The Blog of Dato' Dr Anuar Md Nor

Introduction

Muslim consumers have been a major factor in the increased demands for food products and services that conform to the Islamic religious principles. These food products are considered “Halal” and that they contain ingredients that are permitted in Islam.

“Halal” Certification System  

“Halal” originates from an Arabic phrase that means allowed or permitted by Islamic law. According to JAKIM (Department of Islamic Development Malaysia),  the Malaysian authority that manages application for “Halal” certification, a “Halal” food means that:

• Does not stem from or consists of any part of or item that is forbidden to Muslims by Islamic law, or animals that have not been slaughtered according to Islamic law.
• Does not contain any substance that is considered impure in Islamic law.
• Is not prepared, processed or manufactured using equipment or utensils that are not free from impurities as defined by Islamic law.
• That, in the preparation, processing or storage stage, does not come in contact with or stored near any kind of food that does not meet the requirements of paragraph (a), (b) or (c) or any substances that are considered impure by Islamic law.

A food product manufacturer would apply to JAKIM for “Halal” certification process. Presently, the “Halal” certification is voluntary in Malaysia. Once approved, a “Halal” certificate would be issued to the successful food manufacturer. The “Halal” certificate is an assurance that a particular product or food premise (restaurant) has been thoroughly investigated and found to conform to Islamic law and therefore is suitable for use or consumed by Muslim consumers. Food products or premises certified as “Halal’ by JAKIM  utilize the registered trademark “Halal’ logo.

The Halal’ logo is usually displayed prominently on the packages of the food product or showed in the signage of a food premise.

“Halal” Certification/Logo Has Become a Valuable Customer-Related Intangible Asset   

In Malaysia, the value of the “Halal” certification/logo can be looked at from the patronage of food outlets. During the recent fasting month, most popular food outlets had fewer patrons, who were mainly non-Muslim customers. This indicates that the value of the “Halal” certification/logo intangible assets could be estimated by the additional volume of Muslim customers that could be generated if the food premises are certified “Halal”.

The value of “Halal” certification/logo would be substantial in countries such as Malaysia and Indonesia which have significant Muslim populations. Multinational food countries such as Nestle and Unilever have used their manufacturing facilities in Malaysia to produce “Halal” certified products with “Halal” logo displayed clearly on their food packages.

The Test of Intangible Asset of “Halal” Certification/Logo for Valuation 

For an intangible asset to exist from a valuation, accounting, and legal perspective, it must possess certain attributes, as defined in Reilly and Schweihs’s (1999) book, Valuing Intangible Assets. The authors define intangible assets as having the following attributes:

• It is not physical in nature;
• have specific identification and recognizable description;
• Have legal existence and legal protection;
• Is subject to private ownership and transferability;
• Have tangible evidence or manifestation of the existence of the intangible assets;
• Was created or came into existence at an identifiable time or as the result of an identifiable event; and
• Is subject to term ination of existence at an identifiable time or as a result of an identifiable event.

Reilly and Nesi (1992) extend this list and state that for an intangible asset to have a quantifiable value from an economic perspective, it must possess certain additional attributes, such as:

• Generate some measurable amount of economic benefits in the form of income or a cost decrease which may be measured in several ways , including net income, net operating income or net cash flows, etc.; and
• Enhance the value of other assets which is it is associated.

Test of Attributes of “Halal” Certification/Logo as Intangible Asset for Valuation 

The table bellows shows the test of attributes of “Halal” certification/logo:

The next article would provide an example the estimated value of the “Halal” certification/logo intangible asset of typical food outlet in Malaysia.

Reference:

Reilly, F. and Nesi, N.A. (1992). Interstate intangible asset transfer, the CPA Journal Online, Vol. 62, No.8, pp. 34-40.

Please note we offer services to help local and foreign food companies to apply the JAKIM’s  “Halal” certification in Malaysia. The JAKIM’s “Halal” logo is widely recognized as a trusted assurance for “Halal” food products. Please be free to contact Dato’ Dr Anuar at datodranuar@gmail.com or visit our website, www.bisonconsulting.net.

Introduction

When we visit the KLCC Suria in Kuala Lumpur, Malaysia, a popular shopping mall, our eyes would be dazzled by illuminations of brands, from local brands to international brands. Lighted logos of brands are prominently placed at various points of their well-designed stores.

Brand owners should like my wife, Datin Azimah: toothpaste (Colgate), washing powder (Breeze), petrol (Shell), and fizzy drink (of course, Coke).

Brands help their owners to generate enduring revenue. These brands are valuable, and they are important intangible assets for corporations.

Methodologies to Value Brands     

According to Gabriela Salinas in The International Brand Valuation Manual, there are many methods used to value brands. Many methodologies are developed by brand consulting companies, and one of the most famous methodologies is the Interbrand method.

Valuation Using Interbrand Method

Interbrand is a brand consultancy firm, specializing in areas such as brand strategy, brand analytics, and brand valuation. Its Interbrand method determines the earnings from a brand and capitalizes them by making suitable adjustments. The firm bases its brand valuation on financial analysis, role of the brand and brand strength. In order to calculate brand value, Interbrand uses a five-stage process as follows:

1. Segmentation: This stage consists of determining the main homogeneous client groups on which the financial and demand analysis are based.
2. Financial analysis: Through this analysis, the model attempts to establish “economic earnings”, also referred to as “intangible earnings”.
3. Demand analysis: In this step Interbrand establishes the “Role of Brand Index (RBI)” or the percentage of intangible earnings attributable to earnings, referred to as brand earnings.
4. Brand strength analysis: Through competitive analysis, Interbrand analyses brand strength which is in turn related to discount rate.
5. Brand value calculation: In this stage, the discount rate is applied to “brand earnings.” The sum of the present value of brand earnings represents brand value.                                                                                                                                                                                                                                                                 Stage 1: Segmentation

According to Interbrand, as consumer attitudes and behaviours towards brands vary from sector to sector depending on product type, distribution and other market factors, brand value  can only be accurately be determined through separate evaluation of the individual segments that represent a group of homogeneous consumers.

Stage 2: Financial analysis-Estimation of “Economic Earnings”

To isolate earnings specifically attributable to the brand, Interbrand determines Economic Value Added, which indicates if a company is capable of generating returns that exceeds the cost of capital employed.

Stage 3: Demand analysis or role of brand index (RBI)

RBI is a measure of how a brand influences customer demand at the point of purchase.

RBI is determined via a three-step process:

1. Firstly, Interbrand identifies the demand drivers or the factors that motivate customers to purchase a particular brand.
2. Step 2 determines the relative importance of the specific attributes in step 1.
3. Lastly, InterBbrand determines the role that the brand plays in each of these drivers. The RBI is expressed as a percentage, such that if RBI is 30%, 30% is extracted from intangible earnings.

Stage 4: Brand strength analysis-Determination of brand risk and discount rate

Brand strength represents the brand’s relative capacity to “guarantee demand” and in this way sustains future earnings. This analysis yields the brand risk which is later expressed as a discount rate. The determined discount rate is then applied to earnings attributable to brand in order to arrive at the brand value.

Stage 4.1: Brand strength analysis

In this stage, the brand strength is compared with that of its competitors for each of the seven brand strength factors. Table 1 shows how Interbrand analyses these attributes as a function of other sub-attributes or sub-criteria. For example, the “market” factor is analysed based on “industry concentration” and “market growth” criteria.

Table 1: Brand Strength Specific Attributes

Source: Interbrand

Stage 4.2: Determination of discount rate

A discount rate that adequately reflects the brand risk profile is used to calculate the present value of future brand earnings. The model assumes a relationship between brand strength and discount rate: the higher the brand strength score, the lower the discount rate. The brand strength index calculated in Stage 4.1 is translated into a discount rate using an S-curve. Thus, a brand with an average strength score will be discounted at the industry WACC, and a leading brand with a maximum brand score of 100 will be discounted at a risk-free rate. The relationship between brand strength index and discount rate in the Interbrand method is shown in Table 2.

Table 2: Relationship between Brand Strength and Discount Rates

Stage 5: Calculation of Brand Value

The present value of brand earning is inversely related to brand risk. To calculate brand value for a particular segment, future brand earnings are discounted at present value and an annuity or perpetuity is calculated as a terminal value. The sum of the value of the individual segments yields the total value of the brand.

The Interbrand method’s various components and their inter-relations can be summarised as follows:

• The financial analysis stage is used to determine intangible earnings;
• The RBI module is used to determine the ratio of brand earnings to total intangible earnings; and
• The brand strength analysis module is used to determine the discount rate required for re-expressing future brand’s earnings at present value.

Example of Brand Valuation Using Interbrand Method 

When using Interbrand method, brand value is the net present value of the forecast brand earnings, discounted by the brand discount rate. The net present value calculation comprises both the forecast period and the period beyond, reflecting the ability of brands to continue generating future earnings. An illustration of brand valuation using Interbrand model is shown in Table 3.

Table 3: Valuation Using Interbrand Method

The Interbrand method assumes that in order to arrive at earning attributable to intangible assets, a capital charge must be deducted from NOPAT.

Conclusion

Brands are valuable intangibles as they can generate continuing income for their owners. Brands can be licensed or sold to other corporations. Interbrand method is a useful tool used to calculate the value of a brand.

About the author:

We wish to inform that we have just accepted a position of Adjunct Professor at the Asia e University based in Subang Jaya, Malaysia. Asia e University is a private university approved by the Malaysian Higher Education Ministry, which offers both on-campus learning and on-line learning.