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Are the current reporting rules still fit for purpose?

Intangible assets are a vital asset for many companies. But the practice of reporting one type of intangible assets, namely brands, is muddled, illogical and needs reform. Some companies ignore brands in their financial statements, others capitalise them and some companies then confusingly report brands in different ways. But just how should brands be reported fairly, meaningfully and transparently?

Importance of Brands

The importance of brands and their subsequent loss in value has been highlighted by Kraft Heinz. This US food giant has been rocked by a colossal write-off of its brands. Indeed, for a company to lose in total over $15 billion in just one financial year takes real effort. But Kraft Heinz easily met the challenge. The troubled food company, which has many leading branded food products, recognised this enormous impairment charge for intangible assets against earnings in its 2018 full year results. These impairments, belatedly published this summer, were later compounded by yet further write-offs of intangibles of over $1.2 billion. These write- offs were largely the result of a massive hit to the value of its intangible assets - that mainly comprised of its brands.

Many of the Kraft Heinz brands are increasingly regarded as being stale and reaching the end of their effective lives. Kraft Heinz has been accused of clinging to some of its branded product fortunes for far too long. Product innovation and development has been slow. The outcome is that many of its brands were previously over-stated in their financial statements, so their recent impairments have hit the company hard. Kraft Heinz's substantial impairments of these intangible assets arose especially from under-performance in its US refrigerated and Canadian retail companies and particularly from its Kraft and Oscar Mayer global brands. Even though it generates annual turnover in excess of $26bn and has total assets of over $103bn, its intangible asset write-offs represent sizeable damage to earnings. Although Kraft Heinz correctly point out in their latest annual report that these write-offs are non-cash items in the financial statements, they do nevertheless represent a substantial destruction of shareholder value.

Impairment Tests

The importance of intangibles is also relevant to many other multinational companies. On this side of the Atlantic, Unilever recognises a net goodwill balance of £17.3bn and, in...

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