1. * The Value of Trademarks
Brand Strategy and Impact on Financial Reporting -
Brand Valuation in a Regulated Environment
Andreas Mackenstedt
Copenhagen, 7 June 2007
*connectedthinking
PwC

2. Agenda
1 IFRS financial reporting requirements
2 Brand valuation methodologies for financial reporting
3 Financial statements impact

3. Valuation of Intangible Assets impacting Financial Reporting
Mergers & Acquisitions (M&A): impact on purchase price considerations, individual disposal of patents, brands etc.
Tax Purposes: change of ownership, licensing in/out, transfer pricing
Financing and Securitization: rating (Basel II), start-up financing, sale & lease back, collateralisation
Value Based Management: intellectual asset management, management reporting, investor communication
Financial Accounting: acquisition accounting: purchase price allocation, impairment testing

4. Relevant standards for international financial accounting
US GAAP
IFRS
Acquisition accounting
Business combinations
SFAS 141
Business
combinations
IFRS 3
Business combinations
Joint exposure draft issued by FASB and IASB
Post-
acquisition
accounting
Goodwill
SFAS 142
Goodwill and other intangible assets
IAS 36
Impairment of assets
IAS 38
Intangible assets
IFRS 5
Assets held for sale
IAS 36
SFAS Indefinite lives
SFAS 144
Definite lives
Intangible assets
SFAS 144
Impairment or disposal
of long-lived assets
IAS 16
Property, plant & equipment
IFRS 5
IAS 36
Tangible assets
Fair value measurements Paper SFAS Discussion Paper
In principle: no capitalisation of self-generated / self-developed intangibles

5. = Valuation Concepts and Methods Definition of Fair Value Fair Value
Purchase Price =
Investment Value
Liquidation Value (net realisable value) including Forced Sale
“Fair Value is the amount for which an asset could be exchanged, or a liability settled between knowledgeable, willing parties in an arm’s length transaction.“
Value In Use (Going Concern)
Book Value
Source: IFRS 3 Appendix A
Willing buyer & willing seller
Hypothetical buyer concept
Stand-alone valuation

6. Other Value Concepts, which are not Fair Value according to IFRS
Investment value
Synergistic or strategic value
Willing buyer is not a hypothetical marketplace buyer but rather is a particular buyer with specific expectations about future events, cost of capital, taxation, and other issues
Book value
Historical and capitalised cost of an asset less accumulated depreciation, depletion or amortisation as it appears on the account books of the business
Value in use
Term defined by IAS 36. The asset is considered as part of other assets of the respective enterprise and not on an individual basis. Certain valuation assumptions are rather entity-specific (e.g. synergies), others are defined by the accounting standard (CAPEX enhancements, restructuring).
Liquidation value
The seller is compelled to sell.
The buyer may be a willing buyer, but the seller must sell unwillingly.

7. Current price on active market
Intangible Asset Valuation Valuation techniques for Financial Reporting - Overview
Valuation Techniques
Market Approach
Income Approach
Cost Approach
Current price on active market
Excess Earnings Method
Relief from Royalty Method
Incremental Cash Flow Method
Reproduction Cost Method
Most recent comparable transactions / Multiples
Replacement Cost Method

8. Market approach Premise of value
“Prices from previous transactions provide empirical evidence for the value of an intangible asset”
Principle based on Make or buy decision
Cost does not equal value, but:
Indirect relationship bw cost and value.
Cost relates to the production process and not to the marketplace exchange rates (contrast to market approach)

9. Represents one specific
Market approach
Active market for brands: not existing
Comparable transactions / multiples
Price
Fair value
Represents one specific
transaction only!
Adjustments to derive
fair value necessary!
Changes in market conditions and legislation
Marketplace conditions
Participant-specific influences & motivations
Deal-specific issues, e.g. financing terms, tax issues
Key value drivers:
Future economic benefits
Asset-specific risk
Remaining useful life

10. Income approach Premise of value
“An intangible asset is worth what it can earn!”

11. Income Approach - Valuation principles
Isolate the future cash flows an investor would expect the subject intangible asset to generate
FV =
Cash Flow t
(1 + Discount Rate)t ∑
t=1 T
Discount future cash flows with an appropriate discount rate

12. Income Approach - Valuation principles
Step 3:
If applicable: calculation of terminal value*
Step 1:
Expected future Cash Flows
Asset-specific cash flows:
Step4:
Present value calculation
2007
2008
2009
2010
2011
....
Terminal Value
Asset-specific Weighted Average Cost of Capital (WACC)
Present
Value
Step 2
Determination of asset specific discount rate
* for indefinite lived intangibles only

13. Relief-from-royalty method Concept
Ownership of the asset
e.g. trademark
from paying royalty rate
relieves owner
The royalty savings are the expected cash flows
for the subject intangible asset!

14. Relief-from-royalty method Valuation steps1.
Determine royalty rate for comparable asset 2.
Multiply with matching valuation base 3.
Subtract tax expenses 4.
Calculate present value of royalty savings
If you are calculating pre-tax contributory asset charges you have to deduct the tax expenses after the contributory asset charges 5.
Compute the tax amortisation benefit (TAB*)
* Tax amortisation benefit due to tax deductible amortisation of respective intangible as element to finally calculate fair value

15. Relief-from-royalty method Example
Valuation of brand
Valuation date: 1 January 2007
Brand valuation
from
Fair value
2007
Brand-specific sales
2000
Royalty 4%
Pre-tax royalty savings
80.0
Corporate
40%
32.0
After-tax royalty savings
48.0
Discount
10%
Growth 2%
Residual multiple
11.918
Discount factor
Present value after-tax royalty savings
572
Tax amortisation benefit
114
Fair value
686
Step-up factor TAB
1.2

16. Incremental cash-flow method Concepts
Cost savings
The intangible asset allows the owner
to lower costs
Incremental revenue
The intangible asset
allows the owner
to earn incremental cash flows, e.g. to charge a price-premium
Impact on Net Working Capital!!!
Example: Technology allows Cost Savings
Example: Monopoly rights allows additional revenues

17. Incremental cash-flow method Valuation steps1.
Derive pre-tax incremental cash flows of subject intangible 2.
Subtract tax expenses 3.
Consider incremental contributory asset charges (CAC) 4.
Calculate present value of incremental cash flows
If you are calculating pre-tax contributory asset charges you have to deduct the tax expenses after the contributory asset charges 5.
Compute the tax amortisation benefit (TAB*)
* Tax amortisation benefit due to tax deductible amortisation of respective intangible as element to finally calculate fair value

18. Incremental Cash Flow Method Price Premium Method
Price per bottle
€ 1,30
Brand
Premium
Price effect
Volume effect
Branded Product
Unbranded Product
Brand Forecast
Volume
Branded sales
Price per bottle
€ 1,00
R (x)
Total revenues
C (x)
CP (x)
Brand
Risk
Consideration of brand specific risks and present value calculation
Brand specific revenues
Brand specific costs
Brand specific contribution to income t

19. Incremental Cash Flow Method Example

20. Cost approach Premise of value
“An investor will pay no more for an asset than the cost to purchase or construct an asset of equal utility!“
Principle based on Make or buy decision
Cost does not equal value, but:
Indirect relationship bw cost and value.
Cost relates to the production process and not to the marketplace exchange rates (contrast to market approach)

21. Cost Approach Cost approach methods Reproduction cost method
Replacement cost method
“cost to construct an
exact duplicate”
“cost to construct
equivalent utility”
Reproduction Cost Method:
„cost to construct an exact duplicate“
Using the same materials, production standards, design, layout, and quality of workmanship as the subject intangible asset. The reproduction intangible asset will include all curable inadequacies, and obsolescence that are present in the subject intangible asset.
Replacement cost Method:
„Cost to construct equivalent utility“
using modern materials, production standards, design, layout, and quality of workmanship. The reproduction intangible asset will exclude all curable inadequacies, and obsolescence that are present in the subject intangible asset.
What you get is an indication for a new/unused asset
Value should be the same due to different allowances for obsolesence
Although the reprod. costs and replace. costs are likely materially different for the same intangible asset, the value derived for the subject Intangible Asset should be the same. This will become clear when we talk about allowance for obsolescence
To avoid confusion and inconsistencies cost approach should be selected up front.
Using same materials, production standards, design ...
Using modern materials, production standards, design ...

22. Valuation Concepts and Methods Remaining Useful Lifetime and Nature of Analysis (IAS 38.90)
Expected usage of the asset
Typical product life cycle for the asset
Technical, technological, commercial or other types of obsolescence
Changes in the market demand for the outputs from the asset
Expected actions by competitors
Level of maintenance expenditure required to obtain expected future economic benefits from the asset
Legal factors (limitations)
Period of control over the asset
Dependence on the useful lifetime of other assets
. . . if no foreseeable limit: apply indefinite useful life

23. Financial Statements Impacts
Brand
Value
Brand with indefinite useful life – no amortisation
but annual impairment test
Brand with
definite useful life -
annual amortisation
2007
2008
2009
2010
2011
2012
2013
2014
EBIT
Net income
EPS
ROCE
ROA
ROI
Absolute Profitability
Relative Profitability
Which are the
key financial ratios
used for:
- investor relations
- benchmarking
- internal performance measurement?

24. PwC’s deal continuum considers the importance of intangible assets, esp. brands
Identifying
deals
Evaluating
deals
Executing
deals
Making deals
successful
Harvesting
deals
Bid support
Investment banking advice
Deal flow
Strategy evaluation
No-access due diligence
Deal strategy validation
Value driver identification
Target evaluation
Synergy assessment
Pre-deal purchase price allocation
Deal due diligence
Operations analysis
Deal structuring
Negotiation
Legal services
Tax and human
resources issues
Completion accounts
SPA support
Post merger integration
Synergy review
Operational improvements
Purchase price allocation (IFRS / US GAAP)
Sell-side due diligence
Carve-outs
Capital markets
IPO advice
Buyer identification
Investment banking advice
Exit Strategy
Valuation
Value added
Improvement
Valuation
Structuring
Management
Closing
Aspects of further
Segementation
of Intangible Assets
Intangible Asset DD
Identification
Assessment
Pre Deal
First 100 days
Transformation

25. Thanks for your attention!
© 2006 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the German firm PricewaterhouseCoopers AG WPG and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
PwC

26. pwc Contact PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft
Andreas Mackenstedt
Advisory Partner
Tel:
pwc
© 2006 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the German firm PricewaterhouseCoopers AG WPG and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

27. German Survey 2005 Relevance of intangible assets*
80%
68%
70%
67%
60%
50%
43%
42%
40%
40%
30%
20%
10% 0%
Human
capital
Customer
relations
Industrial
property rights
Brands
Know how
*source: PwC survey: “Brand Valuation for German Companies, fall 2005 (German); n = 60

28. German Survey 2005 Proportion of brand value compared to business enterpise value*
80%
67%
70%
60%
56%
50%
40%
30%
20%
10% 0%
1999 (n = 100)
2005 (n = 60)
*source: PwC survey: “Brand Valuation for German Companies, fall 2005 (German)

29. Brand strategy and impact on financial reporting
Partner Andreas Mackenstedt Princewaterhouse Coopers

30. Refreshments
Welcome back at 16.10