Regulators in the U.S. are set to change the concept of “materiality,” or the determination of what information is necessary for companies to disclose publicly. While sales and earnings figures are important, Baruch Lev, an accounting professor at New York University’s Stern School of Business who analyzed financial reports and quarterly conference calls at some 3,000 companies over the past 50 years, found that financial analysts have all but stopped asking about these figures. Mr Lev said “the usefulness of financial information to investors decreased tremendously over the last 20 to 30 years,” and that companies do not say enough about intangible assets, such as brands, that can drive their business. Indeed, large accounting firms like EY are putting out research pieces on Integrated Reporting, which focuses on disclosing more than just numbers.

Recognizing this change in reporting was coming, the International Organization for Standardization (“ISO”) passed ISO Standard 10668 on Brand Valuation. ISO Standard 10668 recognizes that financial considerations are only one leg of the stool that make up a brand’s value. Legal and Consumer Behavior considerations also play a critical part in determining the value of the brand. Despite the soundness of ISO 10668, it has not been adopted as a rule by FASB; thus, its usefulness has been undermined because most brand valuations are performed by outside accounting firms who continue to rely on the traditional valuation methods, the:  (1) Cost Approach; (2) Market Approach; and (3) Income Approach.

However, even these traditional valuation approaches implicitly require a legal strength analysis of a mark. The cost approach is essentially calculated as a replacement cost for the brand. This requires a consideration of all the costs invested in a brand (e.g., the cost for acquiring, supporting, and maintaining the brand). Supporting and maintaining a brand necessarily involves an assessment of the conceptual and commercial legal strength of brand to assess what it would cost to replicate the same level of legal strength.

The market approach is a comparison of similarly situated brands. This requires comparing brands with similar traits (e.g., legal strength). Finally, the Income Method incudes six different approaches but they all generally rely on the premise that a company can get a higher price on a product with a known brand than for a generic product without a brand. Again, whether a mark has achieved fame requires a legal opinion of the overall strength of a mark.

Whether ISO 10668 is eventually adopted as a rule or not, current brand valuation companies could improve the accuracy of their valuations by including and working together with experienced trademark counsel. And if accounting firms or other brand valuation companies are reluctant to include experienced trademark counsel in the valuation process, any company having its brand valued should insist on getting experienced trademark counsel involved.