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Market valuations make clear that brands do have value. Roger Trapp on the latest arguments in favour of 'intellectual capital' being reflected in accounts

In recent years, brands have become one of the most vexed issues in accounting. The matter came to a head in the acquisition spree of the late 1980s, when companies such as Grand Metropolitan - the owner of such names as Haagen-Dazs ice cream and the Burger King fast-food chain that is currently seeking to merge its brand portfolio with that of Guinness - started putting the value of their acquired brands on their balance sheet.

That was a problem because, under conventional accounting rules, brands had no value. Only physical assets such as plant, machinery and buildings had value. Intangibles, such as brands, came under goodwill that had to be written off. Accordingly, as GrandMet's finance director, Gerald Corbett, explains in a book published today, when the company bought Heublein, a US drinks operation that included Smirnoff Vodka among its brand portfolio, in 1987 pounds 565m of the pounds 800m paid was treated in that way. "Though this write-off was made against reserves rather than as a charge to profits, it meant that the balance sheet net assets fell substantially and hence gave the impression that pounds 565m of the company's money had been wasted," Mr Corbett says.

Dissatisfaction with that state of affairs led to the board of GrandMet to announce in the following year that it intended to value its brands. It was one of the moves that prompted what has come to be referred to as the "long hard look" at accounting for intangibles that has resulted in an exposure draft - or set of proposals for discussion - from the Accounting Standards Board, which sets out the guidelines under which company accounts are drawn up.

As Tom Blackett, deputy chairman of the branch consultancy Interbrand, points out in the foreword to the third edition of the company's book Brand Valuation, the ASB has decided that where brands can be valued reliably, including them on the balance sheet should become standard practice, Moreover, if it can be demonstrated, subject to annual review, that they are expected to last more than 20 years, they do not have to be written off.

However, problems remain. The ASB - at the forefront of a debate now involving standard-setters around the world - "has publicly recognised the inconsistencies that might arise from a situation in which acquired brands could be recognised but home-grown ones ignored", Mr Blackett says.

At the very least, that means that the balance sheet of a company that has grown by buying other companies cannot be compared with one that has grown organically. But, Raymond Perrier, a director at Interbrand and editor of Brand Valuation, believes the anomaly exposes the whole issue of valuation of companies in the current environment.

It might appear odd that companies such as GrandMet which have collected brands over the years can attribute a value to such assets in their accounts while a company such as Coca-Cola, possessor of what is still arguably the world's most powerful brand despite being topped by McDonald's in Interbrand's latest survey, cannot. But it is surely odder still that accountants have no adequate means for explaining how businesses like Microsoft and Intel can have few conventional assets yet - in market capitalisation terms - be among the world's most valuable companies.

Indeed, research suggests that out-of-date accounting methods mean that in most businesses the financial statements fail to account for about two-thirds of the organisations' real value. That value is tied up in copyrights, patents, brands, corporate reputation and other forms of goodwill, Mr Perrier says, calling for boards to make a priority of recognising the importance of the matter. "Brand valuation has been kidnapped by accountants. It is thought to be of interest only to finance directors and accountants," he adds. "I think it should be for marketing people and chief executives. They and advertising agencies are the people whose business depends on good management of brands."

On the basis that management relies on information, Mr Perrier proposes that companies include in their accounts an audited statement of what has come to be called "intellectual capital". That would set out the intangible assets and liabilities that underpin the business.

"There is an increasing gap between information that is made public and information used internally," he says, explaining that this is hardly surprising - the notion of balance sheets was great for 19th century companies, where the value of machinery used in a process was the key concern, but as the 21st century looms, that is no longer the case. Instead, intangibles, such as the knowledge of a company's work-force and the power of its brands, are the real determinants of success.

Pointing out that the intellectual capital statement would be a complement rather than a replacement for balance sheets, Mr Perrier predicts that in 20 years people will wonder why there was ever a debate.

"Business has changed enormously over the last two decades, and intangible assets, primarily brands, are now worth more than tangible assets for many businesses," Mr Perrier adds, stressing that the focus of the planned GrandMet-Guinness merger is brands. He also refers to the troubles that Shell has had with pressure groups over the disposal of Brent Spar and its operations in Nigeria and says that future valuations of the company are going to have much more to do with how it deals with such issues than with the refineries and oilfields.

Brand Valuation (Premier Books, pounds 25) is a collection of articles by marketing practitioners and commentators and seeks to create a better understanding of a concept that is almost certain to become so important that the accountancy profession will have to give its approach to it a fundamental overhaul.

In the words of Mr Blackett, now that brands have established themselves at the heart of businesses, it is incumbent upon their owners to manage them for profit. And to do that requires accountabilityn