicates moreover that the directors are responsible for
determining which are the numeric criteria, objective and verifiable, upon which the value of
elements of intangible assets may be based year by year (1991, 10; X 91).

Regarding write-downs, it has to be differentiated in German rules between corporations and

private companies, between current and non-current assets and whether the decline of value is
expected to last for a longer or more likely for a shorter period. In the regular case of a
corporation, having its brands classified as non-current assets, the brand has to be written down
to its fair value, if an event has decreased the value of the brand for a longer time,. If there is a
recovery of value later, even corporations have, in fact, an option to revalue the brand as long
as the write-up in the balance sheet would have any tax impacts, which is usually the case, due
to the “Maßgeblichkeitsprinzip” (Para. 280 HGB).

DISCLOSURE REQUIREMENTS

Like other IAS and in conformity with the importance of the information aspect of the
accounting conception of the IASC, IAS 38 generally contains a lot of disclosure rules, which
go far beyond the required disclosures for intangible assets in Germany and France. According
to German and French law a company just has to show the development of the balance sheet
item “intangible assets” regarding acquisitions, disposals and amortizations in the fixed assets
schedule. Additionally the method of amortization, the amortization period, write-downs and
possibly write-ups have to be mentioned and explained in the notes. With reference to brands,
IAS 38 only requires in special circumstances additional disclosures (e.g. if the brand is
amortized over more than twenty years). In other cases, the disclosures for brands according to
IAS 38 are similar to those in France and Germany.

26
CONCLUSION

There is wide latitude allowed by the European Fourth and Seventh Directives in respect of
brands, whether in relation to their inclusion among assets, their valuation and amortization or
the treatment of the difference arising on first consolidation. This explains partly the emergence
of accounting solutions, which are sometimes divergent or even contradictory between
countries like the studied France and Germany. As concrete examples of this, our research has
identified different directions and forms of divergence as well as areas of conformity (e.g. the
prohibition of revaluation of brands).

We summarize some of the divergences picked up: capitalization of internally generated brands
does not appear to be impossible in France, even though, there is no published standard so far
and accounting practice is reluctant in using this opportunity. Furthermore, the allocation of the
difference arising on first consolidation to brands seems to be optional under all rules, but more
likely to appear in France than under IAS 38 or in Germany (despite the treatment of goodwill
may differ considerably from the treatment of a separably recognized brand in Germany). Brand
amortization is obligatory for IASC, as in Germany, but for shorter duration, whilst it is not
compulsory in France.

The study shows that generalizations concerning accounting treatments in different countries
and proposed by the IASC lead quite often to untrue statements. Regarding the two qualitative
characteristics of accounting “relevance” and “reliability” it can be stated that although the
differences in the general definition of assets in different countries are very much influenced by
the specific weight of those characteristics in different accounting conceptions, generalizing
statements on concrete and detailed accounting topics can result in totally wrong conclusions.
France often can be found in the same “accounting cluster” as Germany which is usually
referred to as “Continental European” in contrast to IASC. But for example, it becomes
obvious that with regard to self generated brands German standards have more in common with
the IASC opinion than with leading accounting assumptions in France. Also in consolidated
financial statements, with respect to brands, it gets quite clear that France do not hesitate to
break away from the focus on the prudence principle in going towards a more economic
approach of accounting. Most surprisingly IASC stresses in this context more the reliability
aspect (“separability”, “identifiability” and “reliable measurement of cost”) than the relevance
aspect. Finally, regarding amortization of brands, IASC takes a position between Germany and
France.

27
So this research seems, unfortunately, to be a good example of the difficulty of international
accounting harmonization. Therefore it could be worthwhile to think about other ways to make
accounting comparable in the meantime in order to avoid fundamental opposition (we can
hardly imagine French companies starting to depreciate brands, even over twenty years). The
possible solutions have been widely debated (see Hoarau 1995; Haller 1995; Nobes 1995; Van
der Tas 1995) which result in additional information, reconciliations of major accounting items
or restatements of whole financial statements disclosed in corporate reports to allow
comparison between accounting figures according to domestic and to foreign accounting rules.
Those solutions are in the meanwhile quite common in practice. However, new Acts have
opened the opportunity for companies in several countries – also in France and Germany – to
present their consolidated financial statements according to internationally accepted standards -
in particular IAS and US-GAAP - instead of domestic rules. Almost all of the globally acting
companies do or will most likely take this opportunity. There is no doubt that this is good for
international comparisons but not for harmonization because the differences in the accounting
systems continue to exist. Whether they really can be removed through the started new
standard setting activities in those countries remains to be demonstrated in the coming years.

Particularly accounting for intangible assets with all its different facets, e.g. brands, which is
still a very inhomogeneous area in the international accounting field, will be one of the
cornerstones or obstacles in this recently started new harmonization process of national
standard setters. Harding (1995, 9) recognizes that “many national standard setting bodies have
tried to deal with, or are still grappling with, the issues surrounding intangible assets. Few have
so far achieved any consensus within their countries”. We thoroughly agree with this analysis.
Our analysis has shown that even fundamental aspects of accounting for brands as the question
of amortization are not clear neither within one rule nor between the rules of IASC, France and
Germany. It is obvious that a topic far more difficult like the recognition and measurement of
brands as part of a business combination or of internally generated brands, is still far away from
an generally accepted international solution. Those assets are one of the greatest challenges to
national and international accounting, better to say, for accounting in general, as such because
they are the focuspoint of the conflicting relationship between the major characteristics of
accounting data, “relevance” and “reliability”. As long as it is not possible to find a generally
acceptable solution for the recognition and measurement of those items in the balance sheet
there should be other forms of additional information in annual reports.

Especially in taking into account, as emphasized at the beginning or the paper, the role,
importance and value of brands for corporate success and value, their evaluation would be an
important information especially for the capital markets. One way to provide such information

28
could be the disclosure of an additional statement demonstrating the composition, the
development and the values of the most important groups of intangible assets of a corporation
(Haller 1998, 583-591). This should show which portion of the corporate value is made up of
different sorts of intangibles. Such a statement must be accompanied by additional verbal
information e.g. explaining the brand and its valuation. Our reflections have demonstrated that
brands in particular and intangibles in general will remain a major accounting challenge in the
future.

29
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