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

HEC School of Management (Groupe HEC)Department of Accounting and Management Control

1, rue de la Libération78351 - Jouy en Josas Cedex

France

Tel: +33 1 39 67 94 42Fax : +33 1 39 67 70 86E-mail: stolowy@hec.fr

Axel Haller

Johannes Kepler University of LinzChair of Accounting and Auditing (Institut fürRevisions-, Treuhand- und Rechnungswesen)

Altenberger Strasse 69A-4040 Linz - Austria

Tel: +43 732 2468 9488Fax : +43 732 2468 9495

E-mail: axel.haller@urwip.uni-linz.ac.at

Volker Klockhaus

University of CologneChair of Accounting and Auditing

(Treuhandseminar)50923 Cologne

Germany

Tel: +49 221 470 2725Fax : +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 InternationalAccounting Education Education & Research

& Research in AccountingNiagara 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).

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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.

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

Because of this importance of brands for the economic development of certain businesses, theaccounting 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 GrandMetropolitan 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 seeBarwise, Higson, Likierman and Marsh 1989; Power 1992). In France, as well, theconsequence of accounting for intangible assets is important for certain companies because ofrelative significance that these assets, including brands, may have on the presentation of thebalance sheet: for example, in 1997, brands represented 20.7% of the balance sheet total forRémy Cointreau or 14.2% for Pernod Ricard (X 1998). The most remarkable transactionconcerning 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” ismore valuable than the balance sheet total (Breit 1997).

Against this background, the International Accounting Standards Committee (IASC) hasadopted 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 settingout proposals for the recognition, measurement, amortization and disclosure of intangibleassets. 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 muchinfluenced by the Anglo-American accounting approach and that the Continental Europeanconception which stresses reliability, objectivity and prudence of income calculation is oftenunderpresented, it is highly interesting to study in detail whether the treatment developed by the

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IASC (IAS 38) differs from the accounting practice in Continental European countries and toconsider if the content of IAS 38 could be adopted easily by enterprises in those countries. Thatis the main objective of this paper, which compares the positions adopted in the internationalstandard IAS 38 concerning brands and the related practices in two countries, not often studiedtogether: France and Germany.

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

RECOGNITION OF BRANDS AS AN ASSET

The characterization of intangibles as assets is a necessary preliminary step leading to theexamination 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 assetdefinition. For that reason we firstly study the definitions applying to intangible assets beforedealing 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 withoutphysical substance held for use in the production or supply of goods or services, for rental toothers, or for administrative purposes”. An asset “is a resource (a) controlled by an enterpriseas a result of past events; and (b) from which future economic benefits are expected to flow tothe enterprise”.

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

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

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

The definition and the explanations given by IAS 38 are much more detailed than the Germanand, above all, French texts on the subject. Effectively, in Germany, intangible assets, liketangible assets, are not legally defined. The general definition of an asset which is derived inGerman accounting tradition from the “principles of proper accounting” (Grundsätzeordnungsmäßiger Buchführung, GoB) and from the purposes of financial accounting, doesapply to tangibles as well as intangibles. Thus as intangible assets are regarded all items whichapply to the general asset definition and which are fixed but not tangible (so without physicalsubstance) or financial (Haller 1998, 564). The major formal difference to the IASC definitionis that the German definition does not explicitly stress the characteristic of a “future economicbenefit”. It speaks about an “economic value” which an item incorporates, which mostly but notnecessarily implicitly incorporates the idea of a future economic benefit (Moxter 1986, 246-247; Hommel 1997, 352). The predominant two components of the German asset definitionare, quite comparable to the IASC approach, that an asset must be identifiable andindependently 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 itseconomic benefits can be disposed of separately in any form. Thus in respect of separability ofthe item from the enterprise and its independent and reliable measurability the definition ofintangible 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 Raffournier1998) defines intangible assets as being fixed assets other than tangible or financial assets whilea fixed asset being defined as an asset acquired for long term use in the operation of thebusiness. The general definition of an asset is “...an element of patrimony which has a positiveeconomic value for the firm”. (The concepts of “identifiability” and “separability” are not dealtwith). Therefore, intangible assets are only recognized by comparison with tangible assets,which correspond to real rights over tangible objects.

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

Principles of Recognition of Brands

According to IAS 38 (brands are mentioned on several occasions, most importantly in theoverall 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 andeven necessary.

Before looking into the possibilities for recognizing brands, we should remember in this respectthat articles 9 and 10 of the Fourth Directive n° 78/660/EEC of 25 July 1978 foresee that, inorder 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 thecountries in the European Union. This prescription of the Directive was transformed in Franceand Germany as a pure rule concerning the format of the balance sheet. While France even citesbrands in the enumeration of the balance sheet position for intangible assets (“concessions andsimilar rights, patents, licenses, brands, processes, rights and similar assets”) they are notexplicitly mentioned in the correspondent balance sheet position according to German rules(Para. 266 (2) HGB (Handelsgesetzbuch – Commercial Code), but they are covered as theybelong 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 anintangible asset should be recognized as an asset if it meets the definition of an intangible assetabove 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 theenterprise; and

(b) the cost of the asset to the enterprise can be measured reliably.

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Although the codified rulings do not include rules on the recognition, in France, the NationalAccounting Council (Conseil national de la comptabilité - CNC, the standard-setting bodyattached 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 anenterprise should be included in the balance sheet fixed assets:

• if it is possible to demonstrate, with reasonable probability, that the object is capable ofgenerating 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 comparablespecific statement is missing in Germany. According to literature and jurisdiction an item shouldbe 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 isthe opinion, that the acquisition transaction and the price of it is the only proof of anobjectively justifiable reliable value of an intangible asset (Keitz 1997, 35-39; Moxter1987).

Looking at these characteristics and conditions of a recognition in more detail, differencesbetween 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 andsupportable assumptions that represent management’s best estimate”. To external factorsshould be attached greater importance than to internal factors. In Germany and France, asalready mentioned, future economic benefits are not an explicit characteristic of the intangibleasset definition.

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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 theenterprise: 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 theintangible asset can usually be measured reliably. This is particularly so when the purchaseconsideration is in form of cash or other monetary assets. In the case that the brand is acquiredby an exchange (or part of an exchange) with an other (tangible or intangible) asset it has to bemeasured at its fair value, which is supposed to be equivalent to the fair value of the asset givenup adjusted by the amount of any cash or cash equivalents transferred (IAS 38, Para. 34). If thebrand is achieved free of charge or for nominal consideration, by way of government grant, itshould also be recognized at its fair value or at the nominal consideration.

In France, the National Accounting Council report (CNC 1992) mentions acquired brandswithout treating their recognition and measurement. Viale and Lafay (1990) as well as theAccounting Dictionary (La Villeguérin 1997, under the heading “Marques”) deal with thistopic. Brands, which are acquired for consideration, are intangible fixed assets and as such areaccounted 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 assetwhich is acquired by way of an exchange or free of charge should be recognized at its marketvalue, which is the price that would have been paid under normal market conditions (whichmeans at an arm’s length relationship). Thus the measures of acquired brands under IAS 38 andFrench 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 orwith the business of an enterprise possessing the brand. Now a brand itself can be soldseparately 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 preconditionto 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,

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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 initiallymeasured either at the fair value of the asset given up or at its carrying amount (Knop andKüting 1995, 1047-1048). If an intangible asset is acquired free of charge, it must not beenrecognized because of the uncertainty of the value of this asset (Adler, Düring andSchmaltz1995, No. 17 to Para. 248).

Acquisition as Part of a Business Combination (Merger or Consolidated FinancialStatements)

The Fourth and Seventh Directive do not include any explicit advice of how to treat intangibleassets 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 andmeasured separatly. IAS 38 covers the treatment of acquired intangibles as part of a businesscombination 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 consolidatedfinancial statement at its fair value at the date of acquisition, if the intangible asset was part ofan acquisition of an enterprise. As reliable measurement is one precondition of recognition foran intangible asset, it becomes necessary to judge whether the fair value of the intangible assetcan 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 fairvalue may be estimated by the amount that the enterprise would have paid, at the date of theacquisition, for the asset in an arm’s length transaction between knowledgeable, informed andwilling 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 reliablemeasure for the intangible asset as part of the acquisition, that asset has to be included ingoodwill (IAS 38, Para. 31).

As it is usually difficult to make separate evaluations of brands acquired as part of a businesscombination, according to our interpretation of IAS 38, the first consolidation will quite seldomlead to a separate recognition of one brand. This interpretation is confirmed by the positiontaken by Harding (1995, 9), based on E50: “In many cases this [the determination of the cost ofbrands acquired in a business combination] may not be possible, and the cost of brands will besubsumed within goodwill”. In the context of the prohibition to recognize internally generatedbrands, IAS states in Para. 52 that “brands ... cannot be distinguished form the cost ofdeveloping the business as a whole”. However, in fact, IAS 38 seems to leave an option

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whether to separate the brand or to include it in goodwill: The Basis for Conclusions for IAS38, Para. 37 b) explicitly does not require an active market for an intangible asset to beseparated 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 exceptionsmentioned in Basis for Conclusions, Para. 58 are not valid for brands), this is only a question ofdisclosure and additional information and has no material impact on net income (at least as longas 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 beincorporated within the framework of the analysis of the difference between the considerationfor an acquired company and its net assets in case of a merger or another form of businesscombination. Regarding a business combination it has to be recalled that the difference arisingon first consolidation, at the time that an enterprise first comes within the scope of consolidatedaccounts, corresponds to the difference between the cost of acquiring its share and theproportion 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 assetswhich are accordingly reestimated to bring them to the value retained in the calculation ofthe 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 OpinionDated January 15, 1990 (CNC 1990), that elements are considered to be identifiable once theirmethod of evaluation is defined with sufficient precision and it is possible to follow theevolution of their value over the passage of time. The opinion states that “among theseidentifiable elements should be included intangible assets, which have not been included in thesingle company accounts: commercial networks, market shares, databases...”. In this context,the CNC opinion does not mention brands specifically, but commentators (and FrenchCompanies) 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.

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Consequently, in practice, a certain number of French companies allocate a part of thedifference on first consolidation to brands. In fact, according to the annual review of 1997published annual reports made by a group of accounting firms (X 1998), 52 of the hundredgroups reviewed allocate a part of the consolidation difference to brands, in some cases the sorecognized 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 purchaseof the enterprise.

French commentaries on E50 (Giot 1996, 10) considered that an identification as wide aspossible of intangibles, distinguishing them from the acquisition difference, better describes thereality of a company and improves financial reporting while leaving complete liberty to the userto 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 withidentifiability. This above French specific argumentation does not only lead to recognizedbrands 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 theacquired subsidiary, the difference on first consolidation must be allocated to the various assetaccounts 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 tospecific 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 ofintangible assets (including brands, for example) which are not recognized as assets in thesubsidiaries balance sheet (because of self generation), but which were included in theacquisition price. According to the generally accepted principles, there is certainly no optionrelating 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 measurementis a precondition for recognizing an asset in Germany similar to IAS 38. Because of the abovementioned difficulties to determine identifiable intangibles, and to measure them reliably, themajority of German companies record the vague amount of intangibles acquired with asubsidiary as goodwill. Nevertheless, literature and jurisdiction require to separate all itemswhich meet the preconditions for assets, tangible ones as well as intangible ones, from thegoodwill in the case of a merger or in the consolidated financial statement of the parent

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company (Richter 1990, 23; Schnicke and Reichmann 1995, 175-177; Moxter 1996, 29). Thiswould mean that if the purchased company possesses brands, the acquiring company has theobligation 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. Butneither 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 internallygenerated intangible asset meets the general requirements for recognition. Therefore, thestandard adds other conditions for recognition, such as the technical feasibility and theavailability of adequate resources in order to complete the intangible asset so that it will beavailable for use or sale, the intention and ability to use or sell it, the demonstration of probablefuture economic benefits and the ability of the enterprise to measure the expenditureattributable to the intangible asset reliably. Intangible assets arising from development (or fromthe development phase of an internal project) which comply with those explicitly mentionedconditions 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 berecognized as intangible assets”. This because IASC believes “that expenditure on internallygenerated brands ... cannot be distinguished from the cost of developing the business as awhole” (IAS 38, Para. 52). With this concrete prohibition the IASC takes a very prudent pointof view.

On principle, the French viewpoint is opposed to the IAS, but, in practice, conforms to it. As amatter 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 thebeneficiary of the operating rights (...) to a brand” (CNC 1986, I.25). As a result of this broadinterpretation of the content of this account of the PCG, enterprises may include selfgeneratedbrands in their balance sheets. However, there is a high degree of uncertainty as to the nature ofexpenses, which can be so capitalized. This explains why, in practice, French enterprises dousually not recognize internally generated brands as assets.

Against this background, the National Accounting Council (CNC), set up a committee whichworked in 1990-1991 on internally generated brands. This committee issued a report in April1992 (CNC, 1992; Kerviller and Obert 1992) modeled on that which had been adopted in the

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

All the reasoning is based on the concept of a “project”, in which seven criteria are needed torecord 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 thequestion: with what control tools?)

5. Explicit commitment to produce the output (use the brand) whose development is underprocess.

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 aresatisfied, the output (brand) can be capitalized.

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

Unfortunately, this report has never been transformed into a standard and the internallygenerated brands are usually not recorded in practice. (The main counter argument is that theprofit generated by the capitalization of the brand would be taxable). Nevertheless, the ideascontained in the report are very interesting and show that, contrary to what is affirmed in IAS38, solutions exist to calculate the cost of internally generated brands.

We have not discovered official indications in Germany of a similar reflection to thatundertaken in France concerning the recognition of selfgenerated brands. On the contrary, inGermany, the inclusion of internally generated brands in the assets is forbidden because of thelack of sufficient reliability of measurement (HGB, Para. 248, al. 2). In the case of an intangibleasset shown as current asset (which seems at least theoretically possible), on the contrary,

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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 brandmanagement, for the “shareholder value management”, in the context of mergers andacquisitions to estimate the value of a company, for determination of royalties for brands or foraccounting purposes. There are several methods which are discussed and proposed in literatureto lead to a reliable estimation of the value of a brand. In general the mentioned methods can beseparated into three approaches: the cost approach, the income approach and the marketapproach (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; Mazars1990; Medus 1990) which are shortly described as far as they are relevant for financialaccounting 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 differentaccounting texts. It can be used both for acquisitions and for internally generated brands. Thecost approach may either include all costs which were paid in the context of an acquisition of abrand or the costs which were necessary to build up the brand. Problems by using this methodresult from the difficulties of detecting the necessary information if a brand is in use for severalyears, or from the cost allocation between the creation of a brand and other items e.g. thedevelopment of products. Additionally, this method is only based on data from the past andtherefore 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 tobear today to bring it up to its current celebrity and pulling power for customers. In particular itincludes 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

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mentioned above and, above all, it will be rather difficult to define an adequate replication ofthe evaluated brand. This method is authorized under French law only in consolidated accountsand 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 costminus depreciation) and for the valuation of tangible and intangible assets separated fromgoodwill 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 theuse of the trademark. In clear, this approach tries to give an answer to the question: to whatextent does the brand increase the profits of the enterprise? There are several methodsproposed to compute the value.

It can be measured by comparing prices or profit margins of a product sold under the brandwith those of a product sold without branding (premium price method or profit contributionmethod). The main problem of the comparison is the identification of an adequate productwithout branding, as differences between the prices or earnings may also be caused by qualityof the product, by cost efficiency, market conditions or other factors. Additionally theadvantages of branding may have other effects such as stabilizing future demands for theproducts or permitting the production factors to be fully loaded. It may also be possible tocalculate directly the future economic benefits from the brand itself, e.g. by estimating therevenues 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 approachesuse customer evaluations (conjoint-analysis) or detailed analysis of criteria that influence brandpower (scoring models) to determine the value of a brand. Critics of these approaches arisefrom the choice of key factors, the weight of the factors and the relation between the factorsand the income.

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

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

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fund flows, the determination of future discount rates, and the estimation of probable usefullives. 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 ofother transactions made by the same sort of brand, particularly the purchase of separate brandsby the enterprise. It will be difficult to find recent market transactions with similar conditionsconcerning the brand, the products and the company envolved. But as the number of brandtransactions increases, this approach may become more relevant.

Others try to extract the value of the brand from the market value of the company by deductingthe 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 accountingrules 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 orfree of charge, other evaluations may take place, especially it might be necessary to determinethe fair value of the brand. To estimate the fair value of a brand, IAS 38 accepts a range ofmethods.

According to IASC (Para. 24), the cost of an intangible asset comprises its purchase price lesstrade discounts and rebates. The purchase price includes non-refundable purchase taxes, “andany directly attributable expenditure on preparing the asset for its intended use”. As exampleIAS 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 areaccounted for as charges (possibly spread over several financial years). The acquisition costmethod can only be considered objective if the brand is the subject of an individual transaction.

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According to the definition in German law, the acquisition cost generally comprises theexpenses necessary for the acquisition of an asset and its preparation for use to the extent thatthese 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 IASCtext 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 subsequentexpenses.

Internal Generation

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

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

• reliable, through the expedient of the project concept applied to the process of creating abrand (see above)

• relevant, according to the National Accounting Council (CNC 1992), particularly forvaluing a recent brand having a serious chance of commercial profitability and which hasnot yet attained its full maturity.

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

Because of the general prohibition to recognize an internally generated brand there is no need inGermany to think about the valuation problem. Only in the exceptional case of a brand ascurrent 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,

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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 directlyattributable to the brand production, e.g. the legal fees or some costs in the development stageas the creation of the brand or a preliminary consumer testing (Smith 1997, 131-132). Manyother costs, particularly advertising costs, usually belong to indirect or overhead costs. If theoption 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, whichis 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 separaterecognition of a brand which was part of an acquisition of a company because of the lack ofsufficient reliability in measurement. If the brand is recognized, nevertheless, the standard doessupply further precision relating to the methods for valuing brands at fair value obtainedthrough a business combination. These include, where appropriate, recently quoted marketprices, 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. Theymay be used if “they reflect current transactions and practices in the industry to which the assetbelongs”. According to this statement, all of the approaches for valuing brands which werementioned above, could be used. In particular the methods of the income approach and of themarket 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 thereport of the National Accounting Council (CNC 1992). Methods based on the capacity togenerate future cash flows (or profitability methods) can be used to value a brand in the contextof a merger or the first consolidation of an acquisition to separate the valuation difference in itsidentifiable parts. The royalty-relief-method is the most classical and often used approach to thevaluation of brands in France (La Villeguérin 1997).

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

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

MEASUREMENT AFTER INITIAL RECOGNITION

At the end of the financial year, when brands are separately recognized, it is necessary toexamine their value at the balance sheet date. This may result in (1) an amortization, (2) arevaluation 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 amortizationat all and how to determine its useful life. The main arguments against a definite useful life andtherefore 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 certainsectors: - 150 years for champagnes such as “Moët”, or cognacs like “Martell” and “RémyMartin”; - 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). Otherexamples 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 hugeadvertising expenses which are recognized as expenses and therefore does not justifyamortization or a limitation of the useful life. Useful life of tangible assets would beestimated in the same matter on the assumption of regular maintenance. In addition anamortization of the brand would charge the profit margins twice (amortization andmaintaining) (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 (Wildand Scicluna 1997, 94-96). Smith analyses some aspects that might result in a reduction of

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the value of a brand, but generally suggests that trademarks do have an indefinite life unlessany of the factors proof to be true in a special case. Anyway, he accepts that there is aconvention 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 legalpoint of view (Barth and Kneisel 1997, 474). Hence, although the right to use the brandmight last indefinitely, the ability of achieving future economic benefits from this brand hasto determine the question of amortization and useful life. It is not the legal part of a brandwhich creates future economic benefits but the higher sales of products, the stabilizedconnections between customers and the branded products or the economizing of advertisingexpenses (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 theproduct which is sold under the brand. But products, their technology, the customerexpectations or the market conditions change steadily. So if the brand is not supported bymanagement action to anticipate or to oppose these changes the value of the branddiminishes quickly (this result can be reached from several perspectives, see Meffert andBurmann 1998, Barwise, Higson, Likierman and Marsh 1989, 32-38). The question with thisargumentation is whether under this point of view the brand is still an identifiable andseparable asset or whether it is not too much connected to the products or services, whichwould not allow separable recognition.

• The expenses to maintain the brand e.g. advertising costs are not an argument in favor of aindefinite life. The value of a brand is a certain customer connection which leads to highersales. With time this connection looses strength. The publicity creates new customerconnections. So even in the case that the sales keep the same, they are a different matterthan they were at the beginning. By this way, according to this argumentation, the purchasedbrand is replaced by an internally generated brand which should not to be recognized as anasset (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 brandswhich have vanished, like “Steinhäger”, “Simca” or “Triumph” (Harding 1997, 82, Stein andOrtmann 1996, 791).

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

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valuation there seem to be more reasons against amortization; if amortization is to distribute therecognized amount over a limited time there are more arguments in favour of a regularamortization (Barth and Kneisel 1997, 474). The rules of IASC, France and Germany and thejurisdiction 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 purchaseprice or production cost of fixed assets with limited useful economic lives must be reduced byvalue adjustments calculated to write off the value of such assets systematically over theiruseful economic lives”. This article gives a general definition of depreciation. But it should benoted that the Directive does not provide any special measure for brands as opposed toformation expenses (article 34) and costs of research and development (article 37, Para. 2). Somember 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 carriedat 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 beallocated on a systematic basis over the best estimate of its useful life”. In general, IASCsupposes that the useful life of an intangible asset is not longer than twenty years. The period ofthe legal protection of a right usually limits the amortization period (IAS 38, Para. 85), but aslong as a renewal for brands is possible and certain, this limit is not relevant for brands. If theperiod of legal protection and the duration of future economic benefits differ, the shorter periodis 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 thantwenty years such a longer period is accepted. In these circumstances, several conditions mustbe met: (a) the enterprise estimates the recoverable amount of the intangible asset at leastannually in order to identify any impairment loss; (b) discloses the reasons why a longer usefullife better meets the requirements of fair presentation and the factor(s) that played a significantrole 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 isindeterminate (Giot 1996, 10).

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In France, in the report on brands mentioned above (CNC 1992), the depreciable character of abrand has been the subject of considerable debate within the committee, which illustrates thatthe answer does not appear to be evident. As a matter of fact, the General Accounting Planseems (implicitly) to exclude the amortization of the acquired brands (which can be recorded asassets): the title of the account “Amortization of concessions, patents...” excludes “brands”which, however, are recorded under the account “Concessions, patents... brands...”. At thesame 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 ofa brand. For that reason the committee concluded that a brand (acquired or internallygenerated) should not be amortized. French comments on E50 underline that for certainintangible assets with indeterminate useful lives, systematic amortization is not a relevantmethod. It should be replaced by a regular test of impairment (Giot 1996, 10). The problemwith such an argumentation is that such an impairment cannot usually be measured reliably dueto the restrictive definition given to the active market for assets (see below). This excludesnearly any practical application of an extra-ordinary write-down for brands.

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

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

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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 thegeneral opinion before the decision of the court in 1996 (Richter 1990). Because of thosedifferent 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 asin a business combination) and which is not separately reliably identifiable is - as mentionedabove - included in the goodwill. This goodwill (and so the brand as part of it) can, inGermany, be either amortized over a maximum of four years or the longer useful life or treateddirectly as expense. Due to a corresponding fiscal regulation a useful life of 15 years is usuallyalso applied in financial accounts if intangible assets are amortized not over four years butaccording to the useful life. In case of a goodwill arising from a business combination thegoodwill can additionally be set off against reserves. This high amount of options how to treat agoodwill arising from consolidation show that it is not at all unmaterial in Germany whether abrand value is separated from the goodwill and recognized as an identifiable asset orincorporated in the goodwill. While in the first case it must be amortized over the useful life, inthe other case it can be either amortized in between four years, amortized over the useful life ofthe goodwill, directly expensed or set off against reserves. Thus it really matters how anacquired brand through consolidation is taken into account.

Regarding the amortization of brands a general divergence between the German and Frenchaccounting conceptions can be recognized which result - as mentioned above - from a differentperception of the function of depreciation. According to HGB, Para. 253, al. 2, s. 2 thedominant objective of normal depreciation in Germany is not to take account of a fall in valuebut 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 theFrench General Accounting Plan “hesitates between the objective of assessing depreciation andthat of spreading costs” (Klee 1992, 50).

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

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Revaluation

For the evaluation of intangible assets at the end of the financial year, IAS 38 defines abenchmark treatment and an allowed alternative treatment (Para. 63 - 64). The benchmarktreatment has been presented under the heading “Amortization” which means initialmeasurement minus periodic amortization. According to the allowed alternative treatment, anintangible asset should be carried at a revalued amount, which is “its fair value at the date of therevaluation less any subsequent accumulated amortization and any subsequent accumulatedimpairment losses”. Fair value should be estimated by reference to an active market. But as IAS38, 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 relativelyinfrequent and individual. Therefore, the prices for recent transactions do not provide asufficient evidence for the fair value of other brands. Due to this lack of a reliable measurementbasis IAS 38 seems not to allow revaluation of brands.

The situation is absolutely clear in Germany and France. There, in accordance with the FourthEuropean Directive (article 33, Para. 1), the revaluation of intangible assets is generally notallowed. In Germany, because - due to the strong principle of prudence - revaluation is notaccepted for any asset, and in France, because the general revaluation option is limited (as it isin 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 tothe 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 anunexpected decline of value. Examples for such conditions are a loss of customer confidencebecause of an event such as the “Elch-Test” for Daimler-Benz or a loss of image such as “BrentSpar” 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 addsthat an enterprise should estimate the recoverable amount of the following intangible assets atleast 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

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(b) an intangible asset that is amortized over a period exceeding twenty years from the datewhen 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 theSecurities and Exchange Commission) indicates moreover that the directors are responsible fordetermining which are the numeric criteria, objective and verifiable, upon which the value ofelements 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 andprivate companies, between current and non-current assets and whether the decline of value isexpected to last for a longer or more likely for a shorter period. In the regular case of acorporation, having its brands classified as non-current assets, the brand has to be written downto its fair value, if an event has decreased the value of the brand for a longer time,. If there is arecovery of value later, even corporations have, in fact, an option to revalue the brand as longas the write-up in the balance sheet would have any tax impacts, which is usually the case, dueto the “Maßgeblichkeitsprinzip” (Para. 280 HGB).

DISCLOSURE REQUIREMENTS

Like other IAS and in conformity with the importance of the information aspect of theaccounting conception of the IASC, IAS 38 generally contains a lot of disclosure rules, whichgo far beyond the required disclosures for intangible assets in Germany and France. Accordingto German and French law a company just has to show the development of the balance sheetitem “intangible assets” regarding acquisitions, disposals and amortizations in the fixed assetsschedule. Additionally the method of amortization, the amortization period, write-downs andpossibly 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 isamortized over more than twenty years). In other cases, the disclosures for brands according toIAS 38 are similar to those in France and Germany.

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CONCLUSION

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

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

The study shows that generalizations concerning accounting treatments in different countriesand proposed by the IASC lead quite often to untrue statements. Regarding the two qualitativecharacteristics of accounting “relevance” and “reliability” it can be stated that although thedifferences in the general definition of assets in different countries are very much influenced bythe specific weight of those characteristics in different accounting conceptions, generalizingstatements 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 usuallyreferred to as “Continental European” in contrast to IASC. But for example, it becomesobvious that with regard to self generated brands German standards have more in common withthe IASC opinion than with leading accounting assumptions in France. Also in consolidatedfinancial statements, with respect to brands, it gets quite clear that France do not hesitate tobreak away from the focus on the prudence principle in going towards a more economicapproach of accounting. Most surprisingly IASC stresses in this context more the reliabilityaspect (“separability”, “identifiability” and “reliable measurement of cost”) than the relevanceaspect. Finally, regarding amortization of brands, IASC takes a position between Germany andFrance.

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So this research seems, unfortunately, to be a good example of the difficulty of internationalaccounting harmonization. Therefore it could be worthwhile to think about other ways to makeaccounting comparable in the meantime in order to avoid fundamental opposition (we canhardly imagine French companies starting to depreciate brands, even over twenty years). Thepossible solutions have been widely debated (see Hoarau 1995; Haller 1995; Nobes 1995; Vander Tas 1995) which result in additional information, reconciliations of major accounting itemsor restatements of whole financial statements disclosed in corporate reports to allowcomparison between accounting figures according to domestic and to foreign accounting rules.Those solutions are in the meanwhile quite common in practice. However, new Acts haveopened the opportunity for companies in several countries – also in France and Germany – topresent their consolidated financial statements according to internationally accepted standards -in particular IAS and US-GAAP - instead of domestic rules. Almost all of the globally actingcompanies do or will most likely take this opportunity. There is no doubt that this is good forinternational comparisons but not for harmonization because the differences in the accountingsystems continue to exist. Whether they really can be removed through the started newstandard 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 isstill a very inhomogeneous area in the international accounting field, will be one of thecornerstones or obstacles in this recently started new harmonization process of nationalstandard setters. Harding (1995, 9) recognizes that “many national standard setting bodies havetried to deal with, or are still grappling with, the issues surrounding intangible assets. Few haveso 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 questionof amortization are not clear neither within one rule nor between the rules of IASC, France andGermany. It is obvious that a topic far more difficult like the recognition and measurement ofbrands as part of a business combination or of internally generated brands, is still far away froman generally accepted international solution. Those assets are one of the greatest challenges tonational and international accounting, better to say, for accounting in general, as such becausethey are the focuspoint of the conflicting relationship between the major characteristics ofaccounting data, “relevance” and “reliability”. As long as it is not possible to find a generallyacceptable solution for the recognition and measurement of those items in the balance sheetthere 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 animportant information especially for the capital markets. One way to provide such information

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could be the disclosure of an additional statement demonstrating the composition, thedevelopment 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 ofdifferent sorts of intangibles. Such a statement must be accompanied by additional verbalinformation e.g. explaining the brand and its valuation. Our reflections have demonstrated thatbrands in particular and intangibles in general will remain a major accounting challenge in thefuture.

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