Advertising and Sustained Fair Value: The Capitalisation of Brand Intangibles - Essay Example

The paper tells that in the last 15 years, the importance of knowledge-based assets and other intangibles has become one of the key factors driving global economic activity. This transformation influences the conduct of business, the manner in which corporate reporting is performed, and the valuation of intangible assets of a corporation. However, there are counter positions ascertaining that intangible assets are useful only in so far as they contribute to the wealth production of the organisation and that intangibles affecting the conduct of the market is not something new, but a known historical fact.

Through advertising, organisations and manufacturers carefully convey their message to the target market, which is to sell and try their products, services and idea. As such, selling commodities, services or ideas are the primary purpose of advertising. In this sense, advertising is an essential tool that is employed by corporations in order to increase sales. Increase in sales though advertising is attained with the supposition that advertising provides the venue wherein the product of the organization becomes known in the market, thus, opening the market for the product or if it is already in the market, increasing the market share.

With an increase in the market share of the product, services or ideas, there is an increase in the sales, which in turns maximises shareholders’ wealth. . This relationship becomes integral since it shows that advertising is only necessary to the extent that it contributes to the profitability of the company by generating an increase in operational cash flow (Amadi 2005). However, advertising is not for free. It is done for a fee. Thereby, it falls within the capital expenditures of the firm, but there is a growing concern.

The effect of advertising is intangible, which means that it cannot be physically quantified, and as such, it raises the issue whether advertising creates sustained fair value for the company? On the other hand, fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date “ (FASB 157). There are three levels of fair value measurements. Level 1 deals with the market price of identifiable assets or liabilities in the active market (Ronen 2008).

Level 2 tackles the hypothetical market prices based on observable inputs. Finally, level 3 involves the estimation based on unobservable inputs (Ronen 2008). Advertising falls within the three categories identified. This is based on the position that although there is the common perception that advertising contributes to operational cash flow, there is no direct link among advertising, increase operational cash flow and sustained fair value (Amadi 2005; Luo & de Jong, 2008). In fact, recent studies have shown conflicting results regarding the relationship among the three concepts.

Some scholars claim that there is a positive connection (e.g. Grullon, Kanatas & Weston 2004), while some claims that not all companies achieved financial gain out from