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The Commercial Value of a Brand as an Intangible Good in El Salvador 

by Suzanne Tablas

Published: May, 2019

Submission: September, 2019

 



The incorporation of the Law on Security Interests in El Salvador has the objective to create a registry for security interests, that is to say, the inscription of the security interests’ creation, modification, extension, termination and execution, as well as the publicity of these instruments.


The Commercial Value that some brands have, plays a very important role and represents, for some entrepreneurs, a mechanism which enables them to access credits. In some cases, the brand´s goodwill represents one of the most valuable assets in a company and may have a higher value than machinery and personal property. The security interest is the real right constituted by a secured debtor and in favor of a creditor, to ensure the fulfillment of one or several of his obligations or that of a third party.


The Law on Security Interests in El Salvador, represents an important progress, in line with contemporaneous Commercial and Financial realities. In order to guarantee greater efficiency and legal security in the registration and safeguarding processes of all the information, a digital platform available to users has been provided. This law allows employers to use brands as intangible assets to support a credit. Once the request has been filed in the Registry of Security Interests, it informs the Intellectual Property Registry, so that the latter marginalizes the annotations that fall on brands.


In this sense, the value of a Brand as an intangible asset within a Company,is of utmost importance. Therefore, it is necessary to make a real assessment of the companies in order to determine if their brand serves as a sufficient guarantee to be able to access credit.


The Brand represents an intangible asset, and so the owner of a brand has the right and the power to make use of its brands to support a secured transaction. The Brand plays an important role in the market, as it stimulates business competition and ensures transparency in commercial transactions. The Brand serves as a source of information and identification for consumers, whilst it facilitates the differentiation of its products or services, both at the point of origin for the business, and as a way to assess the quality levels of its products or services.


The main function of a brand is to differentiate the products or services in a specific company before the consumers, frequently allowing them to identify their origin and differentiate between the companies’ quality and reputation. Consumers today are very demanding when choosing a product or service depending on their quality and business origin.


We can affirm that there is no specific method of valuation for the brand that meets all the necessary characteristics so that it can be applied in a generalized way, which forces the creation of specific methods for each particular case, pursuant to the nature and particular conditions of each company. Despite the fact that we have affirmed that “brands have an economic value”, their valuation is a very controversial topic, since at this moment there is no agreement on how to do it and there’s no specific method of application within companies’ accounting systems. However, there are different opinions on this subject. Here, the renowned author Hugo Murillo, expert brand evaluator, believes that there are three systems to know the real value of an intangible asset, such as a brand:


  1. Cost method.
  2. Market method.
  3. Income capitalization method.

Verifiable cash flows of several fiscal years are analyzed, as well as the values of intangibles. This system is very important since it projects the brand’s value into the future, making an estimate of the intangible asset’s potential growth.


The author also recommends determining calculations of expected income, to which the capitalization rate is applied to, in order to obtain your brand in progress value. To make such calculation it is necessary to present the audited financial statements of the previous five years, in addition to the financial statements that reflect how much the brand actually bills for the business.


 



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