How Accountants Will Change the Face of Trademark Licensing

As the licensing industry frets about whether the biggest event of the year will be the performance of Harry Potter at retail or Ford’s acquisition of The Beanstalk Group, too many people have ignored a change in accounting rules that will transform forever the valuation of trademarks and brands.  Attorneys and practitioners in trademark licensing need to pay attention, for at least a moment, to the sometimes tedious realm of accounting rules and finance.  It is about to change their lives.

FASB Rule

Until now, the goodwill attributed to the acquisition of one company by another – the value paid for the target company over and above the value of its assets – has been amortized over a 40 year period.  That rule decreases corporate earnings, but it also has a symbolic but very important impact on brand management.  Since the value attributable to goodwill is made up mostly of intangible assets like brands, the rule has preserved the idea that brand value declines over time – like a factory roof.

We know, however, that that well-managed brands do not decrease in value over time.  They grow.  The accounting rule has not only embodied an incorrect assumption, but has also discouraged business types from managing intangible assets as assets.

A new accounting rule from the Financial Accounting Standards Board (FASB), to take effect January 1, 2002, will change all that.  Goodwill from an acquisition will now remain on corporate balance sheets as long as the corporation believes that value has been preserved.

The new rule is not perfect – it does not help the balance sheets of companies that build their own brands without selling out, nor does it set sufficient rules for measuring when goodwill has been impaired – but it advances a more realistic understanding of brand valuation.  It will also lead financial types who spend their hours performing calculations of ROI, ROE and ROA to add another formula to that mix: ROBE, or Return on Brand Equity.

How it Will Change Licensing

Alone in a brand’s mix of marketing tools, licensing produces revenue. Moreover, licensing royalties are the only income generated by that intangible asset – equity in the brand itself.

Too few major corporations have paid attention to the strategic value of licensing.  The new FASB rule will make an explicit connection between licensing and a company’s balance sheet, and offers that company a new way to prove that it is fully employing its assets.

Now that some intangible assets remain on the balance sheet for a longer time at a higher value, managers will pursue more ways to take advantage of them as assets.    They can be borrowed against, they can be increased, and they can be exploited.  They will be, in increasingly sophisticated ways.

That prediction is not hard to make, because the United States is not the first country to take this step.  In Britain and Australia, smaller countries that often display more sophisticated and active brand licensing programs, brand valuations have long been treated as non-amortizing assets on a balance sheet.  The same accounting rule in the United States will create a new era in licensing, one in which more people – and more important people – will recognize its ability to leverage big brand equity.

From the November-December 2001 issue of The Licensing Letter