The Report of the Committee on

Brand Valuation

The Ministry of Economy, Trade and Industry

The Government of Japan

June 24, 2002

 Contents of the Report

Members of the Committee on Brand Valuation 5

Summary 7
The Report of the Committee on Brand Valuation 21
I Publication of the Report 22
II Definition of Brand 25
II-1 Concept of Brand 25
II-2 Concept of Brand Value 25
II-3 Corporate Brand and Product Brand 26
III Brand Royalty Fee: Current Practice and Issues 29
III-1 Current Practice in Charging Brand Royalty Fee 29
III-2 Issues on the Payment and Receipt of Brand Royalty Fee 29
III-2-1 Issues related to the Commercial Code 29
III-2-2 Issues related to the Corporation Tax Laws 31
III-3 Issues on the Calculation of Brand Royalty Fee 33
IV Capitalization of Brands: Implications and Issues 34
IV-1 Capitalization of Purchased Brands 34
IV-2 Capitalization of Internally Generated Brands 35
IV-3 Issues on the Capitalization of Internally Generated Brands 36
IV-3-1 Issues related to Business Accounting regarding
Capitalization of Internally Generated Brands 36
IV-3-2 Issues related to the Commercial Code regarding
Capitalization of Internally Generated Brands 38
IV-3-3 Issues related to the Corporation Tax Laws regarding
Capitalization of Internally Generated Brands 39
IV-4 Treatment of Institutional Issues 40
V Results and Analysis of the Questionnaire on Brand Valuation 41
V-1 Outline of the Questionnaire 41
V-2 Results and Analysis 43
V-2-1 Results of the Awareness and Recognition 43
V-2-2 Results of the Current Practices 49
VI Brand Valuation Model 58
VI-1 Approaches to Brand Valuation 58

2
 VI-1-1 Residual Approach 58
VI-1-2 Independent Valuation Approach 58
(1) Cost Approach 58
(2) Market Approach 59
(3) Income Approach 59
① Royalty Exemption Method 60
② Price Premium Method 60
VI-1-3 Examination of Valuation Methodology under Income
Approach 60
(1) Calculation Methodology for Annual Cash Flow s 61
(2) Techniques for Estimating Future Cash Flows 63
(3) Calculation Methodology for Discount Rates 64
(4) Duration of Cash Flows 65
VI-2 Basic Concept of Brand Valuation Model 66
VI-3 Definition of Key Drivers 67
VI-3-1 Prestige Driver 67
VI-3-2 Loyalty Driver 72
VI-3-3 Expansion Driver 74
VI-4 Brand Valuation Model 78
VI-5 Constraints on the Brand Valuation Model 78
VI-6 Review of the Brand Valuation Model based on Simulations 80
VI-6-1 Reviewing the Time Series Regression 80
VI-6-2 Reviewing the Prestige Driver 81
VI-6-3 Reviewing the Loyalty Driver 82
VI-6-4 Reviewing the Expansion Driver 83
VII Brand Management Model 84
VII-1 Brand Management Model and its Implications 84
VII-2 Analysis of Brand Valuation Amount and the Questionnaire
Results 85
VII-3 Use of Brand Value Chart and Brand Fundamentals within
the Brand Value Board Framework 86
VIII Expected Practices in Charging Brand Royalty Fee 91
IX Disclosure of Brand Assets 93
IX-1 Standards for Accounting for Brand as Assets 93
IX-2 Disclosure of Brand Assets 97

3
Endnote 100
Discussion Procedures 103

Appendices 111
Appendix 1 Questionnaire on Brand Valuation 112
Questionnaire Template
Appendix 2 Classification of Industries Used in the Simulation Exercise 122
Appendix 3 Standard Figures by Industries Used in the Simulation
Exercise 125

4
 Members of the Committee on Brand Valuation

Chairman of the Committee

Yoshikuni Hirose, Dr. (Professor of Accounting, School of Commerce, Waseda
University)

Members of the Committee

Akiko Fujita (Professor of Accounting, Faculty of Economics, Meiji Gakuin
University)
Makoto Fujita (Professor of Management, School of Commerce, Waseda
University)
Keigo Fuchi (Assistant Professor of Law, Gakushuin University)
Shinya Fukuda (Certified Public Accountant, Deloitte Touche Tomatsu)
Naofumi Hara (Senior General Manager, Brand Strategy Department, Global
Hub, Sony Corporation)
Naoki Hirai (Manager, Financial Research Center, Nomura Securities Co., Ltd.)
Toshiro Hiromoto, Dr. (Professor of Accounting, Graduate School of
Commerce and Management, Hitotsubashi University)
Akira Horiuchi (Senior Manager, Group Management Office, Hitachi Ltd.)
Takashi Inoue (Manager, Space, Energy & Technology Policy Group,
Environment, Science & Technology Bureau, Japan Business Federation)
Junzo Ishii, Ph.D. (Professor of Marketing, Graduate School of Business
Administration, Kobe University)
Masaaki Iwasaki, Ph.D. (Professor of Law, Yokohama National University)
Hiroyuki Kansaku (Professor of Law, Gakushuin University)
Yukitoshi Kubo (Certified Public Accountant)
Makoto Matsuo (Attorney at Law)
Shigeru Nishizawa (Associate Professor of Accounting, School of Economy,
Sophia University)
Takahiro Ohno, Dr. (Professor, School of Science and Engineering, Waseda
University)
Daisuke Okamoto (Professor of Management, Keio University)
Hikoh Okuda (Ex-Chief CI Officer, Sony Corporation)
Haruhiko Saito (Executive Director, KPMG Financial K.K.)

5
Tsuyoshi Sakai (Deputy General Manager, Communications Planning
Department, Corporate Communications Division, Shiseido Co., Ltd.)
Hisakatsu Sakurai, Dr. (Professor of Accounting, Graduate School of Business,
Kobe University)
Kazushi Shibata, Ph.D. (Professor of Commercial Code, Faculty of Law, Hosei
University)
Akira Shimizu (Professor of Marketing, Meiji Gakuin University)
Tetsuo Sugimoto (Professor of Consumer Psychology, School of Economy,
Sophia University)
Masatsugu Tsuji, Ph.D. (Professor, Osaka School of Institutional Public Policy)
Risa Ueda (Financial and Payment System Office, Bank of Japan)
Hiroyuki Yamada (Certified Public Accountant, Deloitte Touche Tomatsu)
Hiroshi Yoshimi (Associate Professor of Accounting and Auditing, Graduate
School, Hokkaido University)

6
Summary
 The Report of the Committee on Brand Valuation
(“Hirose Report”)

Ⅰ Publication of the Report

Ⅱ Definition of Brand
Ⅲ Brand Royalty Fee: Current Practice and Issues
Ⅳ Capitalization of Brands: Implications and Issues
Ⅴ Results and Analysis of the Questionnaire on Brand
Valuation
Ⅵ Brand Valuation Model
Ⅶ Brand Management Model
Ⅷ Expected Practices in Charging Brand Royalty Fee
Ⅸ Disclosure of Brand Assets

Summary of the Report

1. Development of Brand Valuation Model for

accounting for brand as an asset on the balance sheet

2. Concept and calculation methodology for brand

royalty fee

3. Presenting Brand Management Model based on the

analysis of brand valuation amount and the results of
the Questionnaire

8
 Publication of the Report of the Committee on
Brand Valuation (“Hirose Report”)
Paradigm shift from “Tangible Business The ban on “pure holding companies”
Strategy” to “Intangible Business Strategy” Reorganization corporate organizations
through M&As, or etc.
Intangibles
US … Investments on tangible assets：Investments
on intangible assets＝approximately USD Ð
1.2 trillion：USD 1.0 trillion Increasing importance in
Japan…Tangible assets：Intangible assets＝
group management
approximately JPY 324 trillion：JPY 144
trillion Ð
(The figures are for top 200 TSE listed companies by
market cap value as of March-end 2001 , excluding Practice of Charging Brand
financial institutions, electricity and gas companies）
Royalty Fees

Major challenge in pursuing “Intangible Business Strategy”

‖
Brand as a Value Driver (a major factor for determining corporate value)
（the fifth major business resources after human resources, goods, money, and information）

Management with strong focus on brands

Ð
Based on an accurate understanding and valuation of the company’s brand

Valuation of brand and the measurement model have been actively discussed in the
marketing domain where valuation of brand has been regarded as an indexation of
qualitative factors.

Lack of reliability in the measurement

Brand Valuation Model based on only objective financial data

Disclosure of Brands Objective Calculation Brand Management

Methodology for Brand Model
Royalty Fee

• Projection of potential • Taxation for contribution

capability of generating
future cash flows
• Enhancement of shareholder
value
• Brand Value Board
• Negative infringement of
rights and interests of • Brand Value Chart
minority shareholders need
• Brand Fundamentals
to be resolved

9
 Definition of Brand

Characteristic of Brand
“identify” and “differentiate” itself with others companies or
competing products

Definition of Brand
emblems including names, logos, marks, symbols, package
designs, and etc. used by companies to identify and
differentiate their products and services from those of
competitors

• Develop customer loyalty to and trust in the products and services

through its brand
• Maintain continuous relationship with the customers through its brand

Creating competitive advantage through brand

‖
Increase present and future cash flows

Price Advantage High Degree of Brand Expansion Powers

Customer Loyalty

Prestige Driver Loyalty Driver Expansion Driver

(PD) (LD) (ED)

BV=f (PD, LD, ED, r)

10
 Capitalization of Brands: Implications and Issues

Implications of Capitalization of Implications of Capitalization of

Purchased Brands Internally Generated Brands

Issuers’ Side
① Possible to enhance competitive
advantage by clearly recognizing and
positioning brand as one of the key
business resources that generate future
cash flows
② Possible to explain the rationality of
impairing goodwill that may not
possess the characteristics of an asset
③ Possible to explain the efficiency of
investments
Issuers’ Side
① Through increasing importance of
brand in business, the business chances
for companies with brand will increase
② Possible to clarify the basis for
calculating brand royalty fee
③ Enhance competitiveness in the market
by clarifying the potential capability to
create future cash flows
④ Possible to adequately analyze
intangibles and also to derive an
adequate corporate value
⑤ Possible to prevent take over bids
(TOB)

Information Users’ Side Information Users’ Side

① Enable to make use in understanding
the efficiency of investments
② Enable to utilize the information to the
prediction of future cash flows
① Enable to make a reasonable prediction
of future corporate values
② Enable adequate corporate valuation
③ Enable to remove the information
asymmetries
④ Comparability would be secured and as
a result, enhance its usefulness as the
source of information for making
investment decisions

Issues on the Capitalization of Internally Generated Brands

Issues related to Business Accounting Issues related to the Commercial Code

① Reliability in measurement cannot be ① Overvaluation of assets
secured ② It may not constitute income available
② The amounts on the creditor is regarded for dividends
as unrealized gains

Treatment of Institutional Issues

① Developing Brand Valuation Model by only using objective financial data
② Taking measures in the area of dividend regulations

11
 Examining Approaches to Brand Valuation

Residual Approach
“Residual Approach” considers brand value as the result of subtracting book value of all
net assets on the balance sheet from the total value of the company described as market
capitalization amount
Ð
Issues
① This approach covers not only brands but also other intangibles
② Accounting is using market data as its input

Independent Valuation Approach

Independent valuation approach values brand independently

Cost Approach Market Approach Income Approach

This valuation approach
values brand based on the
cost spent in developing
the brand
Ð market
Issues
① Time gap
② Correlation gap
This approach values brand This approach values
by making reference to brands based on the net
actual price of similar present value of the
brands traded in the excess profit or future
cash flows
Ð
Issues
① Difficult to assume
similar brand
② Lack of objectiveness
of traded price

Royalty Exemption Method Price Premium Method

This method measures excess profit by the
royalty fee that a company would have to
pay if it did not hold the brand
Ð products without brand
Issues
① Necessity for actual charge of
royalty fee
② Not much meaning in referring to
the royalty fee of other similar
brands
This method measures excess profit by
the present and future price premium
of products with brand compared with
Ð
Expected Cash Flows
Ð
This approach corresponds with the notion
of brand adopted by the Committee
Ð
The Committee decided to adopt this
method

12
 Brand Valuation Model ①

BV=f (PD, LD, ED, r)

Prestige Driver (PD)

Existence of Price Premium

Ð
Able to sell the product constantly at higher prices
compared with the competitors

PD＝Excess Profit Ratio×Brand Attribution Rate×Cost of Sales

＝［5 year Average of｛（Sales of the Company／Cost of Sales of the Company−Sales of a

Benchmark Company／Cost of Sales of a Benchmark Company×Advertisement and Promotion

Cost Ratio of the Company）｝×Cost of Sales of the Company

① Calculation of unit price index: sales per cost of sales

Assume identical quality and function for cost of sales per unit

② Selection of a benchmark company: sales per cost of sales of the

benchmark in the same industry

100 Classifications of industries are used in the simulation exercise

Select a company as the standard company who has the smallest unit price index
within the statistical range of±3σ

③ Calculation of excess profitability: past 5 year average of unit price index

differential

Using unit price index differential for calculating price premium

To reflect recent structural changes in the economy as well as increasing speed
of corporate innovations, the Committee decided that it is appropriate to select
past 5 years

④ Calculation of brand attribution rate : brand management cost ratio

Extracting the portion spent for the development, maintenance, and management of
brand out of total cost spent for gaining excess profit of the company (ratio of
advertisement and promotion cost is used as a figure that represents brand
management cost ratio)

13
 Brand Valuation Model ②
Loyalty Driver (LD)

Existence of customers with high loyalty

Ð
Ensuring stable sales amount

LD ＝ (5-year Average Cost of Sales−5-year Standard Deviation of Cost of

Sales )/ 5-year Average Cost of Sales
(＝1−Volatility Coefficient of Cost of Sales)

µC − σ C
LD =
µC
μＣ：5-year average of cost of sales σＣ：standard deviation of cost of sales

Calculation of stability indicator：coefficient of volatility

If it is stable, the coefficient of volatility should become closer to 0
Ð
If it is stable, the loyalty driver value should become closer to 1

Expansion Driver (ED)

Brand with high status

Ð
High recognition
Strong expansion powers

ED ＝ Average Growth Rate of Overseas Sales and Growth Rate of Sales of

Non-core Business Segments

1  1 0  SOi − SOi −1  1 0  SX i − SX i −1 
ED =  ∑  + 1 + ∑  + 1
2  2 i =−1  SOi −1  2 i =−1  SX i −1 
SO：Overseas Sales SX：Sales of non-core business segments
(Note) Each indicator should not be smaller than 1

① Measurement of geographical expansion powers:

growth rate of overseas sales
② Measurement of expansion powers into different industries:
growth rate of sales of non-core business segments

14
 Brand Valuation Model ③

Brand Valuation Model

BV = f (PD,LD,ED,r)
PD
= × LD× ED
r
 1 0  S i S i*  Ai  
 ∑  − *  ×  × C0 
 5 i =−4  Ci Ci  OEi   µ C − σ C
= ×
r µC

1  1 0  SO − SOi −1  1 0  SX − SX i −1 
×  ∑  i + 1 + ∑  i + 1
2  2 i = −1  SOi −1  2 i = −1  SX i −1 

PD ＝ Excess Profit Ratio× Brand Attribution Rate×Cost of sales

＝ Past 5-term Average of［｛（Sales/Cost of Sales of a Benchmark Company/ Cost of Sales of a
Benchmark Company）× Advertising and Promotion Cost Ratio (Cost of Brand
Management*) ｝］×Cost of Sales
LD＝(Cost of Salesμ− Cost of Salesσ)/Cost of Salesμ
(Note) μandσare calculated based on the past 5-term data of cost of sales
ED＝Average of Overseas Sales Growth Rate and Sale Growth Rate of Non-core Business Segment
(Note) Minimum value of each index should be 1
S：Sales S＊：Sales of a Benchmark Company
C：Cost of Sales (CS) C＊：Cost of sales of a Benchmark Company
A：Advertising and Promotion Cost OE：Operating Cost
(Cost of Brand Management*)
μc：5-term average of CS σc：Standard Deviation of CS
SO：Overseas Sales SX：Non-core Business Segment Sales
r：Discount Rate
*: If one can ensure the credibility of figures through assurance of an independent audit, it is
desirable to use brand management cost as the input

15
 Examples of Brand Valuation
PD：Company: Sales 100 million yen, Cost of sales 80 million yen,
Operating cost 90 million yen,
Advertisement and promotion cost 9 million yen
Benchmark company：Sales 9 million yen, Cost of sales 8 million yen
LD：Average of cost of sales 70 million yen,
Standard deviation of cost of sales 5 million yen
ED：Non-core business sales 30 million yen (current period),
25 million yen (previous period)
Overseas sales 45 million yen (current period), 40 million yen (previous period)
Discount rate: 2%

P D S a le s 100
(÷ ) C o s t o f s a le s 80
S a le s / C o s t o f s a le s 1 2 5 .0 0 %

S a le s / C o s t o f s a le s 1 2 5 .0 0 %
(-) S a le s o f th e b e n c h m a r k c o m p a n y / C o s t o f s a le s 1 1 2 .5 0 %
E x c e s s p r o fit r a tio ( = S a le s / C o s t o f s a le s − S a le s o f th e b e n c h m a r k c o m p a n y / C o s t o f s a le s ) 1 2 .5 0 %

E x c e s s p r o fit r a tio ( = S a le s / C o s t o f s a le s − S a le s o f th e b e n c h m a r k c o m p a n y / C o s t o f s a le s ) 1 2 .5 0 %
(× ） B r a n d a ttr ib u tio n r a te 10%
E x c e s s p r o fit r a tio o f b r a n d a ttr ib u tio n r a te ( = E x c e s s p r o fit r a tio × B r a n d a ttr ib u tio n r a te ） 1 .2 5 %

(× ） C o s t o f s a le s fo r th e r e c e n t p e r io d 80

P D ＝ E x c e s s p r o fit r a tio × B r a n d a ttr ib u tio n r a te × C o s t o f s a le s 1 .0 0

L D σ （ S ta n d a r d d e v ia tio n o f 5 y e a r c o s t o f s a le s ） 5
（ ÷ ） μ （ 5 y e a r a v e r a g e c o s ts o f s a le s ） 70
C o e ffic ie n t o f v o la tility （ σ / µ ） 7 .1 4 %

LD ＝ 1 - C o e ffic ie n t o f v o la tility （ σ ／ µ ） 9 2 .8 6 %

E D G r o w th r a te o f s a le s o f n o n -c o r e b u s in e s s s e g m e n ts 1 2 0 .0 0 %

G r o w th r a te o f o v e r s e a s s a le s 1 1 2 .5 0 %

E D = A v e ra g e g ro w th ra te o f o v e rs e a s s a le s a n d G ro w th ra te o f n o n -c o re b u s in e s s s a le s 1 1 6 .3 0 %

B ra n d v a lu e a m o u n t＝ P D × L D × E D ／ ｒ
PD 1 .0 0
×LD 9 2 .8 6 %
×ED 1 1 6 .3 0 %
÷r 2 .0 0 %
B ra n d v a lu e a m o u n t 54

16
 Practices in Charging Brand Royalty Fee
Categories of brand royalty fee
① Brand usage permission fee＝the cost used for companies, which
possess legal rights to exclusively use
the brand, allow other parties to use
the band

② Brand management fee ＝ the cost used for the maintenance,

management and development etc. of
brands used within the entire
corporate group

Issues related to the Commercial Code Issues related to the Corporation Tax
Laws
① The brand might be charged for
damages and losses under the
① Application of taxation for contribution
Commercial Code (Breach of Law and
Articles of Incorporation), and also be
② Application of transfer pricing
charged for any third party
② Protection of rights and interests of
the minority shareholders

Need for objective premise of brand royalty fees

Develop a robust methodology for calculating brand royalty fee the based
on Brand Valuation Model

Brand usage permission fee＝PD×LD×ED

BP
Brand Management Cost = CBMC × − BMC
CBP

CBMC: Consolidated Brand Management Cost

CBP: Consolidated Brand Profit
BMC: Brand Management Cost paid by the individual company using corporate brand
BP: Brand Profit of the individual company using corporate brand

17
 Brand Management Model ①

Brand management
‖
Maximizing brand value

Brand Value (BV)

Brand Value Board

LD amount PD amount ED amount

Plan Result

Financial Financial
Activity

indicator
Brand Value Chart Business Activity

Business Organization Non-financial

Management indicator

Characteristics of Brand Value Chart

① Incorporates financial and management perspectives in

addition to business activity perspective

②Incorporates financial and non-financial indicators to assess

activities and the effectiveness from various angles

③Establishes feedback loop to further refine brand strategy

Disclosure of Brand Fundamentals

18
 Brand Management Model ②
(Plain：Financial data, Underline：Non-financial Data, Italic：Activity Item)

Maximizing Brand Value

Increase Customers with high Loyalty Ensure Price Premium Improve Brand Expansion Powers

Stablize Sales and Sales Cost Improve Average Return on Sales Sales Increase in New Business
(Deduct Advertising Cost) Improve Operating Margins Sales Increase in Overseas
Decrease Volatility of Sales & Price

Improve Repeat Rate Secure Distribution Channel Secure New Distribution Channels
(Efficiency in Advertising Increase Direct Sales points
investments)

Strengthen Relationship with Increase in Value added ratio Improving Recognition

existing Customers High pricing

Brand Positioning Strengthen sales promotion

Customer segmentation
Selection of market research method Measure Advertising effect of
brands
Marketing Strategy

Prepare criteria for brand usage Reduce R&D cost

Prepare brand management manuals Increase patent rights
(Participate in cost planning) Improve R&D capability
Increase authority of brand management Improve R&D Investment efficiency
organization Strengthen R&D organization
Establish brand management organization
Individual Management of CB and PB Secure qualified human
Top management involvement Resources & budget

Management Strategy R&D Strategy

Establishment of CB and PB
Sending consistent messages
Establishment of brand identity
Clear statement of management philosophy

Management Strategy

19
 Disclosure of Brand Assets

Standards for accounting for brands as assets

Definition of Assets Measurability

①Future economic benefit Î Calculation of brand value by

an objective valuation model
Î Brand ＝ Source of future
cash flows Relevance

②Control by a specific entity Î Useful for projection of future

Î Brand ＝ Differentiation
from other brands
③Occurrence of past transaction
or incidents
Î Brand ＝ Formation through
business activities
cash flows of companies, etc.
Reliability
Î Assurance by audit opinion of
certified public accountant or
audit firms

At least conceptually, brand valuation amount meets the

conditions to be recognized as an asset it on the balance sheet

Disclosure of brand assets

①Disclosing them on the consolidated balance sheet under the

current financial reporting system

②Disclosing them as notes to the consolidate balance sheet

under the current financial reporting system

③Disclosing them as a part of business reporting irrespective of

the current financial reporting system

20
The Report of the Committee on
Brand Valuation
I Publication of the Report

1 In accordance with the structural changes in the economic environment

caused by the so-called “new economy”, advances in IT development and
deregulation have resulted in corporations being confronted with a
paradigm shift moving from a “tangible business strategy” based on
tangible business resources including financial assets, property and
equipment, and land and etc. (referred to as “tangibles”, hereinafter) to an
“intangible business strategy” that is based on intangible business resources
including intellectual property, research and development, and business
know-how (referred to as “intangibles”, hereinafter) .
For example, investments on tangible assets and intangible assets in the
United States are at an equivalent level showing approximately USD 1.2
trillion and USD 1 trillion, respectively1. Japan is not an exception in this
regard. According to research on financial results of top 200 TSE listed
companies by market capitalization value as of March-end 2001 (financial
institutions, electricity and gas companies are excluded), the amounts of
tangible assets and intangible assets were JPY 324 trillion and JPY 144
trillion, respectively.
As descried above, while tangible assets barely earn an average return on
investment, intangible assets have become an important value driver (a
major factor for determining corporate value) for companies2.

2 When implementing an “intangible business strategy”, it is important to

further enhance the value of intangibles and develop a methodology to
adequately measure such value. Particularly, brand is considered as the
fifth major business resources after human resources, goods, money, and
information. Therefore, adequate valuation of the brand and the public
disclosure are both significant challenges in pursuing an “intangible
business strategy”, since they may help predict the firm’s ability to generate
future cash flows and thus enhance shareholder value3.
While it has become increasingly important in group management by
holding companies led by movements such as lifting the ban on “pure
holding companies” and reorganizing corporations through M&As, there
are actual practices within such group management where a parent

22
 company (or a holding company) collects some sort of fees from subsidiaries
or affiliates in the name of “brand royalty fee or etc.” to compensate for the
use of its brand name. However, since there is no objective valuation
methodology established for brands, various practical issues related to
brand royalty fees arise; namely the objective reasonableness, taxation for
contribution, infringement of rights and interest of minority shareholders
and etc. It is therefore important that a robust methodology for brand
valuation within the context of group management is developed.

3 Despite the importance of brand valuation and its public disclosure has
been broadly acknowledged within academia, analyst and the business
community, no substantial steps have been made for it. The Committee on
Brand Valuation (referred to as “the Committee”, hereinafter) considers the
reasons as follows.
Since the valuation of brand and the development of measurement model
has been actively discussed in the marketing domain where the focus has
been placed on strategic positioning, valuation of brand has been regarded
as indexation of qualitative factors such as images, stability, market
recognition and international recognition. However, these factors have
been considered unreliable from an accounting perspective, which looks at
economic phenomena that are only measurable in terms of money.
On this point, the Committee considered that such a problem could be
resolved by utilizing objective financial data such as publicly disclosed
figures in the financial statements to calculate brand value and to develop
models, because accuracy of such information is being assured by the audit
certificates issued by certified public accountants or accounting firms.

4 In the United States, for example, intangible assets such as brands acquired
from other companies are capitalized, but brands that have been internally
generated by companies for a long period are not capitalized. However,
the “Financial Accounting Standards Board (FASB)”, the organization
responsible for developing accounting standards in the US, has started to
consider public disclosure as well as capitalization of intangibles including
internally generated brands. The exposure draft is expected to be released
this autumn.

23
5 Since July 2001, the Committee has conducted a Questionnaire on Brand
Valuation and performed intensive review and discussions from various
aspects in a most comprehensive manner spending approximately 200
hours over wide range of issues such as the development of Brand
Valuation Model, the possible treatment of the brand royalty fee, how to
fully utilize the results of the Questionnaire on Brand Valuation for brand
management, disclosure of brands and etc. as shown in Charts 1, 2, 3 and 4
in the end of the Report. And now the Committee has completed the task
by producing “The Report of the Committee on Brand Valuation” and has
released it globally.

6 The Committee strongly expects that this Report becomes a basis for future
progress and development in areas such as brand-oriented corporate
management, practice of charging brand royalty fee within corporate
groups, and last but not least important, public disclosure and capitalization
of brands.

24
II Definition of Brand

II-1 Concept of Brand

1 The word “brand” is derived from the “brand” in Old Frisian, “brant” in
Old High German, and “brandr” in Old Norse, all of which means “to mark
with a hot iron”. In other words, it is said that the origin of the word
“brand” came from marks that were made on crittur in order for the owners
to identify his/her ownership4. Currently, brand marks, such as names,
logos, marks, symbols, package designs and etc. that differentiate one’s
merchandises, goods, services (referred to collectively as “products and
services”, hereinafter) from those of the others are broadly regarded as
important in business, and companies utilize these unified brand marks to
universally present high quality and innovativeness of the design and
function of their products and services.

2 Since a brand is something to “identify” and “differentiate” itself with

other companies or competing products and services, the Committee has
decided to define “brand” as “emblems including names, logos, marks,
symbols, package designs and etc. used by companies to identify and
differentiate their products and services from those of competitors.”
A brand could be legally protected as a legal right in terms of the Trademark
Law, the Design Law, the Commercial Code, and the Unfair Trade Practices
Act, but the Committee understands that since not all the brands that
generate value to a company are legally protected as legal rights, the
definition above includes those emblems covered by the Trademark Law,
the Design Law, the Commercial Code, and the Unfair Trade Practices Act.

II-2 Concept of Brand Value

1 When companies become able to develop customer loyalty to and trust in

the products and services and maintain continuous relationship with the
customers through its brand, the customers will begin to make purchase
decisions based on brand rather than physical or functional aspects of the

25
 products and services, and as a result, the brand will gain competitive
advantage. Competitive advantage of a brand will be realized initially
through price advantage, high degree of customer loyalty and brand
expansion power, i.e. capability to expand the brand geographically as well
as to expand into similar or different industries, and thus increase present
and future cash flows for the company.

2 Price advantage above means that products and services with a brand
value are able to be sold at higher prices than those without a brand value
but have identical quality and function. In other words, the brand may
become a factor that generates greater present and future cash flows.
High degree of customer loyalty means that customers will purchase
products and services with brands continuously and repeatedly, and
therefore generates stable and steady increase in the present and future cash
flows.
With respect to brand expansion power, it means the ability to expand the
market of the brand overseas and/or to stretch into markets of similar or
different industries, and thus become a factor that increases present and
future cash flows.

3 As described above, it is considered that the competitive advantage of a

brand and various synergies associated with multiple advantages will
increase the cash flows generated by the brand, and thus enhance the value
of the brand.

II-3 Corporate Brand and Product Brand

1 Brands could be classified into “national brand” and “private brand” based
on distribution areas for branded products. National brand is the brand
attached to products distributed and services provided in areas with no
limitation and almost all brands would fall into this category. Private
brand is the brand attached to products distributed through channels
owned by distributors such as supermarkets and department stores.
Also, brands could be classified into “corporate brand” and “product
brand” based on what they represent.

26
2 This Report refers to “brand” including both corporate brand and product
brand. “Corporate brand” is defined in this Report as the emblem with
competitive advantage derived from corporate names or corporate logos,
and “product brand” is defined as the emblem with competitive advantage
brought by particular product names and logos.
For example, let us take an example of a hypothetical XYZ Company. The
corporate brand would be the corporate name and logo “XYZ”, and the
product brand would be names of certain products such as “Sirius”, “Vega”,
or “Altair”.

3 Since corporate groups possess both the values created by the corporate
brand (referred to as “CB value”, hereinafter) and those created by the
product brand (referred to as “PB value”, hereinafter), the relationship
between CB value and PB value could be expressed in the following
formula.

Brand value of a corporate group = f (CB value，PB value)

The above formula explains that brand value of a corporate group consists
of CB value and PB value whose relationship could be expressed in certain
functional relationship. In other words, while relationship between CB
value and PB value could not be expressed in simple arithmetic, it could be
expressed by such a functional relationship since there is a certain
correlation between the two.

4 Although the aggregate amount of CB value may be considered as the

brand value of a corporate group (corporate brand), it is necessary to make
a clear distinction between CB value and PB value to accurately evaluate the
brand value. Since the relationship between corporate brand and product
brand varies depending on specific situation and the relationship between
the two may evolve over time, the Committee considers that it is extremely
difficult to provide separate valuation for CB value and PB value.

27
 Sirius CB ＊ PB

Vega CB ＊ PB

Altair CB ＊ PB

Using the example above, let us assume that brand value of each product of
XYZ Corporation (Sirius, Vega and Altair) could be expressed as the chart
shown above, it is still extremely difficult to separately evaluate CB value of
“XYZ” and PB value of “Sirius”, “Vega” and “Altair” individually.
Therefore, the Committee has decided to express the relationship between
brand value of a corporate group, and, CB value and PB value in the
formula described above.

28
III Brand Royalty Fee: Current Practice and Issues

III-1 Current Practice in Charging Brand Royalty Fee

1 Brand royalty fee is generally described as the consideration that a user of a

brand pays for the usage of the brand to the owner. There are basically
two types of brand royalty fee. One is the brand royalty fee exchanged in
the name of corporate mark usage fee or license fee where companies that
possess legal rights to exclusively use the brand allow other parties to use
the brand (referred to as “brand usage permission fee”, hereinafter). The
other is charged within a particular corporate group in the name of “group
management operating fee” to cover the cost used for the maintenance,
management, development and etc. of brands used within the entire
corporate group (referred to as “brand management fee”, hereinafter).

2 Under circumstances where group management has become increasingly

important, there is a clear trend where brand royalty fee is exchanged
between companies within the same corporate group regardless of the form
such fee appears, i.e. brand usage permission fee or brand management fee.
However, there is no objective calculation methodology for determining the
brand royalty fee. Thus, in the transactions between affiliates as well as
those between parent company and the subsidiaries where one could see
master and servant relationship, there is a potential risk that brand royalty
fee is calculated arbitrarily. This is why an objective calculation
methodology used for exchanging brand royalty fee among group member
entities needs to be established from the viewpoint of the Commercial Code
and the Corporation Tax Laws.

III-2 Issues on the Payment and Receipt of Brand Royalty Fee

III-2-1 Issues related to the Commercial Code

1 If there is no rationality in the payment and receipt of the brand royalty fee
under the Commercial Code, there is a possibility that the directors of the
company who are using the brand might be charged for damages and losses

29
 under the Commercial Code Article 266, Paragraph 1, No.5 (Breach of Law
and Articles of Incorporation), and also be charged for any third party
under the Commercial Code Article 266-3, Paragraph 1. When there are
minority shareholders in a subsidiaries of a company, there is a possibility
that the rights and interests of the minority shareholders might be
negatively infringed by transactions between the subsidiary and its parent.
So there needs to be a rational explanation made to minority shareholders.
In the case where the subsidiary is a public company, its minority
shareholders may likely be general retail investors, whose interests must be
protected. Moreover, if there is an inappropriate exchange of brand
royalty fee, there is a risk that the subsidiary’s financial condition may
deteriorate and creditors might incur losses, which might also become a de
facto breach of dividend regulations.

2 Generally, a brand is subject to legal protection. If a brand is a trademark

or design that has been registered, the owner of the brand has the legal right
to exclusively and dominantly use it. If a brand happens to be a trade
name, there are cases that such a brand is protected by the Commercial
Code. Although it is principally free to select any trade names, the use of
similar or identical trade names for the purpose of unfair competition is
excluded at registration of the trade names. Whether the trade names are
registered or not, use of trade names for fraudulent purpose to give a
misleading view about the business entity is excluded at the registration.
However, it is considered that it is difficult to prove such unfair competition
purposes or fraudulent purposes described above, as these are intentions
that are difficult to prove.
There are cases where a brand is protected by the Unfair Trade Practices Act,
even if the brand was not protected by the Trademark Law, the Design Law
or the Commercial Code or etc. According to the Unfair Trade Practices
Act, attempts to confuse products or business entity by utilizing identical or
similar presentation of products or services that are widely acknowledged
could be sanctioned, and attempts to use identical or similar presentation of
well-known products or services could also be sanctioned. In such cases, it
is not necessary to prove the purposes of unfair competition or fraudulent
purposes that are internal intentions, and even if the trademarks, design or

30
 corporate names are unregistered, they are protected as well. Therefore, so
long as the emblem is widely acknowledged or famous, it is fair to say that a
brand is broadly protected by law.
So long as the brand is subject to legal protection, other companies are
restricted from using such a brand without permission of the owner, and
therefore, it is considered that exchanging a brand usage permission fee is
rational.

3 When a corporate group pursues a brand-focused management strategy as

a whole, regardless of legal protection on its brand, the corporate group
may assign a company within the group to engage in group-wide activities
such as advertising and promotion, management consulting, management
administration of the group-wide business and etc. In such a case, one
may consider the brand management fee as the consideration associated
with outsourcing brand management activity to an entity, which makes it
rational for other entities in the group to pay brand management fee to the
outsourced entity.

4 If it is rational to exchange the brand royalty fee and if one can present that
such a fee is rational, the issues related to the Commercial Code would be
settled. In that sense, the Committee believes that it is critical to develop a
robust methodology for calculating brand royalty fee.

III-2-2 Issues related to the Corporation Tax Laws

1 If an exchange of the brand royalty fee is not considered rational under the
Corporation Tax Laws, such a fee is subject to “taxation for contribution”
under the Corporation Tax Laws Article 37, and to “transfer pricing” under
the Special Taxation Measures Law Article 66-4.

2 “Taxation for contribution” is a system that recognizes a certain portion of a

donation exceeding certain amount as non-deductible. Donation in this
context refers to transfer of assets or providing special economic benefits in
the form of gifts, large purchase or transfers at low price, all of which are
not justified with adequate price levels.

31
3 Since value of a brand has not been recognized as an asset traditionally, the
brand royalty fee had not been considered rational and there was a
possibility that the entire brand royalty fee may be recognized as a donation.
However, the Committee believes that the brand royalty fee is considered
rational from a tax perspective, since brands can be recognized as assets as
described later in Section IX of the Report, and could be legally justified as
described in Section III-2-1 of the Report.

4 Determining what part of brand royalty fee is to be recognized as a

donation or not depends on whether the transferred assets or economic
benefits provided are based on fair value.
However, given the nature of brand being very unique in itself, it becomes
extremely difficult to provide a fair value, i.e. calculate the market price
objectively, especially when it is traded only within a corporate group. In
order to prevent brand royalty fee being recognized as contribution and
thus non-deductible, it is necessary to establish a reasonable calculation
methodology for the brand royalty fee.

5 “Transfer pricing” is a system that calculates the taxable income by

recognizing transactions with overseas affiliates as transactions between
independent bodies at arm’s length price. Under the Corporation Tax
Laws, there are three methods for calculation used to determine arm’s
length price applied to transactions between independent parties;
comparative uncontrolled price method, replacement cost method, and cost
add-on method. However, considering the unique nature of brand and
intra group transactions, it is difficult to come up with an objective
calculation of arm’s length price.
According to residual profit split defined in the special method defined in
the Special Taxation Measures Law-related Circular Article 66-4 (4)-5, one of
the profit sharing methods defined in the Special Taxation Measures Law
Enforcement Order Article 39-12 Paragraph 8, if there is an important
intangible asset, one can calculate the arm’s length price by deducting the
profits gained from the transactions with independent parties from profits
used for the allocation to derive residual profits, and then allocating the

32
 residual profits based on the value of intangible assets.

6 By applying such Articles to support the brand royalty fee calculation, the
amount of residual profits allocated in accordance with brand value could
be recognized as a reasonable value of brand royalty fee. In order to allow
for such a calculation, it is critical to establish an objective methodology for
calculating brand values.

III-3 Issues on the Calculation of Brand Royalty Fee

1 In order to pay and receive a brand royalty fee, one must explain that such
an exchange of fee is rational not only to the counterparty of the affiliated
companies, but also to the minority shareholders and the third parties from
the Commercial Code perspective as well as to the tax authorities from the
Corporation Tax Laws perspective. Therefore, it is necessary to calculate
brand loyalty based on an objective methodology excluding qualitative
factors as much as possible.

2 Payment and receipt of a brand royalty fee should be made on a single

entity basis even though the brand has been developed and maintained by
the entire corporate group. Therefore, in order to calculate a brand royalty
fee owed by an individual group member company, it is important to
consider contributions made by each group company.

3 It is not unusual that the details of transactions that require payment and
receipt of brand royalty fee varies with each transaction. For example, as
pointed out at Section III-2-1 in this Report, it is possible to assume that the
object for which a brand royalty fee is paid may vary. Therefore, it is
considered that calculation of brand royalty fee should not be developed in
a unified formula, but rather depending on the details of the transactions.

33
IV Capitalization of Brands : Implications and Issues

1 As the importance of brand as one of the key business resources increases,

the number of companies that have little assets to be reported on balance
sheets such as, fab-less companies※, IT related companies, bio ventures and
etc. has increased. However, from a practical point of view, capitalization
of brand has not necessarily been a common practice. First of all, as for the
purchased brands, a few companies have capitalized the rights of
trademarks and trade names or advertisers list on its balance sheets in Japan,
and in overseas, such cases are only limited to the capitalization of
corporate brand names or etc. on the balance sheets of British or French
companies.
Furthermore, as for the internally-generated brands, such examples of
capitalization of brand names or mastheads ※ ※ is limited to British
companies in the past. Nevertheless, the result of our Questionnaire
referred in Section V of this Report indicates that the needs for brand
valuation for corporate management have been increasing substantially.
Many supports the view that brand should be capitalized as a value driver.

2 Classifying brand into “purchased brand” and “internally-generated

brand” and categorizing the meaning of the brand by companies that issue
securities (referred to as “issuers”, hereinafter) and by users of such
information, the Committee could generally summarize the meaning of
capitalizing brand as follows.

IV-1 Capitalization of Purchased Brands

1 The meaning of capitalizing purchased brands from an issuers’ perspective

can be explained as follows. By clearly recognizing and positioning the

※
Fab-less is the negative form of noun “fabrication”(manufacturing, composition and
assembly) meaning IT, computer related manufacturing companies that do not
possess internal manufacturing facilities and focus on research and development
activities and outsource manufacturing activities.
※※
Mastheads, according to Standards for Information of Science and Technology, is the
publication details typically found in western publications, shown in the table of content
or on cover page such as name of magazines, date of issue, frequency of issuance, issuer
name, place issued and price, etc.

34
 brand as one of the key business resources that generate future cash flows
rather than treating them collectively in a black box as intangibles referred
to as goodwill, the firms that are undervalued in the capital market may see
an increase in its stock price thus increasing its market capitalization value
enhancing its competitive advantage. By capitalizing the brand, the
company can explain the rationality of impairing goodwill that may not
possess the feature of an asset as well as explain the efficiency of
investments.

2 The meaning of capitalization of purchased brands from the information

users’ perspective can be explained as follows. It makes it possible to
recognize goodwill often recognized as black box as the residual of net
investment, and as a result, enables not only to capture the efficiency of
investments, but also clarifies the value of brand as one of the key business
resources, and thus help utilize the information to predict future cash flows.

IV-2 Capitalization of Internally Generated Brands

1 The meaning of capitalization of internally generated brands on the issuers’

perspective could be explained as follows. It will increase the importance
of brand in business and business chances of companies with brand will
increase. The basis for calculating brand royalty fee becomes clearer.
Besides, it will clarify the potential capability to create future cash flows (the
source of cash flow generation) and corporate values in the form of market
capitalization as well as shareholders’ values increase, thus enhance
competitiveness in the market leading to easier access to finance.
Furthermore, it would make it possible not only to adequately analyze
intangibles as the difference between total market value and book value of
its net assets, but also to derive an adequate valuation for corporate value,
thus prevent take over bid (“TOB”) based on undervalued stock prices.

2 The meaning of capitalization of internally generated brands on the

information users’ side could be explained as below. By identifying
internally generated brands as potential capability to create future cash
flows, it will help predict the expected future cash flows, prospect of future

35
 corporate values as well as to enable adequate corporate valuation and etc.
which may remove the information asymmetries. Besides, by capitalizing
internally generated brands by an objective methodology, its comparability
would be secured, and as a result, enhance its usefulness as the source of
information for making investment decisions.

IV-3 Issues on the Capitalization of Internally Generated Brands

In considering the capitalization of internally generated brands, it is

necessary to examine the issues associated with business accounting, the
Commercial Code and the Corporation Tax Laws, since there have been few
cases implemented in practice. As the Committee explains the quality of a
brand as an asset in Section IX, the Committee would examine such issues
associated with capitalization of internally generated brands assuming that
it already has the conditions qualified as an asset.

IV-3-1 Issues related to Business Accounting regarding Capitalization

of Internally Generated Brands

1 In examining the issues associated with the recognition and measurement

of internally generated brands, it would be reasonable to assume the brand
concept mentioned in Section II as well as the brand value as a source of
competitive advantage. Based on such assumptions, distinguishing it from
the existing concept of goodwill becomes an immediate topic for discussion.
Because, the concept and measurement methodology for goodwill have not
been developed and have been recognized as the difference between
investment amount and the amount of purchased net asset (the value of net
investment), and therefore, goodwill has not been recognized as assets that
could be valued independently. This is the critical difference between
goodwill and brand value that is positioned as identifiable in this Report.

2 When the Committee considers the reasons why internally generated

intangibles as well as internally generated brands have not been recognized
as assets on the balance sheet so far, issues associated with the measurement
and the ability to realize gains, both of which have been issues in business

36
 accounting for recognizing internally generated brand on the balance sheet.
In other words, the issues are that the measurement of brand asset is not
reliable, and that the amounts on creditors are regarded as unrealized gains
※
.

3 While Japanese business accounting is based on a legal entity basis, it is

well known that business accounting, the Commercial Code and the
Corporation Tax Laws are closely related with each other through profit
calculations. Therefore, in the past there have been many conservative
arguments with respect to the reporting of unrealized profits that would not
constitute the income available for dividend under the Commercial Code as
well as the taxable income under the Corporation Tax Laws, even if such is
considered as useful information for making investment decisions5.

4 Since brands are different from other internally generated assets in the
sense that they have been regarded as objects for sale, it seems that
“reliability in its measurement” has been the biggest obstacle for
recognizing it on the balance sheet. In other words, if an objective
methodology for calculating brand value proposed in this Report is
established and the measurement becomes reliable, brand could be
recognized on the balance sheet. However, even in such a case, a brand
asset on the debtor is non-monetary asset such as trading securities. In
other words, certainty of profits is not guaranteed but the possibility that it
may become certain is guaranteed, i.e. it could be realizable. Thus, in the
world of business accounting on a legal entity basis where realization of
profit is regarded as a given conditions for calculating profits, it becomes
necessary to take measures in dividend regulations under the Commercial
Code, since the internally generated brand is a non-monetary asset, its
amount does not reflect any income which is available for dividends.

※
Realized profits must have monetary assets appear on the debtor. In this case, the
debtor is brand asset, which is non-monetary asset, so brand valuation amount on the
creditor are unrealized profits that are not based on monetary assets. Therefore,
considering accounting characteristic of brand valuation amount on the creditor, one
may capitalize the shareholders’ equity in the name of “net brand valuation amounts”
and etc., and decrease the amount in case there is a decrease in the brand value in the
next reporting period.

37
 IV-3-2 Issues related to the Commercial Code regarding Capitalization
of Internally Generated Brands

1 There is no concept of brands under the Commercial Code at the moment.

While there was an opinion in the Committee that it is necessary to examine
whether it is possible to establish a concept of brand different from similar
existing legal concepts such as goodwill, trade names, trademark rights,
patent rights, design rights and etc. the Committee, at least for the time
being, considered that it is necessary to assume the existing Commercial
Code and examine the concept of brand with reference to it and the
Commercial Code Enforcement Rules.

2 If capitalization of brand were considered as “authentic accounting

practice” for business accounting purposes, it would also become acceptable
under the Commercial Code as described in Article 32, Paragraph 2. In
construing the provisions concerning preparation of the books of account,
authentic accounting practices shall be taken into consideration.

3 If the Committee considers capitalization of internally generated brands by

income approach※ described in Section VI of this Report, there are issues in
relation to the Commercial Code as described below.
First, even in the case of trademark rights protected by criminal penalties in
addition to rights to claim injunction, rights to claim compensation for
damages, and rights to recover damaged reputation, valuation of its value
have been made carefully to avoid overvaluation of assets based on
protection of its creditors. Although brands have been protected by the
Unfair Trade Practices Act, it is considered less matured as rights compared
with the trademark right protected by the Trademark Law.
Second, considering the fact that the historical cost method is used as a
premise and some accounting procedures like amortization and impairment
are applied for intangible assets such as patent right, design right,
copyrights and trademark right, it is fair to say that the evaluation by cost

※
This approach is based on the idea that brand valuation is future excess net profits or
the net present value of its future cash flows created by the brand.

38
 approach should be prioritized in the capitalization of internally generated
brands in order to have it recognized equally as other intangible assets such
as trademark rights. However, if recognizing internally generated brand is
established as a fair accounting practice, the brand valuation under income
approach would not have any problems in light of the Commercial Code.
Third, the capitalization of internally generated brand may not constitute
income available for dividends, as is the case with business accounting.

IV-3-3 Issues related to the Corporation Tax Laws regarding

Capitalization of Internally Generated Brands

1 The Committee has reviewed issues from a local perspective regarding

those associated with the capitalization of brand on a legal entity basis
which is in close relations with the Corporation Tax Laws.

2 In considering capitalization of brand based on the current tax laws, its

relationship with the existing concepts need to be examined. In the light of
deferred charge stated in the Corporation Tax Laws Article 2 No. 4 and the
Corporation Tax Laws Enforcement Order Article 14, there were opinions
that there are duplications of start-up expenses and development expenses
in terms of internally generated brands, and duplication of development
expenses and experiment and research expenses in terms of product brands.
However, since brand has a certain aspect of assets as they are utilized as
collateral, there were also opinions that brand should be treated differently
from deferred charges.

3 In the case where there are changes in the brand value, whether it would be
possible to report the valuation gains and losses for tax purposes or not
becomes an issue for scrutiny. While there are some exceptions, tax laws
are extremely conservative in terms of reporting valuation losses and thus
brand would be treated like other assets. As for the evaluation gains, on
the other hand, unless there is no realized gains through sales or etc., it does
not become taxable. Brand should be treated similarly with other assets.

39
 IV-4 Treatment of Institutional Issues

1 The Committee considers that it is necessary to take measures in the area of

dividend regulations under the Commercial Code to capitalize internally
generated brands on a legal entity basis, since there is a possible risk of
violating the requirement regarding the calculation of income available for
dividends.

2 The Committee acknowledges that due to reformations in the financial

market, the business accounting system has been changed dramatically with
the introduction of fair value accounting requiring mark-to-market
valuations, and more emphasis is placed on its function to provide
information rather than to regulate conflicts between stakeholders’ interests.
And since consolidated accounting has become the core of the corporate
accounting, the Committee considers that the possibility for capitalizing
internally generated brands, at least on the consolidated financial statements,
has been established.

40
V Results and Analysis of the Questionnaire on Brand Valuation

V-1 Outline of the Questionnaire

1 In October 2001, in order to collect original data for input into a Brand
Valuation Model and to address various issues related to the development
of Brand Valuation Models, the Committee has conducted a Questionnaire
on Japanese companies, and performed research on the recognition of
Japanese companies regarding the status quo of brand strategy and the
possibility of capitalizing brands.

2 The Questionnaire was sent to the following companies.

(1) Number of Listed Companies: 3,575

Tokyo Stock Exchange 2,123
(Section 1: 1,490, Section 2: 569, Mothers: 34, Foreign: 30)
Osaka Stock Exchange 3,330
(Section1: 51, Section 2: 274, Emerging: 5)
Nagoya Stock Exchange 3,111
(Section 1: 10, Section 2: 100, Centrex: 1)
Fukuoka Stock Exchange 3,35
Sapporo Stock Exchange 3,17
(Listed: 16, Ambitious: 1)
JASDAQ 3,903
NASDAQ・JAPAN 3,356
To avoid double counting, number of firms is counted in order of priority
from Tokyo, Osaka, and Nagoya.
(2) Number of non-listed Companies: 210

3 The following questionnaire was sent to the companies above requesting

answer sheets to be filled and returned to the Ministry of Economy, Trade
and Industry.

I. Company Overview (6 questions)

II. Brand and Brand Image etc. (10 questions)
III. Brand Strategy (17 questions)
IV. Brand Values and etc. (10 questions)
V. Corporate Acquisitions and Brands Acquisitions (5 questions)

41
 Overall response ratio was 26.4%, of which listed companies and non-listed
companies accounted for 26.1% and 31.4%, respectively.

Table 1 List of the Response by Industry

Breakdown
Listed Companies Non-listed Companies

Industry Sent Response Response Sent Response Response Sent Response Response
Ratio
Ratio Ratio
Services 404 102 25.2 387 98 25.3 17 4 23.5
Electrical Equipment 327 101 30.9 306 93 30.4 21 8 38.1
Wholesale 376 78 20.7 369 77 20.9 7 1 14.3
Retailer 342 74 21.6 335 73 21.8 7 1 14.3
Machinery 264 70 26.5 259 70 27.0 5 0.0
Chemicals 239 70 29.3 223 65 28.7 16 5 31.3
Construction 257 64 24.9 250 60 24.0 7 4 57.1
Transportation 135 50 37.0 127 46 36.2 8 4 50.0
Foods 160 42 26.3 158 42 26.6 2 0.0
Other Products 122 34 27.9 120 33 27.5 2 1 50.0
Banking 139 32 23.0 115 26 22.6 24 6 25.0
Textile Products 101 24 23.8 101 24 23.8
Glass/Ceramics 76 23 30.3 74 23 31.1 2 0.0
Other Financial Business 51 20 39.2 43 18 41.9 8 2 25.0
Metal Products 102 19 18.6 101 19 18.8 1 0.0
Pharmaceuticals 61 19 31.1 53 17 32.1 8 2 25.0
Precision Machinery 47 18 38.3 47 18 38.3
Iron, Steel and Mining 83 19 22.9 74 17 23.0 9 2
Securities, Commodity Futures 56 18 32.1 35 11 31.4 21 7 33.3
Trading
Electricity and Gas 24 16 66.7 21 13 61.9 3 3 100.0
Oil and Coal Products 26 13 50.0 13 7 53.8 13 6 46.2
Telecommunications 32 15 46.9 18 7 38.9 14 8 57.1
Real Estates 78 15 19.2 72 15 20.8 6 0.0
Pulp and Paper 34 13 38.2 34 13 38.2
Trucking 75 12 16.0 71 11 15.5 4 1 25.0
Non-Ferrous Metals 48 10 20.8 45 9 20.0 3 1 33.3
Warehouse, Transportation 47 8 17.0 46 8 17.4 1 0.0
Shipping 21 5 23.8 21 5 23.8
Aviation 8 5 62.5 7 5 71.4 1 0.0
Rubber Products 23 4 17.4 23 4 17.4
Agriculture, Forestry and 12 3 25.0 12 3 25.0
Fisheries
Insurance 15 3 20.0 15 3 20.0
Total 3785 999 26.4 3575 933 26.1 210 66 31.4

42
 V-2 Results and Analysis

V-2-1 Results of the Awareness and Recognition

1 Regarding the use of the brand valuation index or etc., companies who
chose “In use” or “Use positively” in terms of the corporate brand (CB) and
the product brand (PB) were 21.4% and 17.8%, respectively. If those who
chose “Not in immediate use but would consider” were added, the total
would account for approximately 70%. The Committee considers this is a
strong indication that Brand Valuation is needed among Japanese
companies.

Use of Brand Value Board※

Use positively Use positively
(CB) 5.7% 5.0%
(PB)
※ In use
15.7% Not in use In use
Not in use 12.8%
29.7%
26.8%

Not in immediate
Not in immediate use but would
use but would consider
consider 52.4%
51.8%

2 In practice, companies that have introduced or are considering introducing

brand valuation by some sort of indices were slightly less than 70% of all the
responded companies. Companies that selected “Valuation in terms of
Money” accounted for 8.8%, and the companies that chose “Considering
valuation other than in terms of Money” accounted for 13.9%. Penetration
of Brand Valuation in corporate management practice in Japan has become
much higher than what had been initially expected, and it could be
considered as a proof that brand is going to be positioned as one of the
important business resources in Japanese corporations.

※
The title has been modified from the initial title “brand scorecard”.

43
 Current Status of Brand Valuation ＜Acceptable to choose more than one item＞

0% 5% 10% 15% 20% 25% 30% 35% 40%

Valuation in terms of Money 8.8%

Considering Valuation in terms of Money 22.5%

Considering Valuation other than in terms of

13.9%
Money

Considering Valuation by Index other than Money 34.0%

Others 33.2%

As for the purposes of using brand value index and etc., many gave
responses including; “Assessment of performance of portfolio of existing
business or products” (CB: 45.4%, PB: 43.4%), “Accurate understanding of
profitability, safety and risks” (CB: 35.9%, PB: 71.3%), “Making decisions to
enter into other products and industries” (CB: 25.8%, PB: 21.5%).※

Purpose of Using Brand Value Board※＜Acceptable to choose more than one item＞

0% 10% 20% 30% 40% 50% 60% 70% 80%

Accurate understanding of profitability, safety and risks

35.9%
71.3%

Assessment of performance of portfolio of existing business 45.4%

or products 43.4%

Assessment of executives in charge of brand management

16.2%
10.3%

Making decisions to enter into other products and 25.8%

industries 21.5%

Guideline for license offering and brand sales to other 10.4%

companies 14.7%

Calculation of fair value for M&A

14.7%
8.1%

Upper Bar：CB Others

9.8%
5.0%
Lower Bar：PB

3 With respect to the disclosure or capitalization of brands, roughly 50% of

the companies responded were of the opinion that “Disclosure should be

※
The title has been modified from the initial title “brand scorecard”.

44
done within the framework of existing financial statements”, which is
broken down into responses such as “Notes of consolidated financial
statement and individual financial statement” and “Consolidated and
individual financial statements”, etc.

Methods for Capitalization of Brand and its Disclosure＜Acceptable to choose more than
one item＞
F.S: Financial Statements
Others Consolidated FS Only
7.8%
8.5%
Consolidated and
Business Reporting
enhancing the existing FS Individual FS
9.4% 13.7%

Individual FS Only
2.8%
“Management Discussion
and Analysis”, ”Business
Status” and etc; other than
FS 29.6% Notes of Consolidated FS
9.1%

Notes of consolidated
and individual FS
Notes of Individual FS 13.8%
5.2%

As for the conditions of capitalization, many responded choosing

“Establishment of objective Brand Valuation Model” (78.3%) and
“Calculation of fair brand value based on an objective Brand Valuation
Model” (67.3%). This supports the view that there is an increasing need for
developing Brand Valuation Model.

Conditions for Brand Capitalization＜Acceptable to choose more than one item＞

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Establishment of objective Brand

Valuation Model
78.3%
Calculation of fair brand value based on
an objective Brand Valuation Model
67.3%
Able to account the amount of brand
gains as brand maintenance cost on I/S
11.0%
Able to account unrealized brand gains
on B/S
13.2%
Unrealized brand gains not charged for
tax purposes
18.1%
Able to exclude unrealized brand gains
from distributable income
8.5%

Others 7.7%

45
 As for the effects of brand capitalization, many chose: “Useful for adequate
comparison with peer companies” (63.4%), “Provides adequate information
for investors in making investment decisions” (60.2%), “Useful for reporting
performance to shareholders” (38.4%). This means that capitalizing brand
is meaningful for managers, investors and shareholders.

Effects of Brand Capitalization＜Acceptable to choose more than one item＞

0% 10% 20% 30% 40% 50% 60% 70%

Provides adequate information for

investors in making investment 60.2%
decision

Useful for reporting performance to

shareholders
38.4%

Useful for adequate comparison with

peer companies
63.4%

Useful to improve financing capability 13.7%

Useful to prevent TOB and to calculate

fair price for M&As
21.3%

Useful for changing business strategy 12.9%

Others 6.1%

4 Regarding the brand royalty fee, the dominant companies have chosen “No
actual offers of services such as consulting, management advisory or
corporate advertisement nor exchange of cost such as brand royalty
fees”(68.0%). Many of them replied, “Not considering” (86.1%) of
exchanging such brand royalty fee.

Exchange of Fees associated with Usage of Brands

Had actual offers of services such as
consulting, management advisory or
corporate advertisement and payments or
receipts of cost such as brand royalty
12.0%

Had actual offers of services such as

consulting, management advisory
or corporate advertisement but no
No actual offers of services
payments or receipt of cost such as
such as consulting,
brand royalty 8.6%
management advisory or
corporate advertisement nor
exchange of cost such as No actual offers of services such as
brand royalty fees 68.0% consulting, management advisory
or corporate advertisement but
had payments or receipts of cost
such as brand royalty 11.4%

46
 Consideration on Brand Royalty Fee Payments
（for companies that answered “no payments” of brand cost in the previous question）
Had actual offers of services such as consulting, management
guidance or corporate advertisement and payments or receipt
of cost such as brand royalty 4.7%
Others
1.6%
Had actual offers of services such as
consulting, management guidance or
corporate advertisement.. Gave up to pay or
receive such cost after consideration
1.2%

Considering payments or receipts of

brand royalty not associated with actual
offered services 5.2%

Considered payments or receipts of

brand royalty not associated with
actual offered services but gave it up
Not under consideration 1.2%
86.1%

However, it was notable that more than half of the companies that had
given up possible payments or receipts of brand royalty fees after an
internal review responded that they would exchange brand royalty fees on
the condition if such fees are calculated under an objective valuation
methodology. As the importance of group management by holding
companies increase, it is predicted that many companies will consider
introducing exchange of brand royalty fee.

5 Regarding corporate acquisitions or brand acquisitions, 20.2% responded

that they have acquired companies or brands in the past 5 years. Many of
them stated the purpose of such acquisition as “For expansion of
businesses” (69.3%), and “For increasing market share” (52.4%). In
selecting the company or brand for acquisition, they valued “Types of
industry”(50.8%) and “Technology” (50.8%).

Corporate Acquisitions or Brands Acquisitions in the past 5 Years

Yes No
20.2% 79.8%

47
 Purpose of Corporate Acquisition and Brand Acquisitions
＜Acceptable to choose more than one item＞
（among companies that had corporate or brand acquisitions in the past 5 years.）

0% 10% 20% 30% 40% 50% 60% 70% 80%

For horizontal integration 24.3%

For vertical integration 14.8%

For expansion of businesses 69.3%

For purchasing technological capability 30.7%

For increasing market share 52.4%
To enhance economies of scale 25.9%
For strengthening the brand 14.8%
Others 4.8%

Important Factors in selecting Acquisition Targets＜Acceptable to choose more than one＞

（Those only who had corporate or brand acquisition in the past 5 years）

0% 10% 20% 30% 40% 50% 60%

Identity・Color 14.8%

Branding Power 24.6%

High profitability 34.4%

Types of industry 50.8%

Similarity in identity 30.1%

Technology 50.8%

Others 9.3%

In calculating the acquisition prices, many companies responded “Synergy

effect between the company and acquired company” (57.6%), “Net asset
value of acquired companies” (50.0%) as major items for considerations.
However, the prices of intangibles and goodwill in acquisitions are mostly
calculated “By comparing investment amount with net asset value of the
acquired companies” (49.2%), and “Calculation by evaluating intangibles or
goodwill separately” accounted for only 18.5%.

48
 Factors considered in Calculation of Purchase Price<Acceptable to choose more than one
items>（Those only who had corporate or brand acquisition in the past 5 year）

0% 10% 20% 30% 40% 50% 60% 70%

Net asset value of acquired

company
50.0%

Human resources of acquired

company
22.1%

Technology of acquired company 44.8%

Brand owned by acquired

company (incl. Intangible items)
20.3%

Synergy effect between the

company and acquired company
57.6%

Market capitalization of acquired

company
14.0%

Profitability of acquired company 44.2%

Others 2.9%

Calculation Method for Intangible Assets or Goodwill of Acquired Companies

（Those who had corporate or brand acquisition in the past 5 year）

Not Sure
21.7%

Calculation by comparing
Others investment amount with
10.6% net asset value of the
acquired companies
49.2%
Calculation by
evaluating intangibles
and goodwill
separately
18.5%

V-2-2 Results of the Current Practices

1 Regarding the existence of brands that bring competitive advantages,

companies that acknowledge existence of such brands accounted to more than
80%, and among them many responded that “Both corporate brand and product
brand bring competitive advantage” (44.8%).

49
 Existence of Brand that brings Competitive Advantages

No such CB or PB
13.7%
No such CB but there is a PB that Both CB and PB bring
brings competitive advantages competitive advantage
4.8% 44.8%

No such CB, but a few PBs bring

competitive advantages
16.8%

No such PB but there is CB that

brings competitive advantages
20.0%

Regarding the actual effects of competitive advantages, many responded

“Capability to sell and offer more products at the same price of those of
other companies”, “Creation of synergies by using brands and develop new
markets”, “Capability to sell the product at higher price than that of other
companies“. However, many wholesale companies answered “Capability
to gain huge income by offering license or selling brands to other
companies”. This means the effect of competitive advantages derived from
brand varies widely by industries.

Competitive Advantages brought by Brand Effect

＜Acceptable to choose more than one items＞

0% 10% 20% 30% 40% 50% 60% 70% 80%

Capability to sell the product at higher price than that of 34.8%

other companies 31.1%

Capability to sell and offer more products at the same 68.7%

price of those of other companies 70.5%

Creation of synergies by using brands and develop new 52.9%

markets 47.5%

16.9%
Capability to cut advertising cost
18.0%

Capability to gain huge income by offering license or 5.1%

selling brands to other companies 4.9%

20.8%
Capability to secure distribution channel easily
17.2%

Upper Bar ： Companies with brands that 8.6%

Others
bring competitive advantages 9.0%
Lower Bar：Companies without brands that
bring competitive advantages

50
2 Regarding the elements constituting a company’s brand images;
“Reliability” (9.3 points), “Security”(8.5 points), “High Quality”(8.7 points),
“Functionality” (7.6 points) were the elements that gained high points.
And also, as for the customer preference of the company’s brand image,
many placed emphasis on; “Reliability” (42.7%), “High Quality” (20.0%),
“Functionality” (12.3%), and “Security” (8.3%). Furthermore, as for the
intangible items that create and support the brand image, “Technological
capability” (8.1points), “Product development” (7.4 points), and “Servicing
capability” (7.0 points) were the items that gained high points. Based on
these results, it seemed that Japanese companies attach importance on
brand images related to tangible aspects of their products and services.

Elements Composing Brand Images＜Full marks: 10 points＞

0 1 2 3 4 5 6 7 8 9 10

Reliability 9.3

Security 8.5

High Quality 8.7

Functionality 7.6

Name recognition 7.1

Status 5.4

Premium image 4.9

Durability 5.9

Endurability 5.1

Sense of fashion 4.4

International recognition 5.3

Innovation Spirits 6.7

Tradition 5.3

Others 1.1

51
Most Important Brand Images preferred by Customers
Innovation Others
Spirits 5.9%
2.8%
Sense of fashion
2.0%

Name
Reliability
recognition
42.7%
4.5%

Functionality
12.3%

Security
High Quality
20.0% 8.3%

Intangible Items Creating and Supporting Brand Images＜Full Mark: 10 points＞

0 1 2 3 4 5 6 7 8 9 10

Technological capability 8.1

Cost reduction capability 6.6

Advertisement/PR 5.2

Trademark right 5.4

Copyright 3.4

Design right 3.9

Patent 5.2

Software related to manufacturing 4.7

Customer list 5.5

Management capability 6.9

Product development 7.4

Design capability 5.5

Control over delivery channel 5.1

IR/PR 5.2

Information creativity 5.2

HR development 5.9

Servicing capability 7.0

Others 1.5

52
3 With respect to developing brand strategies, 73.5% consider it at the level of
“Corporate brand for the corporate group” and the importance of corporate
brand on a consolidated basis was broadly recognized.

Expected Level of Brand Strategy ＜Acceptable to choose more than one＞

0% 10% 20% 30% 40% 50% 60% 70% 80%

Corporate brand for the corporate group 73.5%

Corporate
. brand as a corporate group
Corporate brand or product brand representing
26.2%
business unit or segment
Product brand representing product group
25.2%
(family brand)

Product brand representing each product 38.3%

Others 1.7%
4 Regarding Brand Management, approximately 60% of all surveyed
companies manage brands in some ways or recognize the cost of Brand
Management. However, 42.2% of all surveyed companies have internal
organizations for Brand Management and roughly 70% of companies that
did not have internal organization for managing brand have their top
management who is interested in Brand Management, thus in total,
approximately 80% of all surveyed companies recognize the importance of
Brand Management.

Status of Brand Management

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Managing corporate brand and

product brand by assigning 4.9%
brand mangers respectively

Managing corporate brand and

15.5%
product brand separtely

Managing corporate brand and

product brand together at the 41.7%
head office

No particular brand
35.2%
management

Others 2.7%

53
 Existence of Brand Management Organization

Yes No
42.2% 57.8%

Interest in Brand Management

（only among companies without brand management organizations）

Yes No
72.2% 27.8%

5 Points that companies place emphasis in developing, maintaining and

managing corporate brands are; “Shared understanding of management
philosophy” with the highest share of 68.5%, followed by “Public relations
and IR” (40.0%), “Sending consistent message” (37.0%). In the case of
product brands, on the other hand, “Improvement of product quality”
gained the highest share of 61.1%, followed by “Improvement of
manufacturing technology”(35.4%), and “Advertising and promotion”
(32.1%).
Considering the difference in the level of brands, it should be natural that
corporate brands were positioned as the basis for product brands in many
cases that many companies were keen to establish a consistent brand
internally and externally. On the other hand, with respect to product
brands, many companies placed emphasis on developing an individual
brand with a specific image. Here again, it is worth noting that many
companies valued the “hardware” aspect of products in developing product
brands.

54
 Items that require Attention in Developing Brands ＜Choose 3 items＞

0% 10% 20% 30% 40% 50% 60% 70% 80%

Shared understanding of management 68.5%

philosophy 7.7%
Improvement of morale 29.8%
3.0%
Sending consistent message 37.0%
15.9%
Customer survey 5.0%
14.9%

Improvement of manufacturing technology 12.4%

35.4%

Improvement of product quality 25.0%

61.1%

Advertising and promotion 20.9%

32.1%

Price setting and the maintenance 5.1%

23.6%

Securing distribution channel 2.7%

7.0%

Establishing brand identity and criteria 14.5%

6.8%
Ensuring positioning of brand 8.1%
17.7%

Creation of new product concept 5.1%

31.2%

Public relations and ＩＲ 40.0%

5.9%
Prevention of forged goods 1.5%
5.7%

Other companies' products 2.5%

14.4%

Others 1.0%
0.8%

Upper Bar: CB
Lower Bar: PB

6 As for the actual cost component for the development of corporate brands,
the following items had high ratio; “Advertising costs” (61.2%), “Cost
associated with protection of trademark and design rights” (45.4%), “Cost of
ensuring management philosophy” (32.0%), “Branding cost (naming cost)”
(29.9%). The result for product brands was almost the same, but ratio for
“Cost of ensuring management philosophy” was low at 3.8%, whereas
“Sales promotion cost“ was high at 51.9%. It is worth noting that ratio for
the cost directly related to products were high such as; “Marketing research
cost”, “Cost of product guarantees”, and “Customer servicing cost”.

55
 Cost to be included in Brand Cost＜Acceptable to choose more than one＞
（only among companies that capture brand cost）

0% 10% 20% 30% 40% 50% 60% 70%

29.9%
Branding cost (naming cost) 29.9%

8.0%
Cost of purchasing brand 11.3%

61.2%
Advertising costs 61.5%

23.8%
Sales promotion cost 51.9%

12.9%
Cost of R&D 21.2%

18.7%
Labor costs 20.1%

15.8%
Marketing research cost 28.8%

Cost associated with protection of trademark 45.4%

and design right 49.7%

32.0%
Cost of ensuring management philosophy 3.8%

22.8%
Cost for improving employee morale 5.2%

15.8%
Customer servicing cost 26.9%

13.1%
Cost of product gurantees 28.0%

1.9%
Upper Bar: CB Others 2.2%
Lower Bar: PB

7 Regarding the indices for demonstrating effectiveness of brand

development, key items selected for corporate brands were; “Improvement
of customers’ brand awareness” (51.4%) followed by “Improvement of
brand image”(42.7%), “Sales growth” (42.0%), and “Increase in stock price”
(37.4%). In the case of product brand, on the other hand, “Sales growth”
(60.8%) was the highest, followed by “Growth of sales quantity” (46.3%),
and “Market share” (42.5%).

56
Index to Measure Effectiveness of Brand Cost＜Acceptable to choose more than one＞
（only among companies that captures brand cost）

0% 10% 20% 30% 40% 50% 60% 70%

Sales growth (rate) 42.0%

60.8%

30.8%
Operational profit growth (rate) 39.5%

18.1%
Gross profit growth (rate) 25.4%

37.4%
Increase in stock price 8.0%

Decrease in financial cost 6.4%

3.5%

Growth of sales quantity 14.2%

46.3%

51.4%
Improvement of consumers' brand awareness
41.3%
42.7%
Improvement of brand image 34.8%

6.4%
Rate of intention to purchase the brand 18.9%

Rate of trial purchse of the brand 3.3%

12.4%

Rate of repeated purchase of the brand 7.9%

24.8%

26.0%
Market share 42.5%

10.4%
Control of distribution channels 12.4%

26.7%
Improvement of employee morale 4.4%

Upper Bar: CB Others 5.3%

5.6%
Lower Bar: PB

57
VI Brand Valuation Model

VI-1 Approaches to Brand Valuation

Generally speaking, approaches to valuation of intangibles including brands

can be classified into “residual approach” and “independent valuation
approach”. Strengths and weaknesses of these approaches are explained
as follows.

VI-1-1 Residual Approach

1 “Residual approach” considers brand value as the result of subtracting the

book value of all net assets on the balance sheet from the total value of the
company described as the market capitalization amount.

2 The strength of this approach is that it is based on market capitalization,

which could be seen as an objective measure, since stock price is determined
by various views of market participants. It is also true that calculation is
relatively easy. On the other hand, the value calculated in this approach
includes not only brands subject to valuation but also goodwill and other
intangibles. Therefore this approach does not accurately measure the
value of the brand. Besides, assuming the market capitalization amount as
the overall value of the company may mean that accounting is using market
data. To conclude, the Committee decided not to adopt this approach.

VI-1-2 Independent Valuation Approach

Independent valuation approach values brand independently and could be

classified broadly into; “cost approach”, “market approach”, and “income
approach”.

(1) Cost Approach

1 This valuation approach values brand based on the cost spent in
developing the brand. This approach could be classified into two different
approaches; “historical cost approach” values the brand based on the costs

58
 expensed for the maintenance and management of the brand such as the
development, marketing, and advertising expense, while the “replacement
cost approach” values the brand based on the expected total cost required to
recreate the brand that would have similar or equal characteristics of the
brand subject to valuation.

2 Since the “cost approach” values brand independently by looking into

measured consideration for it or its replacement cost, it matches with the
empirical evidence shown in various marketing studies aimed at
demonstrating the relevance between costs of advertisement and corporate
values. While this approach has strength in its feasibility and usefulness
for making comparisons, it also has weakness revealed by practical cases
where a brand could not be developed even at a huge cost, or on the other
hand, a good brand had been developed at a minimal cost, i.e. relationship
between cost and brand value is unclear. There is other shortcomings in
this approach where historical cost paid to develop a brand as well as
replacement value estimates may not be relevant to the value of a brand due
to time gaps and correlation gaps. To conclude, the Committee did not
adopt this approach as the brand valuation approach.

(2) Market Approach

This approach, also referred as “sales comparison approach”, values brand
by making reference to the actual price of similar brands traded in the
market. Although this approach is rational in the sense that it is based on
the actual traded price, it may not be rational in assuming that similar brand
will be priced alike, since brands are by nature somewhat unique compared
with others. In addition, it is difficult to obtain truly comparable data, and
there could be issues in objectivity raised by differences in actually traded
price of brands that may vary widely depending on the purchaser. Due to
such limitations, the Committee decided not to adopt this approach.

(3) Income Approach

Income approach, which may be called as “economic value approach”,
values brands based on the net present values of the excess profit or future
cash flows. The Committee has decided to support this approach to

59
 determine the brand value.
There are variations to this approach based on how much excess profit is
measured, i.e. “royalty exemption method” and “premium price method”.

① Royalty Exemption Method

This method measures excess profit by the royalty fee that a company
would have to pay if it did not hold the brand. Since royalty fee is the
traded price agreed between the seller and the purchaser regarding a brand,
it is reasonable to regard it as the excess profit. However, there are some
practical problems similar to the market approach. Specifically, this
method cannot be used if there is no actual exchange of royalty fee, and due
to the nature of brands that none of them are alike, it does not make sense
referring to the royalty fee of other seemingly similar brands.

② Price Premium Method

This method measures the excess profit by the present and future price
premium of branded products compared with products without brand.
This approach focuses on the price premium as the fundamental effect of a
brand and corresponds to the concept of brand adopted by the Committee.
Therefore, the Committee has decided to adopt this method.

VI-1-3 Examination of Valuation Methodology under Income Approach

1 In applying the “income approach”, it is necessary to calculate the net

present value of future cash flows by discounting them at a discount rate.
There are two ways to look at the cash flow and discount rate both of which
are the two components for the calculation of net present value. The first
approach is not to reflect risks in the cash flows but have them reflected in
the discount rate as the denominator (referred to as “traditional approach”,
hereinafter), and the second approach is to have risks reflected in the cash
flows as the numerator and do not have them reflected in the discount rate
(referred to as “expected cash flow approach”, hereinafter).

2 The traditional and expected cash flow approaches can be summarized as

follows based on three viewpoints: cash flow, discount rate and issues.

60
 The traditional approach is based on the assumption that it is possible to
reflect expectations on future cash flows in a single most-likely cash flow.
On the other hand, the expected cash flow approach does not rely on a
single most-likely cash flow but utilizes all available cash flow predictions
that are likely to happen and derives expected future cash flow amount
reflecting variance of such predicted cash flows. In the traditional
approach, discount rate reflects risks but in the case of expected cash flow
approach, a risk free rate is applied.

3 In either approach, there is a problem involving the subjective component

in the estimate for calculating the net present value of future cash flows. In
the case of traditional approach, risks associated with cash flows are
reflected in the discount rate, which makes the content of risk to be
somewhat unclear, whereas in the case of expected cash flow approach,
risks associated with cash flows are reflected in the cash flows themselves
that makes risks clearer.

4 The shift from the traditional approach to expected future cash flow
approach has become an international trend as seen in Statements of
Financial Accounting Concepts No.7, “using cash flow information and
present value in accounting measurements”6 issued by the Financial
Accounting Standards Board. Thus, the Committee has decided to adopt
expected cash flow approach but not traditional approach. Expected cash
flow approach calculates the cash flows reflecting all possible risks based on
the calculation methodology for annual cash flows.

(1) Calculation Methodology for Annual Cash Flows

1 Though there are various methods for calculating annual cash flows in
measuring corporate value, the major examples other than substituting
accounting profit for corporate value includes “free cash flow”, “net
operating profit after tax (referred to as “NOPAT”, hereinafter), economic
value added (referred to as “EVA”, hereinafter), which is a performance
appraisal benchmark developed and registered by Stern Stewart & Co as its
trademark, and the excess profit model developed by Ohlson.

61
2 Free cash flow is calculated as follows: operating profit – tax cost +
non-monetary expense – increase in working capital – investment
expenditure. The main features of this method is that it does not deduct
the cost of capital and recognize increases or decreases in working capital
and write-back cost that does not involve cash out flows, and thus deduct
actual capital investment expenditure.

3 NOPAT is calculated as: operating profit – tax cost ± balancing items, and
the feature of this method is not to deduct cost of capital. The balancing
items include 5-year amortization of research and development costs that
would be immediately charged as expense for financial accounting
purposes.

4 EVA is calculated as: operating profits – tax cost ± balancing items –

(invested capital × weighted average cost of capital), and the feature of
this method is that it deducts cost of capital.

5 The excess profit in the Ohlson model is calculated as: net income for the
year - (net asset book value at the beginning of the year × risk free rate),
and the feature of this method is that it deducts cost of capital.

6 In all of these calculations, tax expenses are deducted, however the

treatment of the cost of capital differs. In the case of free cash flow,
although capital expenditure is deducted by recognizing the changes in
working capital and write-back the non-monetary expense such as
depreciations of working capital. Even if such adjustments are made, total
cash flow as an aggregate of each year’s cash flow does not differ from other
calculation methodologies.

7 In determining whether to use the method that deducts cost of capital or

not, such decision depends on the objective of present value calculation.
For example, in calculating excess cash flows as a business performance
measure, the method that deducts cost of capital would be appropriate.
And in case of calculating asset value for accounting purposes, it is

62
 reasonable to adopt the method that does not deduct tax expense as well as
cost of capital, since both tax expense and cost of capital are taken into
consideration separately.
As for the net present value calculation used in Discounted Cash Flows
(“DCF”) or EVA, the cash flow before deducting interest expense would be
used when discounted by the weighted average cost of capital (“WACC”)
based on the ratio of cost of equity capital and ratio of cost of debt, which is
the minimum requirement by shareholders or creditors, and in case of
discounting by the ratio of cost of equity capital, the cash flow after
deducting interest expense will be used.

8 Since the purpose of the Committee is to develop a valuation methodology

for brand value for the purpose of its capitalization (to be accounted on the
balance sheet), it was decided not to deduct the cost of capital and tax
expense. Although adjusted free cash flow reflecting changes in working
capital was taken into consideration, it was decided to use financial
accounting figures as they are, since the major factors of brand value (i.e.
brand loyalty and brand expansion power), are difficult to be reflected in
the form of cash flows, and the Committee wanted to avoid developing a
complex model.

(2) Techniques for Estimating Future Cash Flows

1 In order to calculate future cash flows, it is ideal to calculate future cash
flow of each year and sum them up. However, in reality, as it is difficult to
calculate the future cash flow of each year, it is a common practice to
calculate future cash flows for a few years and estimate cash flow onwards
based on certain assumptions.

2 Time series regression model is one of the most simple estimation measures.
This model is based on a linear regression with time series as explanatory
variable. In other words, the model derives a straight line that indicates a
trend of cash flow based on the historical performance data and assumes
that the future cash flow would occur on the extended straight line.
Although this methodology is consistent with the traditional approach that
uses the most-likely single cash flow, it has a problem of not reflecting risks.

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3 Although the Committee discussed the possible adoption of other models
such as multivariate autoregressive model, geometric Brownian motion
model, and the geometric Brownian motion model considering jump
process, the Committee decided not only to adopt any of these not because
they were complicated, but also because they require various subjective
parameters and assumptions as well as huge amount of data.

4 The Committee has considered possible adoption of the adjusted time

series regression model that has been adjusted to incorporate risks while not
making the model too complicated. As a result of various simulations, the
Committee could not see statistical significance in the regression, which
gave unsatisfactory R-square figures. The Committee sought about
adopting methodologies used in analyzing stock prices ( dx = µdt + σdβ ) as
well as panel analysis and etc., and have concluded that it is most realistic to
use the historical average figures considering the availability of data and the
simplicity of calculation. The Committee believes that the actual series of
past profit data incorporate risks materialized in the past, and the average of
the aggregated profit figure should be considered as the most starting point
for the future expectations. This concept is consistent with the expected
cash flow approach, and is a highly objective calculation method since it
gives anyone the same results. Thus, the Committee has decided to adopt
this methodology, which assumes the future cash flows by taking average of
past accounting profits.

(3) Calculation Methodology for Discount Rates

Since risks are not reflected in the discount rates, a risk free rate is used
under the expected cash flow approach. As an example of a risk free rate,
one may consider using yields of high credit long-term bonds such as
long-term government bonds. This is the same concept used in net present
value calculation for retirement benefits. There are various types of
government bond yields one may use as reference for risk free rate
depending on the time to maturity. In choosing the yield for valuation, the
period should be consistent with the effective period of a certain brand’s
value. In Japan, however, due to the lack of depth in the markets of

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 super long-term government or corporate bonds, 20-year yield has to be
chosen as the longest period.

(4) Duration of Cash Flows

1 As for the duration of cash flows, there is an approach that assumes cash
flow will disappear after a certain period of time; on the other hand, there is
an approach that assumes cash flows to continue permanently.

2 It may be too optimistic to consider that a brand would exist permanently

considering the fact that life cycle of products are becoming shorter due to
increasingly competitive market environment. On the other hand, to
assume that a brand would diminish at certain period of time may involve
subjective factors in deciding the period.

3 It is considered that in developing brands, companies expect that the effect

of their research and development materializes in a cumulative manner over
certain period of time. It is extremely difficult to predict when an
established brand loses its value, and particularly considering corporate
brand, the life of a corporate brand may correspond to the life of the
company. Therefore, the Committee considers that it is appropriate to
assume that cash flows for corporate brand will exist permanently based on
the assumption of business as a “going concern”.

4 In measuring brand value for the whole company including corporate

and product brands, the Committee decided to adopt an approach that
assumes certain expected cash flows to continue permanently. Some
companies demonstrate clear growth trend in their performance, but the
Brand Valuation Model adopted by the Committee does not reflect such
growth trend into future expectations, and therefore takes a conservative
view in valuing brand for such company. Considering that many existing
brand measurement models tend to overestimate the value of brands and
business accounting generally respects conservative asset valuations, the
Committee believes that such underestimate in valuation is even desirable.

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 VI-2 Basic Concept of Brand Valuation Model

1 The Committee considered two methods in valuing brands; one is

valuation in terms of money, and the other is valuation in terms of money
and other qualitative factors such as images, stability, brand recognition,
international recognition that could be indexed and added as additional
points. The latter method has been widely used in the area of marketing to
measure value of brands. In order to transform non-financial qualitative
factors such as data often used in marketing into monetary values, there
must be some kind of formula to find rationality in such formula and it may
be difficult to demonstrate that such measure is objective.

2 From a financial accounting perspective, which focuses on economic

phenomena that can be measured in terms of money, valuing brands using
a marketing-based approach is not acceptable due to the lack of reliability in
the measurement. Thus, in developing Brand Valuation Model, the
Committee decided to use only information available in the publicly
reported financial statements that are assured through financial statement
audit.

3 In valuing a brand, it is necessary to consider whether to do it on a

consolidated basis or on a legal entity basis. If valuation is performed on a
consolidated basis, there can be a case where a corporate brand of a
company within a corporate group happens to be a product brand for the
corporate group, and also there can be a case where multiple corporate
brands exist in a corporate group. In such a case, it is possible to expect
synergies between corporate brands (or possibly product brands within a
corporate group) of legal entities.
In considering the Model in the Committee, it was decided to calculate the
brand value of a corporate group based on the consolidated financial
statements, as it is practically difficult to measure synergies among multiple
corporate brands in a corporate group or a legal company.

4 Since consolidated financial statements are prepared by simply adding up

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 the legal entity figures in a consolidated working sheet and making entries
to offset them, it is likely to assume that brand value of a corporate group
could also be calculated by summing up legal entity’s brand value and
making necessary adjustments as described above. However, it is not
possible, because aggregation of legal entity’s brand value does not
correspond to brand value of a corporate group. Therefore, valuation of a
corporate group’s brand follows the same process as procedure for
consolidating capital accounts on a consolidated working sheet.
To put it more concretely, like the case of “XYZ Vega”, for example, many
products have corporate brand name and product brand name attached to it,
and it is difficult to separate the cash flows generated from a product into
CB value and PB value. Therefore, the Committee decided to express the
brand value of a corporate group in the formula described in Section II-3-3. .

5 The Committee has decided to calculate brand value based on the concept
of a brand described in Section II-1, i.e. brand value is described as a
function of three drivers, namely, (1)Prestige, (2)Loyalty and (3)Expansion.

Brand value (BV)＝f (PD, LD, ED, r)

PD：Prestige Driver
LD：Loyalty Driver
ED：Expansion Driver
r ：Discount Rate

VI-3 Definition of Key Drivers

VI-3-1 Prestige Driver

1 Prestige Driver is the factor of brand value, which focuses on the price
advantage created by the reliability of the brand that enables the company
to sell the product constantly at higher prices compared with the competitor.
Price advantage is described as the competitiveness of products with strong
brands that can be sold at higher prices compared with products without
brand or with weak brand, even if both products have exactly the same

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 quality and functions. Price advantage is explained by the excess value of
branded products over that of non-branded products, and it becomes the
basis for the increases in present and future cash flows generated by the
brand (referred to as “excess profits”, hereinafter).

2 When cash flows generated by companies are examined in detail, they

could be broken down into a unit price and quantity. The Committee has
tried to look into this issue by breaking down the price advantage
classifying it into price premium described as the difference in unit prices
and quantity premium described as increase in quantity sold. However,
since there are correlation and synergies between unit price and quantity,
the Committee decided that it is not meaningful to make such a distinction.

3 Regarding the calculation of excess profits, the Committee decided to

recognize “sales differentials per cost of sales” as the excess profitability and
as the index that demonstrates unit price differentials between products.
The Committee considered the possibility of adopting indices other than
“sales differentials per cost of sales” such as operating margins ratio and
gross margins ratio. However, operating margin ratio is affected by selling
and administrative expense other than price premium, and gross margin
assumes sales amount as a unit of product though it has already reflected
price advantage. Therefore, the Committee decided to adopt “sales
differentials per cost of sales” as the unit price index.

4 As this Model looks at price advantage brought by brand as major source

of brand value, there needs to be a benchmark for making comparison.
This conceptually means that the benchmark would be the sales per cost of
sales for non-branded products with the same quality and functions of
branded products.
In determining the benchmark, there are methods such as; (1) using the
average of the same industry, and (2) using the lowest figure in the same
industry. The former method will create half of an industry with negative
brand value. So far as companies are conducting business in pursuit of
profits, it is fair to assume that most of them are creating certain brand value.
Therefore, the Committee decided that the former method should not be

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 chosen. The latter method will select a firm with no price advantage as the
benchmark and this will fit with the concept of the brand value of the
Committee. Therefore, the Committee decided to adopt the latter method.

5 Considering the fact that the Committee has applied listed companies in
developing the Model, there were critical opinions that every company
should have some corporate brand and value associated with it. However,
the Committee believes that it may not make sense to assume that the
applied listed corporations manufacture and sell products with the same
quality and functions of those of small companies, nor is it possible to
assume they compete each other in the same market. Therefore,
acknowledging that this method may be a conservative assessment of brand
value for major corporations, but the Committee considered selecting a
company with the smallest sales per cost of sales in the same industry
among the listed companies as the benchmark.

6 While every factor of corporate activity must be reflected in the excess

profitability since it is derived from the product price differentials, it may
also include factors generated from intangibles such as manufacturing
know-hows, technologies and etc. that are not necessarily generated by
brand. Therefore, it is necessary to extract the part only attributable to
brand from the excess profitability.

7 As the methods to calculate the portion of excess profits originated by

brands, there are; (1) a method to extract the profits originated by brands by
using a certain ratio (referred to as “brand attribution rate”, hereinafter),
and (2) a method which regards the residuals obtained by deducting profits
not originated by brands (e.g. capability to save costs and manufacturing
know-how) from the excess profit as the profits originated by brands. The
Committee decided to take the former method calculating the profits
directly attributable to brand, since the latter method was not different from
the residual approach descried in Section VI-1-1.

8 It is considered desirable that the brand attribution rate is described as the

proportion of development, maintenance and management cost related to

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 brand (referred to as “brand management cost”, hereinafter) to the overall
operational cost of a company. As specific items included in the brand
management cost, the following items are included based on the results of
Questionnaire (Question No. 26) conducted by the Committee.

＜Items with response rate over 15%＞

Branding cost, advertising and promotion cost, sales promotion cost,
personnel expense, costs associated with market research, costs associated
with protection of trademark and design rights, cost to ensure shared
understanding of management philosophy, cost of improving employee
morale, and cost for customer services

9 In calculating the brand attribution rates, the Committee has contacted

companies about the content of their brand management cost and discussed
how such items could be utilized. Although one can say that brand
management cost includes financial data such as advertising and promotion
cost which is relatively easy to capture objectively, there are costs such as
cost of improving employee morale, which differs by industries and
companies and thus it is difficult to set the actual range of brand
management cost. Considering these points, including all the costs above
as brand management costs and use them for calculating the brand
attribution rate may not seem appropriate since it includes certain arbitrary
component into the calculation. Besides, brand management cost is not
disclosed in financial reports and there is no statistics or consistent data
available regarding brand management cost. Under such circumstances,
the Committee sought of utilizing advertising expense since it plays an
important role for brand recognition, and decided to use the “proportion of
advertising expense to total operation cost” (referred to as “advertising
expense ratio”, hereinafter) as the figure to represent the brand attribution
rate in the measurement.

10 Regarding the use of advertising expense ratio as the brand attribution

rate, there were opinions that stating problem in this approach, which
assumes stable correlation between cost incurred by the company and

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 profits gained from the cost would regardless of the content of the cost.
And there were opinions pointing out problems such as the fact that more
advertising and promotion cost is spent regardless of the effect, the higher
the brand attribution rate becomes, and the fact that the time lag exist
between the time actual advertising and promotion cost is spent and when
the effect becomes apparent. Furthermore, there were opinions that the
relationship between advertising and promotion cost and brand value
changes by the age of the brand or the degree of maturity, assuming that
advertising expense could be reduced if brand value increases.

11 Considering the limitations in the publicly reported financial statements,

the Committee decided that it would be appropriate to use the advertising
expense ratio for calculating the brand attribution rate since there is no issue
with the objectiveness, although it is no doubt desirable to use brand
management cost if all companies can secure credibility of audit on financial
statements. As a result, the Committee used the advertising expense ratio
in performing its simulations.

12 Since there are many companies that do not show advertising and
promotion cost as an independent item, the average of the industry was
used for such companies as a second best solution. In order to refine
accuracy in the valuation of brand values, further institutional action is
required to ensure comparison between companies regarding the range of
brand management cost and the range of advertising and promotion cost
and disclosure of such information.

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13 The formula for calculating the Prestige Driver was decided as follow:

PD＝Excess profit ratio×Brand attribution rate×Cost of sales

＝［5 year average of｛（Sales of the company／Cost of sales of the company−Sales of a benchmark

company／Cost of sales of a benchmark company×Advertisement and promotion cost ratio of the

company）｝×Cost of sales of the company

1 0  S i S i*  Ai 
PD = ∑  − *  ×  × C0
5 i = −4  C i C i  OE i 
S：Sales of the Company S＊：Sales of the Benchmark Company
C：Cost of Sales of the Company C＊：Cost of Sales of the Benchmark Company
A：Advertisement and Promotion Cost OE：Operating Cost

VI-3-2 Loyalty Driver

1 Loyalty Driver is the factor, which focuses on the capability of a brand to

maintain stable sales for a long period based on stable clients or repeaters
with high loyalty. As far as customers judge that they can benefit from a
brand, they are likely to continue purchasing products with such brand.
The effect of a brand could be expressed as Prestige Driver and Loyalty
Driver, both of which reflect price and quantity effect of the cash flows
generated by the brand in its relationship with customers. Therefore, by
multiplying Loyalty Driver with Prestige Driver, one can calculate the most
stable and certain portion of the present and future cash flows generated by
brands.

2 Since Loyalty Driver describes strength of brand value, the Committee

sought about conducting consumer research in calculating loyalty
component. However, since it would be practically impossible to conduct
consumer research over the number of consumers that would have
statistical significance and convert it into figures that are comparable and
able to capture every fiscal period as financial accounting information, the
Committee decided to use companies’ information on customers to develop
measures for loyalty component.

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3 As specific data that indicate customers with high loyalty, one may think
about actual number of such customers, the proportion of such customers to
overall customers, sales and operating profits from customers with high
loyalty and etc. However, since not so many companies capture such
information on a firmwide basis and if so, such information are highly
confidential from strategic point-of-view. Therefore, the Committee
decided that it would be difficult to obtain a comprehensive set of
information. And even if one may be able to obtain such information,
there will still be problems of comparability and objectivity that may not be
appropriate for using such information in brand valuations.

4 In developing an index that indicates loyalty, the Committee has

considered the possibility of quantifying stability of market share
information. The methods for quantifying market share information
include; (1) the method using market share based on product quantity
publicized by market research companies, (2) the method using market
share by sales, (3) the method using market share by cost of sales. It has
been decided to exclude the first method, because the Committee had
doubts about relying on the results of a market research company may raise
issues from independence of the valuation model and their classification of
industries were not consistent. The Committee also decide not to adopt
the market share method, because the Committee’s Valuation Model was
agreed to be based on firm wide data obtained from publicly reported
financial statements, and quantity information by product may not be
consistent with data in the financial statements.
Other than that, the Committee discussed the possible adoption of “stability
of market share by sales” and “stability of market share by cost of sales” as
financial statements data that indicate market share. However, so far as
market share is used, growth or decline of the market as a whole is not be
reflected in the calculation and externalities such as trends in other
companies may affect the company’s share, and therefore, does not fit with
the concept of Loyalty Driver as an indication of customers with high
loyalty.
As a result, the Committee decided that it is adequate to use the “stability of
cost of sales” as a parameter for Loyalty Driver, since the data is objective

73
 based on financial statements data and captures growth and decline of
markets. The Committee has discussed about the possibility of using
stability of sales, but effect of Prestige Driver is reflected in the sales and
was determined inappropriate as an independent parameter. Therefore,
the Committee decided to use the 5-year for the cost of sales and derive the
average (μ) and standard deviation (σ), and defined Loyalty Driver by
taking the proportion of the difference between standard deviation and
average to the average. The Committee decided to use σ, which indicates
the magnitude of volatility, by converting it into relative amount and
subtracting 1 to make it clear that it indicates stability. In other words, the
Committee decided to use σ / μ as coefficient of volatility and by
subtracting 1, and decided to define the formula for the Loyalty Driver as
(μ−σ)/ μ. If the figure of cost of sales is stable, standard deviation
should be small and the Loyalty Driver value described as (μ−σ)/μ
should become closer to 1.

5 The formula for calculating Loyalty Driver has been decided as follows.

LD ＝ (Cost of sales(μ) − Cost of sales (σ)) / Cost of sales (μ)

µC − σ C
LD =
µC
μＣ：5-year average of cost of sales σＣ：Standard deviation of cost of sales

VI-3-3 Expansion Driver

1 Expansion Driver focuses on the fact that a brand with high status is widely
recognized, and therefore, is capable of expanding from its traditional
industry and markets to similar or different industries as well as to overseas
expanding its market geographically. By multiplying the Expansion
Driver, which indicates a brand’s capability to expand itself, by Prestige and
Loyalty Drivers, one may possibly evaluate the expected growth of future
cash flows generated by the expansion of the brand.

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2 Since the Expansion Driver demonstrates a brand’s capability to expand
its value by stretching into similar or different industries as well as to
overseas, and also indicates the synergies among several brands, the
Committee discussed various parameters to derive certain relationship
between brand profits. Such parameters include; the degree of extension
to overseas by product (changes in share of overseas sales and the number
of customers overseas), the degree of expansion by the number of products
using the same brand (the number of brands used in different products),
and the degree of expansion into different industries (the number of brands
used in multiple industries). However, due to problems in providing
objective and comparable data, the Committee decided that it is most
appropriate to use the average of “the growth rate of the overseas sales”
and “the growth rate of sales in the non-core segment of the company”.
Although it might be possible to consider R&D cost ratio as a parameter of
Expansion Driver, the Committee concluded that R&D capability should be
valued as a factor to support brand value but should be evaluated as
intangibles such as know-how or ability to save cost of sales.

3 In addition to growth rates, the Committee discussed the possibility of

using “the ratio of overseas sales” and “ratio of non-core segment sales” as
parameters for Expansion Driver. While there would be a possibility of
capturing brand expansion capabilities of companies that have already
entered into the non-core business or expanded to overseas, the relationship
between the level of such expansion itself and the ability to increase future
cash flows is not necessarily the same, and there are cases where expansion
into non-core businesses or expansion to overseas have been regarded as
failure in a profitability perspective. Thus, the Committee decided that it is
inappropriate to regard overseas sales ratio or sales ratio of non-core
business segment as a parameter for Expansion Driver.

4 The Committee discussed the possibility of using “the number of product

brands” and “the number of businesses into which brand has expanded” as
indicator for brand expansion capability, but since they cannot be converted
into monetary units, the Committee decided to decline them as parameter
for Expansion Driver.

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5 There was an opinion that few multi-useful brands, brands that have the
capacity to penetrate into various industries, exist in reality and the more
companies expand into new businesses, the more the brand identity would
be diluted. But, the Committee decided that in order to evaluate such
multi-useful brand adequately, growth rate of sales of non-core segment
should be used as Expansion Driver.

6 The Committee discussed the implications for multiplying growth rate of

overseas sales and growth rate of non-core segment sales. Calculation of
brand value by multiplying the growth rate of overseas sales and non-core
segment sales for the past 3 years by Prestige and Loyalty Drivers assumes
growth of overseas sales and non-core segment sales as well as growth of
brand value in the following period. This assumption may well get
criticized, but seems an appropriate method when a third party tries to
demonstrate capability of the brand to expand.

7 There is an opinion that when considering the expansion of brand,

companies usually consider not only expansion to non-core business but the
expansion of a brand within its core business, which should be reflected in
the brand value as an Expansion Driver. However, it is difficult to capture
expansion power of a brand by objective data in the financial statements,
and brand profit from core business as the major source of corporate profit
is captured in the Prestige Driver. The Committee decided that it is not
appropriate to incorporate brand expansion power for core business as a
parameter for Expansion Driver.

8 Eventually, the Committee decided to adopt the average of “the growth

rate of the overseas sales” and “the growth rate of sales in the non-core
segment of the company” as the parameter for brand expansion power.
The growth rate is produced by calculating the three-year average of annual
growth rates. In the case where there is no growth in the overseas sales
and non-core business sales (growth rate of less than 1), the Committee has
decided to recognize that Expansion Driver is not contributing the brand
value, and therefore, set the value of Expansion Driver to 1.

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 Regarding the calculation of overseas sales, data of overseas sales are
obtained from publicly reported financial statements, and regarding the
calculation of sales of non-core business segment, segment data of various
business segments shown in the publicly reported financial statements were
used. The largest business segment among all segments of a company has
been designated as the core business segment, and other business segments
have been designated as non-core business segment.

9 The formula to calculate Expansion Driver has been decided as follows:

ED ＝ Average of growth rate of overseas sales and growth rate of sales of

non-core business segments
(Note) Minimum value of each index should be 1

1  1 0  SOi − SOi −1  1 0  SX i − SX i −1 
ED =  ∑  + 1 + ∑  + 1
2  2 i =−1  SOi −1  2 i =−1  SX i −1 
SO：Overseas Sales SX：Sales of non-core business segments

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VI-4 Brand Valuation Model

1 The model developed based on the basic concept of Brand Valuation Model
discussed above is as follows:

BV = f (PD, LD, ED, r)

PD
= × LD × ED
r
 1 0  S i S i*  Ai  
 ∑  − *  ×  × C0 
 5 i =−4  Ci Ci  OEi   µ C − σ C
= ×
r µC

1  1 0  SO − SOi −1  1 0  SX − SX i −1 
×  ∑  i + 1 + ∑  i + 1
2  2 i = −1  SOi −1  2 i = −1  SX i −1 

PD ＝ Excess Profit Ratio× Brand Attribution Rate×Cost of sales

＝ Past 5-term average of［｛（Sales/Cost of sales−Sales of a benchmark company/
Cost of sales of benchmark company）× Advertising and promotion cost ratio
(Cost of Brand Management*) ｝］×Cost of sales
LD＝(Cost of salesμ− Cost of salesσ)/Cost of salesμ
(Note) μandσare calculated based on the past 5-term data of cost of sales
ED＝Average of overseas sales growth rate and sale growth rate of non-core business segment
(Note) Minimum value of each index should be 1
S：Sales S＊：Sales of Benchmark Company
C：Cost of sales (COS) C＊：Cost of sales of Benchmark Company
A：Advertising and Promotion Cost OE：Operating Cost
(Cost of Brand Management*)
μc：5-term average of COS σc：Standard Deviation of COS
SO：Overseas sales SX：Non-core business segment sales
r：Discount Rate
*: If one can be assured about credibility by financial statement audit, it is desirable to use
brand management cost

2 The Committee decided to use a risk free rate as the discount rate applied
to the expected cash flow.

VI-5 Constraints on the Brand Valuation Model

1 While the Committee has calculated brand value on a consolidated basis in

developing the Brand Valuation Model, the Committee acknowledges that

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 the Model has limitations illustrated by examples such as a company who
has expanded into electronics, movies and financial services may have its
brand value calculated based on the electronic industry, i.e. brand value of
companies that have expanded into other businesses is calculated based on
the core business.
In addition, the Committee discussed separating brand value into corporate
brand and product brand and ways to calculate CB value and PB value
separately. However, since it was decided that the Model should use
objective data in the financial statements, calculating PB value requires
financial statement data for product with the product brand as well as those
of competitive products. The Committee requested companies in the
Questionnaire to provide financial statement data by each product brand,
but not all companies have responded to such request and gathered samples
were not enough to develop a Brand Valuation Model.

2 As the second preferred option, the Committee discussed the possibility of

utilizing trial calculation of product brand value by using business segment
information for each line of business disclosed in the publicly reported
consolidated financial statements. The Committee believed that in doing
so, one might be able to accurately calculate the brand value of companies
that have expanded into different industries. However, it was impossible
to obtain segment data of each line of business in a consistent manner to
ensure comparability, which is essential for the model, which calculates
price advantage against competing products as the major factor of brand
value. It is worth noting that under the current “disclosure requirements
for segment information”, determination of business segmentation is
principally left to each company’s discretion, and as a result, business
disclosed by a company as “electronics” may be referred to as “general
electric”, “civilian electric” or “electric component” or etc. which makes it
difficult to make a comparison. Also, there were companies that
frequently changed their classification of business segments which results in
a lack of consistency when looking at the historical data.
Needless to say, the Committee believes that by improving such
comparability of business segment information by line of business, brand
valuation methodology will become more sophisticated.

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3 Since it has been decided that the model adopted by the Committee would
measure price advantage within the same industry of a company, the
determination of the industry that a company belongs becomes critical in
determining the company’s brand value. For this reason, it is important to
use an objective classification of industries. The Committee examined the
following industry classifications: (1)classification by Tokyo stock exchange,
(2)classification of the Nikkei average index, (3)classification used in
NOMURA 400, and (4)Japan standard industrial classification.
Although (1)classification by Tokyo stock exchange and (2)classification of
the Nikkei average index are generally widely recognized, the number of
industries classified is 33 and 36, respectively, and do not provide a detailed
classification required for adequately measuring price advantage. The
Japan standard industrial classification has 99 industries and classified in
greater detail, but it lacks consistency with the industry classification widely
recognized in the market.
As a result, the Committee decided to utilize (3)classification used in
NOMURA 400, which has relatively detailed industry classification (73
classifications) and reflects industry categories widely recognized in the
market, as the base classification. Necessary adjustments for industries
where NOMURA 400 does not provide detailed classifications by using
Japan standard industrial classification (for example, real estate and
specialty stores) would need to be made. 【See Appendix 2 “Classification
of industries used in the simulation exercise” for the adopted industry
classification】

VI-6 Review of the Brand Valuation Model based on Simulations

VI-6-1 Reviewing the Time Series Regression

The Committee has examined the model that calculates the Prestige Driver
based on time series regression model and uses stability of the Prestige
Driver as Loyalty Driver. This method aims to derive time series
regression formula based on the actual data of the Prestige Driver over the
past 10 years. According to the coefficient of determination (R２) results of

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 the time series regression formula calculated for 200 major companies using
above method, there were roughly 140 companies with a R２ less than 0.5.
The Committee decided not to use this time series regression formula as
Brand Valuation Model. The result was the same even after some fine-
tuning was made by changing the parameter for the Prestige Driver from
“sales per unit cost of sales” to “ratio of operating profit to sales”.

VI-6-2 Reviewing the Prestige Driver

1 Companies that do not have price advantage described as Prestige Driver

include financial institutions, regulated industries, regional monopoly firms,
young firms that does not have enough data to calculate brand values, and
companies that applied for the Company Rehabilitation Law since FY 2000.
The Committee understands that these companies do not fit with the
concept of a Prestige Driver and decided that the Model developed by the
Committee does not provide any meaningful brand value results for these
companies. This point had been confirmed by running simulations on the
Model.

2 The Period Used for Calculating Excess Profitability In calculating

“sales per unit cost of sales”, a figure used as the basis for calculating excess
profitability, selecting the period for historical data becomes important.
The Committee performed trial calculation to measure brand value using
historical data for 3, 5 and 10 years, and as a result, the Committee
concluded that it would be most appropriate to select the past 5 years which
gives the highest correlation with the recent market capitalization amount.
Data for the past 3 years’ was not stable and influence caused by each year’s
data was significant. On the other hand, data from the past 10 years’ treats
all data equally and is unable to reflect recent structural changes in the
economy as well as increasing speed of corporate innovations. This is why
the Committee decided that data from the past 5 years is most appropriate.

3 Selection of a Benchmark Company In selecting the benchmark

company, the Committee has calculated the lowest sales per unit cost of
sales for each industry and identified problem where the number becomes

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 less than 1 or very close to 1, i.e. almost all the company’s gross profits
would become the basis for calculating Prestige Driver. Thus, in order to
avoid the influence of these irregular cases, the Committee decided to select
the benchmark by excluding abnormal figures (companies) that goes
beyond 3σ in the same industry. The benchmark companies are selected
after all individual company data are gathered, so in practice, they are
determined in advance based on the data at the beginning of each reporting
period.

4 Advertising and Promotion Cost Ratio (Advertising Expense Ratio)

On the advertising and promotion cost ratio (advertising expense ratio)
regarded as brand attribution ratio, the Committee recognized huge
difference exists based on the industry and the business profile and the
difference is affecting the brand value. For example, advertising expense
ratio of wholesale companies or so-called B-to-B businesses is generally
small and as a result their brand value is relatively small. The Committee
discussed whether some sort of adjustment for these type of companies is
needed or not, but the Committee understood that these companies report
profits associated with intangibles other than brand, such as R&D,
manufacturing know-how and distribution network, rather than profits
related to brands. In order to enhance price advantage from brands, it is
at least necessary to improve recognition of brands, and to do so, companies
will spend money on advertisement and promotion and thus the Committee
decided not to make any special adjustment for these companies.

VI-6-3 Reviewing the Loyalty Driver

Among the listed companies, the Committee performed simulations for

approximately 3,300 companies and found that there were a limited number
of companies (17 companies) with negative value in their Loyalty Driver.
This, in concept, indicates that these companies have no customers with
high loyalty at all. In addition, there were companies whose Loyalty
Driver values were extremely low. However, by analyzing the reasons
for such cases, they were not only examples of emerging companies
increasing their performance rapidly but also cases that had problems with

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the continuity of data. Examples include cases of M&A, cases of irregular
reporting of financial statements due to changes in the reporting period,
cases where consolidate subsidiaries increased due to introduction of new
accounting standards focusing on effective controls by the parent. The
Committee decided to exclude these companies from the simulation
exercise.

VI-6-4 Reviewing the Expansion Driver

Regarding the expansion driver, there were some companies with a growth
rate of sales in the non-core segment business and overseas business
showing 100% growth per annum, which deviates significantly from the
average level. The Committee has analyzed the issue and found that the
reason was the same with the case regarding the Loyalty Driver and was
also caused by changes in the classification of business line segmentation.
These companies were excluded from the simulation exercise.

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VII Brand Management Model

VII-1 Brand Management Model and its Implications

1 While brand value is becoming more important in corporate management,

it is extremely important how to enhance the value of brands in the
management focusing on brands (referred to as “brand management”,
hereinafter). In other words, in order to increase the objective value
derived from the Brand Valuation Model developed by the Committee, it is
necessary to clarify what kind of activities are effective and implement them
in corporate management.

2 The Brand Valuation Model developed by the Committee evaluates brand

value quantitatively based on three key drivers using only data found in the
financial statements. However, in pursuing brand management,
information other than the brand value amount is required. For example,
in addition to quantitative information such as financial data and
non-financial data other than brand value, qualitative information on
corporate activities behind the data is also important. Without proper
understanding of the relationship between quantitative information other
than brand value and qualitative information, and brand valuation amount
(value chain relationship), one cannot utilize this information in brand
management effectively.

3 The Committee tried to derive some information from the Questionnaire

results that has close relation to brand valuation amount and, by performing
various tools such as CHAID and regressions, analyze how firms with large
values act to enhance their brand valuation amounts and through what
indices they measure the results of its effectiveness. And based on such
results, the Committee presents a Brand Management Model that will
enhance brand valuation amounts of companies.

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 VII-2 Analysis of Brand Valuation Amount and the Questionnaire Results

1 Companies with large brand valuation amounts place importance in clearly

presenting their brand identity to their customers (refer to Q25 of the
Questionnaire). To be more specific, this means that companies take
certain actions such as; send a consistent message about its own brands,
take aggressive advertisement and promotion to consistently send such
messages, ensure that all the employees share brand identity and etc. (refer
to Q25 of the Questionnaire). Therefore, it may be said that unless clear
information about brand identity of the company is communicated to the
customers, brand value will not increase no matter how much is invested in
advertisement and promotion activities.

2 In order to enhance brand value, it is important to independently manage

corporate brand and each product brand (refer to Q18 of the Questionnaire).
The Committee believes that it is worth noting that in relation to
establishing identity of a corporate brand, companies that developed
internal criteria for using their brands tends to have high brand valuation
amounts (refer to Q25 of the Questionnaire).

3 The indices that companies with high brand values seem to utilize in
measuring the effectiveness of its activities to enhance brand value were
effect of advertisement and promotion, ratio of intention of customers to
repeatedly purchase the branded products (refer to Q27 and 29 of the
Questionnaire). Particularly, the companies that conduct market research
on the effectiveness of advertisement of product brands (refer to Q29 of the
Questionnaire) had high brand values, and considering that there was no
clear relationship between the methods and frequency of marketing
research and brand valuation amount, the content of marketing research
seemed to be very important in brand management.

4 According to data mining performed to companies with high brand values,

one can classify them into two categories based on the difference in their
brand strategies; (1) companies that enhance the brand value by
maintaining and managing their own brands for a long period of time

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 (“self-generated type”), and (2) companies that enhance the brand value
through M&A of other companies (“M&A type”). Both types have a
common feature in possessing competitive corporate and product brands
and consider factors such as fashion and status of their brands not simply
reliability, security and high quality (refer to Q8 and 13 of the
Questionnaire).

5 Self-generated type companies, in comparison to M&A type companies,

tend to perform a variety of aggressive marketing research efforts such as
testing product concepts, testing the naming and packaging, survey on
customer evaluation of their brands and etc. Furthermore, self-creative
type companies has characteristics in placing emphasis on fashion aspect in
their brand image and might be seen as reflection of their consciousness to
adapt their brands into changes in the environment.
As to the M&A type companies, the Committee found that they perform
brand image surveys more frequently than self-creative type companies.
One of the characteristics of M&A type companies is that they place
emphasis on innovative image and their M&As are focused on strategic
positioning in the market. They conduct brand image surveys frequently
to assess the influence of the results of M&As or brand image.

VII-3 Use of Brand Value Chart and Brand Fundamentals within the Brand
Value Board Framework

1 Based on the above analysis, the Committee suggests a new brand

management model. As illustrated in Chart 1, the brand management
model consists of brand value board and brand value chart. Brand value
board indicates parameters built into the Brand Valuation Model as well as
the brand value amount, and should be used as the ultimate control sheet
for overall brand management. The brand value chart defines activities
necessary to enhance the result of brand value board and provides a chart
for financial and non-financial indicators that measure the results. The
chart enables the relationship between brand value amount and quantitative
and qualitative information to be clear. Brand Management Model
proposed by the Committee is designed to maximize the brand value by

86
 functionally integrating brand value board and brand value chart.

Chart 1 Brand Value Board and Brand Value Chart

Brand value (BV)

Brand value board

LD amount PD amount ED amount

Plan Result

Financial Financial
Activity

Indicator
Brand value chart Business Activity

Non-financial
Business Indicator
organization
management

Chart 2 Brand Fundamentals

Brand fundamentals The important item to enhance brand valuation

amount at companies

⇒ Voluntary disclosure to external stakeholders

2 The brand value chart has the following characteristics; (1) it incorporates
not only business activity perspective but also financial and management
organizational perspectives, (2) it incorporates financial and non-financial
indicators into the valuation to evaluate its activity and the effects from
various angles, (3) it establishes a feedback loop, where financial and
non-financial indicators are utilized to improve the brand strategy.

87
3 On the first point, traditional brand strategy placed too much focus on
marketing activities, and as a result, customer satisfaction, activities to
improve brand image and recognition, and the effects of these activities
have been measured. By incorporating financial and management
organizational perspectives, one may not only analyze cost benefit
relationships of activities but also plan for more efficient activities, and thus
efficiently maximize brand value by having various organizations in the
company to functionally cooperate with each other beyond activities, which
have been restricted to the organization for managing brands.

4 On the second point, the Committee believes that by analyzing both

financial and non-financial indicators of brand value, one can evaluate the
brand strategy from various angles and develop a clear value chain of brand
value, activities, financial and non-financial indicators.

5 On the third point, by introducing the feedback loop to further improve

business performance, the Committee believes that one may unite various
indicators and improvement activities at various organizations that are
involved directly and indirectly in brand management activities. This
enables a company to take prompt measures for maximizing the brand
value.

6 Since the contents of brand value chart may vary by companies, the
Committee understands that it is not appropriate for the Committee to
decide the content of the brand value chart in a comprehensive and
consistent manner. The Committee believes that the content of brand
value chart should be determined by individual companies reflecting their
brand strategies. However, in order to further promote and encourage
brand management practice at companies, the Committee proposes to
define key items that enhance brand value at companies as brand
fundamentals, and discloses its conceptual framework in this report.
Chart 3 in the following page shows some examples of the brand
fundamentals that the Committee derived from analyzing the results in
Section VII-2 and through the discussions. Since brand fundamentals

88
presents what activities were taken by companies to maximize their brand
value by looking into information other than brand value such as financial
and non-financial data, the Committee believes that it is useful for external
stakeholders to obtain such information through voluntary disclosure of key
items chosen by companies as described in Chart 3.

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Chart 3 The Relationship between Brand Value Board and Brand Value Chart
（Plain：Financial data, Underline：Non-financial Data, Italic：Activity Item）

Maximizing brand value

Increase customers with high Loyalty Ensure price premium Improve brand expansion powers

Stabilize sales and sales cost Improve average return on sale Sales increase in new business
（Deduct advertising cost） Improve operating margins Sales increase in overseas
Decrease volatility of sales & price

Improve repeat rate Secure new distribution channel

Secure distribution channel
（Efficiency in advertising
investments） Increase direct sales points

Strengthen relationship with Increase in value added ratio Improving recognition

existing Customers High pricing

Brand positioning Strengthen sales promotion

Customer segmentation
Selection of market research method Measure advertising effect of
brands
Marketing strategy

Prepare criteria for brand usage Reduce R&D cost

Prepare brand management manuals Increase patent rights
(Participate in cost planning) Improve R&D capability
Increase authority of brand Improve R&D Investment efficiency
management organization Strengthen R&D organization
Establish brand management org.
Individual Management of CB and PB Secure qualified human
Top management involvement Resources & budget
Management strategy R&D strategy

Establishment of CB and PB
Sending consistent messages
Establishment of brand identity
Clear statement of management philosophy

Management strategy

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VIII Expected Practices in Charging Brand Royalty Fee

1 As noted in Section III-2, brand royalty fee can be divided into “brand
usage permission fee” and “brand management fee”. Set out below is how
to calculate the brand royalty fee, applying the Brand Valuation Model
developed by the Committee described in Section VI-4.

2 As to the brand usage permission fee, the Committee believes that it is

rational that the brand user company pays the benefits of the brand (“brand
profit”) to brand owner company that has the legal right. Brand profit can
be calculated applying the Brand Valuation Model developed by the
Committee. To be precise, by putting actual financial data of each
company into the formula for projected future cash flow of the Brand
Valuation Model (PD×LD×ED), one can obtain the brand profit amount.

3 Regarding the brand management fee, the Committee believes that it is

rational that the brand management company receives the differential
between actual expense and the total expenses for managing the corporate
brand (i.e. total expense for maintenance, management, improvement of the
corporate brand) by brand profits of individual companies that are using
the brand. The actual calculation methodology is described below.

Brand management fee = Total brand management cost for a corporate brand ×
(Brand profit of a company using the brand ／ Group’s total
brand profit) − Brand management cost actually been paid
by the company for the corporate brand)
BP
Brand management cost = CBMC × ― BMC
CBP
CBMC: Consolidated Brand Management Cost
CBP: Consolidated Brand Profit
BP: Brand Profit of the individual company using corporate brand
BMC: Brand Management Cost paid by the individual company using
corporate brand

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4 The Committee believes that issues related to the Commercial Code and the
Corporation Tax Laws will be resolved by applying the above brand royalty
fee based on the actual business practice. However, in such case, the
Committee stresses that the following should be considered. In other
words, compared with the Brand Valuation Model which is based on the
assumption to calculate the amount on a consolidated basis, brand profit is
calculated based on individual company’s profit and loss accounts. In
order to make the total amount of individual company’s brand profit equal
to the overall corporate group’s expected future cash flows, certain practical
adjustments become necessary in calculating the brand profit by calculating
sales and cost of sales for each company using their external sales
information.

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IX Disclosure of Brand Assets

IX-1 Standards for Accounting for Brand as Assets

1 In order to account for brands as assets on the balance sheet, it is necessary

to clarify standards to be recognized on financial statements. Since there is
no clear concept of assets nor standards for recognition established in the
Japanese business accounting system, the Committee will discuss this issue
based on the recognition criteria from Statements of Financial Accounting
Concepts (“SFAC”) developed by FASB.

2 According to SFAC No.57, the criteria for recognition of an assets※ is

described as follows (par. 63):
(1) It should meet the “definitions” of an element of financial statements
(2) It should meet the “measurability” criterion so that it could be
quantified in monetary units with sufficient reliability
(3) It should meet the “relevance” criterion so that its informational
characteristics should have “feedback value” ※ ※ or information
“predictive value” ※※※
or both and must be timely
(4) Economic activities or phenomena are represented accurately in the
information and should meet the “reliability” criteria with no bias of

※
“Recognition is the process of formally recording or incorporating an item into the
financial statements of an entity as an asset, liability, revenue, expense, or the like.
Recognition includes depiction of an item in both words and numbers, with the amount
included in the totals of the financial statements. For an asset or liability, recognition
involves recording not only acquisition or incurrence of the item but also later changes in
it, including changes that result in removal from the financial statements.” (par. 6)
“Since recognition means depiction of an item in both words and numbers, with the
amount included in the totals of the financial statements, disclosure by other means is not
recognition. Disclosure of information about the items in financial statements and their
measures that may be provided by notes or parenthetically on the face of financial
statements, by supplementary information, or by other means of financial reporting is not
a substitute for recognition in financial statements for items that meet recognition criteria.
Generally, the most useful information about assets, liabilities, revenues, expense, and
other items of financial statements and their measures (that with the best combination of
relevance and reliability) should be recognized in the financial statements.” (par. 9)
※※
Characteristic of information which allows the user of information confirm or correct
expectations in advance. (SFAC No.2)
※※※
Characteristic of information useful to increase the possibility that the user of information
can accurately predict the performance of past or present events. (SFAC No.2)

93
 those who measure the value regardless of measurement
methodologies used.
Hereinafter, the Committee will discuss this recognition criterion in
further detail.

3 The first criteria for recognition, “definitions” refers to the definition of the
elements in the financial statement in SFAC 68 (SFAC No.3), which requires
certain information to meet this definition to be recognized under the
financial statement. In order for brands to be recognized as assets on the
financial statements, it is required to meet the definition of assets as set out
below.

“Assets are probable future economic benefits obtained or controlled by a

particular entity as a result of past transactions or events.” (par. 25)

4 As is clear from this definition, in order for brands to be accounted for as

assets, the following requirements should be met;
(1) it should be a future economic benefit with the capability to
contributing to future net cash inflows either directly or indirectly
independently or by combining with other assets (“future economic
benefit”)
(2) its economic benefit should be obtained by a specific entity and
controlled so that no third party can gain access to this benefit
(“control by a specific entity”)
(3) transaction or other incidents have occurred that give rise to specific
rights to or control of this benefit (“occurrence of past transactions or
incidents”)

5 The first characteristic of an assets is the existence (or the non existence) of
a “future economic benefit”. Economic benefit is a common characteristic
for all economic resources and is interpreted as being something that
eventually results in cash flows to the business enterprises, whether tangible
or intangible and whether or not it has a market price or is otherwise
exchangeable (par.28). As discussed above, given the fact that a brand is a
typical value driver and is a source for future cash flows, it does meet the

94
 first criterion.

6 The second characteristic of an assets is that the economic benefit should be

attributable to a specific entity. The attribution of economic benefit “rests
generally on a foundation of legal rights”(Section 187), for example, as there
are times when entities obtain and control economic benefit through other
means such as by keeping manufacturing methodologies and processes
secret, the legal rights “is not an indispensable prerequisite for an entity to
have an asset” (par. 187).
In the case of brands, this second criteria is met given that they are
attributable to companies as corporate brands or product brands, and are
independently recognized from brands of other companies.

7 The third characteristic of an asset is “occurrence of past transaction or

event”. This is a requirement to distinguish “between the future economic
benefits of present and future assets of an entity” (par. 190) and exclude
items from an assets that may in the future become an entity’s assets but
have not yet become its assets (par. 191).
Given a brand is usually developed over a long time span and is linked to
the current brand whether it be corporate brand or product brand, it does
meet this third criteria as well.
Therefore, given that brand possesses each of those three essential
characteristics, it meets the asset definition. However, even if brand meets
the asset definition is justified, the following recognition criteria has to be
further met in order to be recognized as a brand on the balance sheet.

8 The second criteria for recognition, “measurability”, is explained as the

information “has a relevant attribute measurable with sufficient reliability”
(SFAC No.5 par. 63). In other words, in order for the information to be
recognized on financial statements, it has to be quantified in monetary units
with sufficient reliability. Therefore, this means that information that is
not measurable with monetary units is not recognizable on financial
statements. In brand valuation models often used in marketing, qualitative
factors such as image, sustainability, recognition, international recognition
or etc. have been indexed, but they have not been recognized on the balance

95
 sheets as brands, because they do not meet the “measurability” criteria.

9 In order to measure brands, it is necessary to choose attributes by which to

quantify a recognized item and choice of a scale of measurement (par. 3).
Under SFAC No.5, admitting that there are many exceptions, it refers to five
different attributes used under current accounting practices rather than
single attribute (par. 70); namely historical cost (or historical proceeds),
current cost, current market value, net realizable (settlement) value and
present (or discounted) value of future cash flows (par. 67), and suggests
that use of different attributes will continue (par. 70). In addition, under
SFAC No.7, it refers to expected cash flows as an extension of current
market value and this has been used in the Brand Valuation Model adopted
by the Committee.

10 The third criteria for recognition, “relevance”, is generally perceived to be a

primary qualitative characteristic of accounting information and explained
as “the information about it is capable of making a difference in user
decisions” (SFAC No. 5 par. 63). In this case, exercising influence over
decision making means, “making a difference in a decision by helping users
to form predictions about the outcomes of past, present, and the future
events or to confirm or correct expectations”9.
Therefore, in order for certain information to be recognized on the financial
statements, such information needs to be “relevance” for the information
user, and for this purpose, such information must have feedback value or
predictive value (or both) for users and timeliness (SFAC No.5 par. 73).
However, “relevance” of information cannot be determined in isolation.
This is because “relevance” should be evaluated in the context of the
principal objective of financial reporting providing information that is
useful in making decisions, and in the context of full set of financial
statement with consideration of how recognition contributes to the
aggregate decision usefulness (par. 74). In case of brands, as discussed in
Section IV, it satisfies the “relevance” criteria both from the issuers’ side as
well as the users’ side.

11 The fourth criteria for recognition, “reliability”, is the other primary

96
 qualitative characteristic of accounting information and explained as “the
information is representationally faithful, verifiable, and neutral“ (SFAC
No.5 par.63). Basically, reliability of the measurement process in
accounting is the precondition to ensure the reliability of the information.
For this purpose, it is necessary to prove that the information collected and
economic activity and events that are subject to instruction should be equal
or equivalent. Furthermore, it is necessary that measurement be repeated
until equal or similar results are obtained, and that proof be made that no
matter what measurement methodologies are used, there should not be any
bias by the measurer (SFAC No.2 par. 82).
In general, “reliability” is assured by audit assurance on the financial
statement audit by a certified public accountant or an audit firm. In case of
brands, whether the brand is subject to financial statement audit or not will
be basis for making judgment on the existence of “reliability”. This,
however, does not hinder problems for the Committee’s Brand Valuation
Model or the results of it, because the Committee has decided to use
information on the publicly reported financial statements that are being
assured by an independent auditor.

12 In order for brands to be recognized under financial statements, it should

meet all of the above criteria for recognition. The Committee considers
that the Brand Valuation Model and the results proposed by the Committee
both meet above criteria to be recognized as an asset on the balance sheet, at
least conceptually.

IX-2 Disclosure of Brand Assets

1 Even with the assumption that all requirements are met to recognize
brands as assets conceptually, there is a need to further discuss how these
items should be publicly disclosed. Set out below are three ways of public
disclosure under the Japanese business corporate accounting system10.
(1) Recognizing them on the consolidated balance sheet under the
current financial reporting system
(2) Recognizing them as notes to the consolidated financial statement
under the current financial reporting system

97
 (3) Disclosing them as part of business reporting regardless of current
financial reporting system

2 The first proposition is to recognize brands on balance sheet on the

assumption that corporate accounting system already accepts such a
recognition with the recent developments in the consolidated accounting
principles, under the circumstances where international financial reporting
standards (referred to as “international accounting standards”, hereinafter)
has become de facto standard further accelerating to introduce fair price
accounting principles based on market price and concept of expected
realizable.

3 Under the current Securities and Exchange Law, the consolidated financial
statements has already become common, and due to the fact that
consolidated financial statements have been decided to be introduced to the
Commercial Code, one may consider that corporate financial accounting has
shifted towards consolidate accounting and its function has shifted from
coordinating various interests of stakeholders to providing information.
Taking such movements into account, the Committee believes that there is
no significant issues in recognizing internally generated brands on at least
the consolidated balance sheet under the current corporate financial
accounting principle.

4 The second proposition is based upon a consideration that for the time
being, given that the first proposition is too radical, a step-by-step approach
needs to be taken. This gives rise to the idea of disclosing brands under
notes or supplementary information section of the financial statement as
supplementary information. On the assumption of semi-strong form of
efficient market hypothesis※, there are views that so long as information are

※
One of the versions of Efficient Capital Markets Hypothesis (ECMH). ECHM means that
information is correctly understood and being effectively incorporated into the market price
of securities market, and the degree of its effectiveness could be classified based on the
degree to which information is appropriately incorporated: (1) Weak Form , (2) Semi-strong
form and (3) Strong Form. Efficiency of the Weak Form could be explained as the status
where all information that could be obtained from the past stock price movement is reflected
properly in the current stock price. Efficiency of the Semi-strong Form could be explained
as the status where information that anyone could obtain from officially reported financial

98
 disclosed, whether it be on consolidated financial statement or referred to as
notes, there is no substantial difference in terms of its effectiveness such as
impact on stock price or etc. 11

5 The third proposition is basically the same as the second proposition.

Business reporting has been proposed by Mr. E. L. Jenkins, the former
Chairman of FASB, in his report, referred as “Jenkins Report”12 published in
1994, when he was also the Chairman of special committee on financial
reporting at AICPA. Business reporting aims at providing wider
information than what have been disclosed on the traditional financial
reporting including financial statements, and aims at promoting further
decision making by stakeholders on capital allocation at companies.

6 To be more specific, business reporting is a new paradigm reporting

assuming substantially wide disclosure not limited to financial information,
but also including non-financial information, forecasts information,
company’s basic objective, strategy, scope of properties and its explanation,
impact of structural change in the industry on the company, discussion and
analysis by the management, disclosure of information in the annual report,
presentations to the analysts, corporate information provided in fact books
as well as in corporate websites and etc.
As an alternative to business reporting, companies may also disclose under
the filed annual securities report “Section 2: Business conditions” with titles
such as “Information on brand valuation based on the Model developed by
the Committee on Brand Valuation, Ministry of Economy, Trade and
Industry”.

statements etc is reflected in the current stock price in the complete form. Thus, if the stock
market is efficient defined under the Semi-strong Form ECMH, it would be impossible to
identify out undervalued or overvalued stocks no matter how precisely publicly reported
financial statements are analyzed. Furthermore, efficiency defined in the Strong Form
ECMH could be explained as the status where not only publicized information but also
internal information is reflected in the stock prices, though it could only be assumed
conceptually.

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 ―――――――――― ◆ ◆ ◆ ――――――――――

The basic idea behind the proposed Brand Valuation Model in this report
can be applied to valuation of intellectual properties and intangible assets
other than brands, but it requires further study given the wide definition
of intangibles.

Chairman of the Committee

Yoshikuni Hirose, Dr. (Professor of Accounting, School of Commerce, Waseda
University)

Members of the Committee

Akiko Fujita (Professor of Accounting, Faculty of Economics, Meiji Gakuin
University)
Makoto Fujita (Professor of Management, School of Commerce, Waseda
University)
Keigo Fuchi (Assistant Professor of Law, Gakushuin University)
Shinya Fukuda (Certified Public Accountant, Deloitte Touche Tomatsu)
Naofumi Hara (Senior General Manager, Brand Strategy Department, Global
Hub, Sony Corporation)
Naoki Hirai (Manager, Financial Research Center, Nomura Securities Co., Ltd.)
Toshiro Hiromoto, Dr. (Professor of Accounting, Graduate School of
Commerce and Management, Hitotsubashi University)
Akira Horiuchi (Senior Manager, Group Management Office, Hitachi Ltd.)
Takashi Inoue (Manager, Space, Energy & Technology Policy Group,
Environment, Science & Technology Bureau, Japan Business Federation)
Junzo Ishii, Ph.D. (Professor of Marketing, Graduate School of Business
Administration, Kobe University)
Masaaki Iwasaki, Ph.D. (Professor of Law, Yokohama National University)
Hiroyuki Kansaku (Professor of Law, Gakushuin University)
Yukitoshi Kubo (Certified Public Accountant)
Makoto Matsuo (Attorney at Law)

100
Shigeru Nishizawa (Associate Professor of Accounting, School of Economy,
Sophia University)
Takahiro Ohno, Dr. (Professor, School of Science and Engineering, Waseda
University)
Daisuke Okamoto (Professor of Management, Keio University)
Hikoh Okuda (Ex-Chief CI Officer, Sony Corporation)
Haruhiko Saito (Executive Director, KPMG Financial K.K.)
Tsuyoshi Sakai (Deputy General Manager, Communications Planning
Department, Corporate Communications Division, Shiseido Co., Ltd.)
Hisakatsu Sakurai, Dr. (Professor of Accounting, Graduate School of Business,
Kobe University)
Kazushi Shibata, Ph.D. (Professor of Commercial Code, Faculty of Law, Hosei
University)
Akira Shimizu (Professor of Marketing, Meiji Gakuin University)
Tetsuo Sugimoto (Professor of Consumer Psychology, School of Economy,
Sophia University)
Masatsugu Tsuji, Ph.D. (Professor, Osaka School of Institutional Public Policy)
Risa Ueda (Financial and Payment System Office, Bank of Japan)
Hiroyuki Yamada (Certified Public Accountant, Deloitte Touche Tomatsu)
Hiroshi Yoshimi (Associate Professor of Accounting and Auditing, Graduate
School, Hokkaido University)

101
1 Financial Accounting Standards Board, FASB Report: Disclosures about
Intangible Assets, FASB, Apr. 19, 2002, p.9.
2 Yoshikuni Hirose, “Framework of Intangibles Accounting”, Zeikei-Tushin,
Volume 57, No. 3, Feb. 2002, p.88.
3 Yoshikuni Hirose, “Immediate Needs of Accounting for Brand Values on the
Balance Sheets”, The Economist, Special Extra Issue, Jul. 7, 2001, No.24,
Accounting Revolution 2001, Final Chapter, p.57.
4 Yoshikuni Hirose, The Theory on Accounting Standards, Chuou Keizai Co.,
1995, P.184 and Yoshikini Hirose, Financial Accounting (3rd), Chuou Keizai
Co., 2002, P.92.
5 Robert K. Barnhart (editor), Chambers Dictionary of Etymology, Chambers
(Edinburgh), 1988, p.113, C. T. Onions (editor), The Oxford Dictionary of
English Etymology, Oxford at the Clarendon Press, 1976, P.114.
6 Financial Accounting Standards Board, Statement of Financial Accounting
Concepts No.7: Using Cash Flow Information and Present Value in Accounting
Measurements, FASB, Feb. 2000.
7 Financial Accounting Standards Board, Statement of Financial Accounting
Concepts No.5: Recognition and Measurement in Financial Statements of Business
Enterprises, FASB, Dec. 1984.
8 Financial Accounting Standards Board, Statement of Financial Accounting
Concepts No.6: Elements of Financial Statements: A Replacement of FASB
Concepts Statement No.3: Incorporation an Amendment of FASB Concepts
Statement No.2, FASB, Dec.1985.
9 Financial Accounting Standards Board, Statement of Financial Accounting
Concepts No.2: Qualitative Characteristics of Accounting Information, FASB,
May 1980, par.47.
10 Yoshikuni Hirose, ibid. (No.2), PP.93-94.
11 W. H. Beaver, Financial Reporting: An Accounting Revolution, Prentice-Hall,
Inc., 1981, PP.163-164.
12 American Institute of Certified Public Accountants, Comprehensive Report of
the Special Committee on Financial Reporting: Improving Business Reporting – A
Customer Focus: Meeting the Information Needs of Investors and Creditors,
AICPA, 1994.

102
 Discussion Procedures

Brand Valuation Committee had conducted: Committee Meetings (Chart 1),

Working Group Meetings (Chart 2), Ad-hoc Working Group Meetings
(Chart 3) and Follow-up Meetings (Chart 4) as described below.

Chart 1 Brand Valuation Committee

July 19,
1st ① Purpose of the group and kick off
2001 (Thu)
Meeting ② Appraisal of intangible assets in M&A deals
18:00-20:00
August 22, ① Current status of Brand Valuation Model
2nd
2001(Wed) ② Current practices in Brand Valuation (1)
Meeting
17:00-19:00 …SONY, SHISEIDO
September 13, ① Disclosure of questions for the survey
3rd
2001 (Thu) ② Current practices in Brand Valuation (2)
Meeting
14:00-17:00 …Hakuhodo Inc, Interbrand
① Current practices in Brand Valuation (3)
October 18,
4th …Hitachi Ltd, DENTSU
2001(Thu)
Meeting ② Accounting standard for intangible assets
17:00-20:00
③ Characteristic of goodwill and brand as assets
December 5, ① Problems in capitalization of internally
5th
2001 (Wed) generated brand
Meeting
17:00-20:00 ② Balanced scorecard and brand scorecard
December 13,
6th ① Collection of survey and the result
2001 (Thu)
Meeting ② IC management
14:00-16:00
① Interim report: Examination on Brand
February 12,
7th Valuation Model (Draft)
2002 (Tue)
Meeting ② Business reporting
17:00-20:00
③ Auditing of intangibles
March 20,
8th
2002 (Wed) Simulation of the Brand Valuation Model
Meeting
15:00-18:00

103
 April 16, ① Issues associated with Brand Valuation Model
9th
2002 (Tue) ② Brand Fundamentals
Meeting
17:00-19:00 ③ Business Reporting
May 8,
10th
2002 (Wed) Refining Brand Valuation Model
Meeting
15:00-16:30
May 29,
11th
2002 (Wed) Discussion on the Report (Draft)
Meeting
17:00-19:30
June 20,
12th Brand Valuation Committee
2002 (Thu)
Meeting Note on the Report
19:00-20:00

Chart 2 Brand Valuation Committee, Working Group

July 11,
1st
2001(Wed) Procedure and topics for study
Meeting
14:00-17:00
① Brand concept from a marketing perspective
July 23,
2nd ② Brand concept from an accounting perspective
2001(Mon)
Meeting ③ Brand concept from a legal perspective
15:00-19:00
④ Selection of survey items (1)
① Selection of survey items (2)
② Chronological analysis of studies on brand
3rd August 8, 2001(Wed)
③ Putting the concept of brand in order
Meeting 17:00-21:00
④ Examination of brand valuation approach
⑤ ASA：Evaluation criteria for business
① Strengths and weaknesses of the Interbrand’s
August 17,
4th method
2001(Fri)
Meeting ② Definition of a brand
15:00-21:30
③ Selection of survey items (3)
① Discuss the concepts for Brand Valuation
5th August 30, 2001(Thu)
② Selection of survey items (4)
Meeting 15:00-19:00
③ Current status of Brand Valuation Model (1)

104
 September 12,
6th ① Confirmation Questionnaire items (Draft)
2001(Wed)
Meeting ② Framework for fair value accounting
14:00-20:00
① Current status of Brand Valuation Model (2)
September 27, ② Coefficient of efficiency
7th
2001 (Thu) ③ Synergy effect
Meeting
16:00-20:00 ④ Accounting standards for intangible assets
⑤ Fair value accounting scheme (SFAC) No.7
① Topics for examination going forward
② Characteristic of goodwill and brand as asset
③ Concept of brand in business:
October 10,
8th Business Accounting Deliberation Council’s
2001 (Wed)
Meeting view
17:00-21:00
④ Current status of Brand Valuation Model (3)
⑤ Similarities between financial instruments
and brand
October 24, ① Characteristic of good will and brand as asset
9th
2001 (Wed) ② Breakdown of items of the Questionnaire
Meeting
17:00-21:00 ③ Brand loyalty and tax
① Commercial law issues associated with
capitalization of internally generated brand
November 15,
10th ② Tax issues associated with capitalization of
2001 (Thu)
Meeting internally generated brand
14:00-18:30
③ Analysis on the brand valuation methods based
on the existing marketing models
① Business accounting issues associated with
November 22, capitalization of internally generated brand
11th
2001 (Thu) ② Concept of brand as the premise for Brand
Meeting
17:00-21:00 Valuation Model
③ Balanced scorecard and brand scorecard
November 29,
12th
2001(Thu) Brand Valuation Model (Draft) (1)
Meeting
16:00-20:00

105
 December 12, ① Collection of the Questionnaire and
13th
2001 (Wed) examination of the result (1)
Meeting
16:00-20:00 ② Brand Valuation Model (Draft) (2)
December 20,
14th
2001 (Thu) Brand Valuation Model (Draft) (3)
Meeting
15:00-19:00
① Collection of the Questionnaire and examination
January 9,
15th of the result (2)
2002 (Wed)
Meeting ② Brand Valuation Model(Draft) (4)
17:00-21:00
③ Business reporting (1)
January 17,
16th ① Brand Valuation Model(Draft) (5)
2002 (Thu)
Meeting ② Scheme for the audit of intangibles
14:00-17:00
January 30,
17th
2002 (Wed) Examination of Brand Valuation Model (Draft) (1)
Meeting
14:00-19:30
① Examination of Brand Valuation Model
February 6, (Draft) (2)
18th
2002 (Wed) ② Business reporting (2)
Meeting
17:00-21:00 ③ Necessity of organizing accounting standards
for intellectual assets
February 13,
19th ① Revision of Brand Valuation Model (Draft) (1)
2002 (Wed)
Meeting ② Necessity of brand capitalization
18:00-21:30
February 20,
20th
2002 (Wed) Revision of Brand Valuation Model (Draft) (2)
Meeting
16:00-21:00
March 6,
21st ① Revision of Brand Valuation Model (Draft) (3)
2002 (Wed)
Meeting ② Study Report (Draft) (1)
17:00-20:00
Mach 14,
22nd ① Revision of Brand Valuation Model (Draft) (4)
2002 (Thu)
Meeting ② Study Report (Draft) (2)
17:00-20:00

106
 March 28,
23rd
2002 (Thu) Simulation of the Brand Valuation Model (1)
Meeting
17:00-20:00
April 4, ① Simulation of the Brand Valuation Model (2)
24th
2002 (Thu) ② Brand fundamentals (1)
Meeting
14:00-18:00 ③ Issues for examination
April 8,
25th
2002 (Mon) Calculation of brand loyalty (1)
Meeting
17:00-18:30
May 7,
26th ① Brush up on the Brand Valuation Model
2002 (Tue)
Meeting ② Calculation of brand loyalty (2)
17:00-19:30
May 16,
27th
2002 (Thu) Brand value board
Meeting
19:00-21:00
May 24, ① Calculation of brand loyalty (3)
28th
2002 (Fri) ② Brand fundamentals (2)
Meeting
18:00-22:00 ③ Examination of the report (Draft) (1)
June 5,
29th
2002 (Wed) Examination of the report (Draft) (2)
Meeting
15:00-18:30
June 12,
30th
2002 (Wed) Examination of the report (Draft) (3)
Meeting
15:00-18:00

Chart 3 Brand Valuation Committee, Ad-hoc Working Group

August 17,
1st
2001 (Fri) Current status of Brand Valuation Model (1)
Meeting
13:00-14:45
August 22,
2nd
2001 (Wed) Selection of Questionnaire items
Meeting
15:00-16:45
August 30,
3rd
2001 (Thu) Current status of Brand Valuation Model (2)
Meeting
11:00-12:30

107
 August 30,
4th
2001 (Thu) Case study of brand valuation practice
Meeting
13:00-14:45
December 13,
5th
2001 (Thu) Brand Valuation Model (Draft)
Meeting
16:00-19:00
May 7,
6th
2002 (Tue) Calculation of brand loyalty (1)
Meeting
16:30-19:00
May 16
7th
2002 (Thu) Calculation of brand loyalty (2)
Meeting
17:00-19:00

Chart4 Brand Valuation Committee, Follow-up

February 23
1st
2002 (Sat) Consideration of Brand Valuation Model (1)
Meeting
15:00-21:00
February 24
2nd
2002 (Sun) Consideration of Brand Valuation Model (2)
Meeting
14:00-19:00
February 27,
3rd
2002 (Wed) Consideration of Brand Valuation Model (3)
Meeting
17:30-21:30
March 8,
4th
2002 (Fri) Consideration of Brand Valuation Model (4)
Meeting
19:00-24:00
March 20,
5th
2002 (Wed) Consideration of Brand Valuation Model issues
Meeting
13:00-14:30
April 3,
6th
2002 (Wed) Consideration of brand fundamentals
Meeting
19:00-24:00

108
 April 8,
7th
2002 (Mon) Report (Draft) (1)
Meeting
18:30-21:30
May 9,
8th
2002 (Thu) Report (Draft) (2)
Meeting
19:00-21:00

109
Appendices
 Appendix 1

Questionnaire Template※

I Company Overview

Q2 : Please provide all business segment information of your company in the consolidated
financial statements and indicate the number of product brands within each segment.

Q3 :Please provide three major product brands that belong to the business segment
specified above and provide the number of years that the brand exists in the market.

Q6 :Which of the items listed below do you focus as a corporate strategy for corporate
principles of your company? Select one item for being the most important, and tick off the
item (could be more than one) important to your company.
The most important Important
(Please tick one box) (Please tick as many)
① Improveme customer satisfaction □ □
② Maximizing stockholder value □ □
③ Expand market share □ □
④ Increase asset value □ □
⑤ Contribution to society □ □
⑥ Increase corporate value □ □
⑦ Others □ □
Please specify

Ⅱ Brand and Brand Image, etc.

Q8:What are the brands in your company that can gain predominant competitive position
over other competitors? Please select one.
(Please tick one box)

① We have both corporate brand and product brand which can gain predominance over
other competitors □

※
Extracted and modified for English translation

112
 ② We only have corporate brand which can gain predominance over other competitors
□
③ We have some product brands which can gain predominance over other competitors
(i.e. no corporate brand) □
④ We have one product brand which can gain predominance over other competitors
(i.e. no corporate brand) □
⑤ We neither have corporate brand nor product brand which can gain predominance
over other competitors □

Q9 :(Please answer this question if you choose ①, ②, ③ or ④ in Q8)

Which of the items listed below do you see as the effectiveness of your company’s brand
which gain predominance over other competitors? Please tick off the items of category
(could be more than one) which applies to your company.

① Capability to sell the product at higher price than that of other companies. □
② Capability to sell and offer more products at the same price of those of other
companies □
③ Creation of synergies by using brands and develop new markets □
④ Capability to cut advertising cost □
⑤ Capability to gain huge income by offering license or selling brands to other
companies □
⑥ Capability to secure distribution channel easily □
⑦ Others
Please specify

【 Please answer Q11-16 for your corporate brands and each product brand which were
specified in Q3. 】

Q11 :Which items do you think that your customers place value on your
products/services? Please place the items in the order of importance.
① Brand image
② Quality
③ Functionality
④ Design
⑤ Cost of obtainability

113
 ⑥ Others
Please specify

Q12: Which are the requirements of the brand image? Please give the points of each item by
10 point full marks.

① Reliability point
② Security point
③ High Quality point
④ Functionality point
⑤ Name recgnition point
⑥ Status point
⑦ Premium image point
⑧ Durability point
⑨ Endurability point
⑩ Sence of fashion point
⑪ International recognition point
⑫ Innovation sprits point
⑬ Tradition point
⑭ Others point
Please specify

Q13 : Which is the preference of your customer on your brand image ? Select one item for
being the most important, and tick off the item (could be more than one) which is
important for your company.

The most important Important

(Please tick one box) (Please tick as many)
① Reliability □ □
② Security □ □
③ High Quality □ □
④ Functionality □ □
⑤ Name recognition □ □
⑥ Status □ □
⑦ Premium image □ □
⑧ Endurability □ □
⑨ Immortality □ □
⑩ Sence of fashion □ □

114
 ⑪ International recognition □ □
⑫ Innovation sprits □ □
⑬ Tradition □ □
⑭ Others □ □
Please specify

Q14 :Which of the items listed below corresponds to the brand that provide competitive
advantage at your firm? Please rank the items in the order of importance.

① Nationwide/global operation
② A large market share
③ The high influence on the marketing channel
④ The steady sales without having to compete on price
⑤ Universally recognized as a top brand
⑥ Price leadership in the industry
⑦ The long term relationship with the customer
⑧ High customer loyalty
⑨ Provide comfort to customers
⑩ Novel and innovative products and services

Q15: Which of the items create and support your company’s brand image? Please give the
points of each item out of 10 point full marks.

① Technological capability (including know-how) point

② Cost reduction capability point

③ Advertisement/PR point
④ Trademark right point
⑤ Copyright point

⑥ Design right point

⑦ Patent point

⑧ Software related to manufacturing point

⑨ Customer list point

115
 ⑩ Management capability point

⑪ Product development point

⑫ Design capability point

⑬ Control over delivery channel point

⑭ IR / PR point

⑮ Information creativity point

⑯ HR development point

⑰ Servicing capability point

⑱ Others point
Please specify

Q16: Among the following 3 items as the contributing factors in achieving operating profit,
how do you rate them by their contribution to operating profit ? (eg. ①：7 ②：2 ③：1)

① Excellent brand image which name, mark, design, and logo, etc. produces
② Excellent quality which patent, knowhow, and production technology, etc. produces
③ Daily sales efforts and cost reduction efforts

Ⅲ Brand Strategy

Q17: At which level is the brand strategy developed at your company? Please tick off the
items of category (could be more than one) which is suitable for your company. If you
choose “others”, please concretely explain the level of brand strategy of your company.
① Corporate brand for the corporate group □
② Corporate brand or product brand representing business unit or segment □
③ Product brand representing product group □
④ Product brand representing each product □
⑤ Others □
Please specify

Q18: How does your company manage the corporate and product brands? Please tick off
the items of category (could be more than one) which is suitable for your company. If you
choose “others”, please concretely explain.

116
 ① Managing corporate brand and product brand by assigning brand managers
respectively □
② Managing the corporate brand and product brand separately □
③ Managing corporate brand and product brand together at the head office □
④ No particular brand management □
⑤ Others □
Please specify

Q22: What are the strategic targets for brand in your company? Please tick off the items of
category (could be more than one) which is suitable for your company. If you choose
“others”, please concretely explain.
① Customers (general consumers) □
② Customers (companies) □
③ Shareholders □
④ Local residents □
⑤ Business connections □
⑥ Employees □
⑦ Stakeholders other than ①~⑥ above □
⑧ Others □
Please specify

Q24: How does your company measure the cost of developing, maintaining and managing
the brand of your company? Please tick off the items of category (could be more than one)
which applies to your company. If you choose “others”, please concretely explain.
① By the level of corporate group □
② By the level of each business unit □
③ By the level of each product group □
④ By the level of each product brand □
⑤ Do not measure the cost □
⑥ Others □
Please specify

Q25: What does your company focus in developing, maintaining and managing the brand
of your company? Please tick off the items of category for corporate brand and product
brand separately (should be chosen as many as three for each) which applies to your
company. If you choose “others”, please concretely explain.

117
 Corporate Product
① Shared understanding of management philosophy □ □
② Improvement of morale □ □
③ Sending consistent messages □ □
④ Customer survey □ □
⑤ Improvement of manufacturing technology □ □
⑥ Improvement of product quality □ □
⑦ Advertisement and promotion □ □
⑧ Price setting and the maintenance □ □
⑨ Securing the distribution channel □ □
⑩ Establishing brand identity and criteria □ □
⑪ Ensuring positioning of brand □ □
⑫ Creation of new product concept □ □
⑬ Public relations and IR □ □
⑭ Prevention of forged goods □ □
⑮ Other companies’ products □ □
⑯ Others □ □
Please specify

Q26: (This question is only for who checked ①~④ in Q24.)

What is the cost of developing, maintaining and managing of the corporate brand and the
product brand at your company? Please tick off the items of category (could be more than
one) for the corporate brand and the product brand separately. If you choose “others”,
please concretely explain what the cost is.
Corporate Product
① Branding cost (naming cost) □ □
② Cost of purchasing brand □ □
③ Advertising costs □ □
④ Sales promotion cost □ □
⑤ Cost of Research & Development □ □
⑥ Labor costs □ □
⑦ Marketing research cost □ □
⑧ Cost associated with protection of trademark and design right □ □
⑨ Cost of ensuring management philosophy □ □
⑩ Cost of improving employee morale □ □

118
 ⑪ Customer servicing cost □ □
⑫ Cost of product guarantees □ □
⑬ Others □ □
Please specify

Q27 : This question is only for those who checked ①~④ in Q24.
What kind of indicator does your company use to measure cost against benefit of
developing, maintaining and managing the brand? Please tick off the items of category
(could be more than one) for the corporate brand and the product brand separately. If you
choose “others”, please concretely explain what kind of indicator your company uses.
Corporate Product
① Sales growth (rate) □ □
② Operational profit growth (rate) □ □
③ Gross profit growth (rate) □ □
④ Increase in stock price □ □
⑤ Decrease of financial cost □ □
⑥ Growth of sales quantity □ □
⑦ Improvement of consumers’ brand awareness □ □
⑧ Improvement of brand image □ □
⑨ Rate of intention to purchasing the brand □ □
⑩ Rate of trial purchase of the brand □ □
⑪ Rate of repeated purchase of the brand □ □
⑫ Market share □ □
⑬ Control of distribution channels □ □
⑭ Improvement of employee morale □ □
⑮ Others □ □
Please specify

Q28 : Please provide financial data listed below for each product brand which were
specified in Q 3. The financial data on Sales Volume, Sales Cost, Gross Profit on Sales, Cost
of Advertising, Cost of Sales Promotion, Cost of developing, maintaining and managing the
brand, and Operating Profit are required for last five year. Please give estimated data on Sales,
Gross Profit on Sales, and Operating Profit for current year.
If it is difficult to answer for each product brand, please provide the data for each business
segment specified in Q2.

119
Ⅳ Brand Values and etc.

Q34 : How do you think about the relationship between the corporate brand and the
product brand? Please tick off the items of category which applies to your company. If you
choose “others”, please explain concretely.
① The corporate brand and the product brand are valued independently □
② The corporate brand improves the value of the product brand □

③ The product brand improves the value of the corporate brand □

④ The corporate brand and the product brand improves each other’s value □

⑤ Others □
Please specify

Q38: What is the expected effect (benefit) by accounting for the brand value on the balance
sheet? Please tick off the items of category (could be more than one) which is suitable for
your company. If you choose “others”, please concretely explain.

① Provides adequate information for investors in making investment decision □

② Useful for reporting performance to shareholders □
③ Useful for adequate comparison with peer companies □
④ Useful to improve financing capability □
⑤ Useful for preventing TOB and to calculate fair price for M&As □
⑥ Useful for changing business strategy □
⑦ Others □
Please specify

Q40: What is the adequate treatment in accounting the brand value on the balance sheet or
its disclosures? Please tick off the items of category. If you choose “others”, please explain
concretely.
① Only in the consolidated financial statements □
② Both consolidated and individual entity’s financial statements □
③ Only at individual entity’s financial statements □
④ Notes on the consolidated financial statements □
⑤ Notes on both consolidated and individual entity’s financial statements □
⑥ Notes on the individual entity’s financial statements □
⑦ “Management Discussion and Analysis”, “Business Status”, etc. □

120
⑧ Business reporting enhancing the existing financial statements □
⑨ Others □
Please specify

We sincerely appreciate your cooperation and thoughtfulness.

121
 Appendix 2
Classification of Industries Used in the Simulation Exercise

Classification of Industries
1 Glass & cement

2 Synthetic fibers

3 Natural fibers

4 Paper & pulp

5 Natural resource development

6 Oil products

7 Chemicals

8 Specialty chemicals

9 Steel

10 Specialty steels & other metal products

11 Nonferrous metals

12 Wire & cables

13 Environmental equipment & plant

14 Construction machinery

15 Machine tools

16 Bearings & tools

17 Robots & pneumatic machinery

18 Shipbuilding & heavy machinery

19 Other industrial machinery

20 Automobiles

21 Auto parts

22 Tires

23 Industrial electronics

24 Telecommunications equipment

25 Consumer electronics

26 Electronic devices

27 Semiconductor manufacturing equipment

28 Precision equipment & films

29 Other industrial electronics

30 Pharmaceuticals

122
31 Wholesale trade (Pharmaceuticals)

32 Health care

33 Basic foods

34 Processed foods

35 Liquors & beverages

36 Manufacture of metal products

37 Cosmetics & toiletries

38 Apparel & sports goods

39 Sporting and athletic goods

40 Other personal goods

41 Trading companies

42 General trading companies

43 Wholesale

44 Wholesale trade (Textile and apparel)

45 Wholesale trade (Residential equipment machinery)

46 Department stores

47 General merchandise stores

48 Convenience stores

49 Specialty retailers

50 Retail trade (Dry goods, apparel and apparel accessories)

51 Retail trade (Furniture, homecare machinery)

52 Restaurants

53 Sports facilities

54 Travel agencies

55 Amusement and recreation service

56 Education

57 Hotels

58 Services for individuals, etc.

59 Mail order business

60 Building maintenance services

61 Printing service related business

62 Business consultant

63 Social protection services

123
64 Worker dispatching services

65 Data processing and information services

66 Private employment services

67 Research and inspection

68 Construction services

69 Advertisement displays

70 Other business services etc.

71 Consumer software and games

72 Business software

73 Wholesale trade (System-related)

74 Cinemas & leisure facilities

75 Broadcasting

76 Publishing

77 Advertising

78 Telecommunications providers

79 Internet services

80 Construction

81 Road pavers

82 Building installation works

83 Housing

84 Real estate

85 Real estate trading

86 Housing materials

87 Marine transportation

88 Air transportation

89 Trucking

90 Railways

91 Harbour transportation & warehouses

124
 Appendix 3
Standard Figures by Industries Used in the Simulation Exercise
(P=most recent period)
Classification of
No. P-4 P-3 P-2 P-1 P
Industries
1 Glass & cement 110.4% 108.7% 106.7% 106.9% 109.4%
2 Synthetic fibers 97.6% 106.8% 106% 108.4% 108.9%
3 Natural fibers 102.1% 101.2% 89.3% 92.3% 92.9%
4 Paper & pulp 106.4% 103.6% 105.7% 106.1% 105.8%
5 Natural resource 114.4% 114.5% 114.4% 117% 116.8%
development
6 Oil products 108% 107.2% 107.3% 107.7% 106.6%
7 Chemicals 104.8% 104.9% 104.3% 100.3% 104.3%
8 Specialty chemicals 106.1% 106.4% 106.4% 106.5% 106.5%
9 Steel 104.4% 104.3% 100.1% 103.8% 105.1%
10 Specialty steels & other 103.3% 105.6% 103.3% 104.9% 101.6%
metal products
11 Nonferrous metals 106.6% 103.5% 96.4% 106.6% 98.5%
12 Wire & cables 110.6% 108% 99.5% 108.7% 112.7%
13 Environmental 93.2% 92.1% 101.1% 100.5% 98%
equipment & plant
14 Construction machinery 109.4% 108.8% 106.2% 107.4% 108.1%
15 Machine tools 102.1% 108.4% 106.6% 93.5% 96.2%
16 Bearings & tools 110.3% 114.2% 111.9% 112.9% 111.7%
17 Robots & pneumatic 117.2% 117.6% 117.9% 118.6% 118.4%
machinery
18 Shipbuilding & heavy 102.8% 103.6% 106.7% 103.5% 103.9%
machinery
19 Other industrial 98.8% 94.6% 99.1% 96.4% 100.1%
machinery
20 Automobiles 109.4% 107.4% 101.1% 113.4% 116.8%
21 Auto parts 103.4% 102.3% 96.3% 101.7% 103.7%
22 Tires 139.3% 138.2% 141.9% 143.1% 143.2%
23 Industrial electronics 103.3% 101.5% 105.6% 78.8% 104.8%
24 Telecommunications 106.5% 109.2% 111% 112% 111.2%
equipment
25 Consumer electronics 99.2% 102.6% 89.7% 97.8% 99.7%
26 Electronic devices 103.8% 104.4% 101.2% 103.9% 106.7%
27 Semiconductor 114% 113.8% 111.7% 112.5% 110.2%
manufacturing equipment
28 Precision equipment & 108% 109.5% 97.9% 105.9% 104.2%
films
29 Other industrial 106.2% 106.8% 105.2% 100% 103.3%
electronics
30 Pharmaceuticals 139.7% 143.3% 141% 140% 136.9%
31 Wholesale trade 110.3% 110% 110.1% 108.9% 108.6%
(Pharmaceuticals)
32 Health care 103.5% 106% 108.5% 113.5% 112.3%
33 Basic foods 101.9% 101.5% 102% 102.2% 102.5%

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34 Processed foods 108.5% 108.2% 108.4% 108.4% 107.5%
35 Liquors & beverages 109.7% 111.5% 110.2% 114.6% 116.4%
36 Manufacture of metal 115% 112.1% 113.1% 113.4% 108.5%
products
37 Cosmetics & toiletries 107.8% 107.8% 109.6% 110.1% 110.9%
38 Apparel & sports goods 99.1% 104.5% 106.6% 106.1% 106.4%
39 Sporting and athletic 141.8% 131.1% 131.8% 146.3% 143.4%
goods
40 Other personal goods 106.7% 105.3% 107.8% 105.7% 107.8%
41 Trading companies 103.3% 103.3% 103.4% 104.5% 104.6%
42 General trading 103.2% 103% 103.3% 103.8% 104.6%
companies
43 Wholesale 112.2% 107.8% 105% 111.6% 110.5%
44 Wholesale trade 107.7% 107.6% 108% 108.7% 109%
(Textile and apparel)
45 Wholesale trade 107% 105.1% 107.5% 107.5% 107.8%
(Residential equipment
machinery)
46 Department stores 127.7% 127.8% 127.6% 126.2% 120.9%
47 General merchandise 116.4% 117.8% 116.5% 121% 121%
stores
48 Convenience stores 148.1% 145.9% 146% 142.8% 140.3%
49 Specialty retailers 100.5% 47.5% 100.6% 100.3% 95.1%
50 Retail trade (Dry goods, 136.4% 137.4% 137.9% 138.3% 138.4%
apparel and apparel
accessories)
51 Retail trade (Furniture, 109.3% 111.6% 112.6% 112.8% 112.1%
homecare machinery)
52 Restaurants 111.9% 112.1% 110.6% 110.5% 108.4%
53 Sports facilities 112.5% 114.1% 117.1% 117.9% 96.7%
54 Travel agencies 97.3% 96.5% 86.7% 90.8% 100%
55 Amusement and 118.4% 119.3% 112.1% 113.4% 101.3%
recreation service
56 Education 116.5% 113.7% 122.6% 118.1% 116.3%
57 Hotels 88.3% 88.4% 87.7% 85.5% 81.9%
58 Services for individuals, 109.4% 108.3% 104.3% 107.9% 107.3%
etc.
59 Mail order business 160.5% 161% 157.6% 167.7% 172.4%
60 Building maintenance 115.9% 116.2% 116.8% 118.1% 117%
services
61 Printing service related 114.9% 117.5% 117.4% 116.8% 116.2%
business
62 Business consultant 133.9% 138% 135% 132.2% 126.9%
63 Social protection services 128.3% 126.3% 122% 121.5% 119.3%
64 Worker dispatching 124.8% 120.8% 120.6% 120.3% 121.9%
services
65 Data processing and 115.1% 115.3% 114.4% 115.1% 115.6%
information services

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66 Private employment 134.5% 144.9% 152.4% 152.8% 152.6%
services
67 Research and inspection 113.1% 112.1% 108.2% 108.1% 109.1%
68 Construction services 125.2% 125.9% 126.6% 127% 129%
69 Advertisement displays 116.1% 118% 119.1% 119.4% 114.5%
70 Other business services 108.2% 108.7% 111.2% 112.2% 108.8%
etc.
71 Consumer software and 113% 105.6% 110.3% 111.1% 111.3%
games
72 Business software 109.9% 90% 90.5% 105.1% 106.2%
73 Wholesale trade 106.2% 109% 108.7% 108.4% 107.9%
(System-related)
74 Cinemas & leisure 106.7% 110.7% 113.1% 113.1% 109.9%
facilities
75 Broadcasting 28.8% 94.7% 105.5% 123.2% 139%
76 Publishing 109.1% 116.4% 120.6% 117.6% 102%
77 Advertising 111.3% 110.7% 110.3% 110.8% 112.8%
78 Telecommunications 103.5% 96.2% 97.5% 100.3% 101.6%
providers
79 Internet services 100% 50.4% 44.2% 102.3% 56.9%
80 Construction 101.5% 98.9% 104.4% 102.5% 105.5%
81 Road pavers 106.3% 103.7% 106.6% 106.5% 106.2%
82 Building installation 96.3% 105.4% 105.4% 107% 106.7%
works
83 Housing 102.1% 104% 104.9% 110.1% 110.6%
84 Real estate 111.7% 109.4% 110.7% 107.5% 110.3%
85 Real estate trading 107.4% 104.7% 94.1% 103.6% 102.6%
86 Housing materials 112.6% 110.3% 110% 102.8% 113.4%
87 Marine transportation 100.5% 92.1% 107.2% 91.6% 107.5%
88 Air transportation 120.2% 53% 77.2% 95.9% 106.5%
89 Trucking 98.2% 98.3% 97.8% 100.6% 101.8%
90 Railways 93% 90.7% 89% 98.2% 98.1%
91 Harbour transportation & 102.7% 105% 104.7% 104.8% 104.7%
warehouses

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