In order to attach the correct market value to a brand, the method used must meet certain criteria. The method must be relevant to the type of commodity on which it is applied. It should be the best method possible for the brand. Such a method should also be understandable, economical, reliable, as well as comparable to other methods. Three major approaches are adopted for brand valuation. These are cost approach, market approach and the income approach.
Cost approach is based on the costs related to the development of the brand. It is an aggregate of the costs incurred, to date, in creating the brand. These costs include product concept development, market feasibility study, product promotion and improvement. This method assumes that historical costs apply and will recur hence it is easy to apply. However, the method cannot be relied upon in predicting future trends as it is based on historical costs.
Market approach utilizes the prevailing market conditions in valuation. It is based on the value to which the brand can be sold in the market. It is the agreed price that the seller and the buyer would be willing to exchange the product. The method is best applicable when one intends to sell a product. Nevertheless, this method is limited due to the lack of relevant market information to base the valuation.
Income approach adopts the present value concept in valuation. The future benefits, cash flows and cost savings are discounted to obtain the present value that can be attached to a particular brand. This method assumes that future cash flows are predictable and known with certainty. Intrinsic value calculated therefore becomes the value of the brand. Income approach is the most preferable method in valuation of brands.
As a financial analyst, I would adopt the income approach to assess the correctness of the value attached to Tata brand. This would entail the computation of the present value of the future cash flows related to the brand. Some questions to ask include enquiring on the projected sales, expenses and net earnings of the firm. The firm’s assets would also be analyzed for depreciation and the associated tax shield. Computation will this be done to compare with the reported values.
Impairment of assets
Asset impairment refers to the reduction in the recoverable amount of an asset below the asset’s current carrying value in the financial statements. Recoverable amount is the higher of the value in use and the sale proceeds that would be obtained in the market if the asset were currently sold. The benefit that would accrue to the business because of the use of the asset is the value in use. This is arrived at by computing the present value of the future cash flows expected from the use of the asset. Carrying value is the current net book value of the asset. It results from the original cost of the asset less the accumulated depreciation to date.
Impairment of assets is indicated by various factors. These are classified into external and internal factors. Internal factors include adverse change in the use to which an asset is put and its economic performance. Physical damage to an asset rendering it obsolete also indicated impairment. Externally, impairment would be indicated by a fall in the asset’s market value more significant than expected from passage of time or normal use. Increase in the market interest rates that interfere with the discounting rate initially used in computing the asset’s value in use is also a key factor.
According to IAS 36, impairment is computed by computing the excess of the carrying value above the recoverable amount of the asset. In case of impairment loss, the loss is charged to the income statement and the carrying value adjusted to factor in the loss. If the recoverable amount exceeds the carrying amount, a recommendation for revaluation is made. As a financial analyst, I would enquire about the impairment loss on the assets if any. I would also investigate if the relevant disclosures were made in the financial statements. Any revaluations on assets will also be investigated to ensure appropriate accounting treatment.
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