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December 11, 2020

Do accountants lowball brand values?

There is an ongoing controversial discussion about the treatment of intangible assets in accounting and financial reporting. Some wish that more detailed and meaningful information about intangible assets is disclosed. They lament the conservatism in the accounting profession and standard setting. Others say that such information on intangible assets is not accurate and too expensive to gather and update.

In this context, goodwill is a often seen as a Trojan horse. For the supporters of intangible value, goodwill is a residual category for “not elsewhere classified”, and thus meaningless. For them, high shares of accounted goodwill stand for conservatism in valuing other intangible assets. For equity analysts, high shares of goodwill point to potential overpayment. If goodwill is high, the value of identifiable intangible assets is low. For the opponents of intangible value, goodwill is like a relief not to overstrain their efforts to value intangible assets.

Interestingly, the share of goodwill in enterprise value has been quite constant at around 50% on average all along the way since purchase price allocations are required under the IAS and IFRS framework.

Almost five years ago, MARKABLES published an article treating the ostensible conservatism of accountants in the valuation of intangible assets: “Debunking the Myth That Business Appraisers Lowball Brand Values”, in Business Valuation Update, Vol. 22, No. 7, July 2016. The article has lost none of its topicality; there is no evidence for accountants acting conservatively with regard to intangible asset value.

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