Вы находитесь на странице: 1из 17



Janek Ratnatimga and Michael T. Ewing
ABSTRACT: Practitiotiers perpetLtally question whether they are spending the right amount of money on the right
marketing activities to optimize sales, profitability, brand equity, and shareholder value. This perennial problem Is perhaps
even more salient today, as organizations increasingly begin to recognize the value of intangible assets and question the
extent to which marketing should be viewed as an investment (as opposed to an expense). This paper introduces the notion
of brand capability within a tangible-intangible asset valLiation framework. Specifically, a model is developed to assess the
impact of integrated marketing communication on brand equity by leveraging capability-enhancing marketing expenses
to economic values through the use of specific combinations of expense-leveraged value indices.

It is now widely accepted that intangible assets provide the

most sustainable source of competitive advantage (Barskey
and Marchant 2000; Leadbeater 2000; Litman 2000). Indeed,
brand equity ofteti accounts for a major portion of shareholder
value. However, Ratnatunga, Gray, and Balachandran (2004)
argue chat firms need to go beyond individual asset values (be
they tangible or intangible) and begin to recognize how these
assets work in concert to provide the capability of an organization CO enhance its shareholder value. They contend chac
capability economic values can be derived for all tangible and
incangible assets in an organization using specific expenseleveraged value indices (Ratnatunga, Gray, and Balachandran
2004). Integrated marketing communicacion (IMC) is particularly amenable to such a valuation approach, as by ics very
nature, it seeks to Integrate tangible and intangible asset and
expense combinations to increase the strategic capabilities ot
an organizacion.
As Forcini-Campbell (1994) points out, organizations do
not integrate marketing for its own sake; they do so to have
an effecc in the marketplaceto grow sales and strengthen
brands. IMC combines and converts tangible and incangible
inputs into oucputs. However, measuring the commercial
success (or otherwise) ot IMC has proved difficult (Eagle
and Kitchen 2000). This paper examines che extent co
which che CEVITA (Capability Economic Value of Incangible and Tangible Assets) approach, recently developed
by Ratnatunga, Gray, and Balachandran (2004), can be

Janek Ratnatunga (Ph.D., Bradford) is a professor in the Department of Accounting and Finance, Monash University, Australia.
Michael T. Ewing (DCom, Pretoria) is a professor of marketing in the
Faculty of Business and Economics, Monash University, Australia.

adapted and applied to the budgeting and valuation of IMC

The search for reliable mechods to assess communications effeccs can be traced Co che earliest writings on advertising in
che nineceench cencury. In fact, the current emphasis on markecing measurement and the "bottom line" (Ambler 2000) is
arguably stronger chan at any point in the discipline's history.
Various accempcs have been made to value brands, and the
notion of brand equity has accracced considerable atcencion.
Customers are increasingly being viewed as assets, with tangible equity (Blaccberg and Deighcon 1996) and lifetime value
(Pict, Ewing, and Berchon 2000). A strong case is also being
developed co view markecing as an investment rather chan as
an expense (Almquisc and Wyner 2001; Zyman 1999), and a
concomitant research scream is focusing on apportioning
marketing expenditure between customer acquisition and
cuscomer recencion (e.g., Neckermann 2004). Integrated marketing communication (IMC) has che potential to be a leading contributor to, and central player within, this new
paradigm. In fact, calls to measure IMC's ROI (return on investment) were made more than a decade ago (Wang 1994).
IMC is considered cricical co organizacional performance because it provides competitive advantage via cash flow and
shareholder value (Eagle and Kitchen 2000). However, che
excant liceracure has hitherco failed co expressly demonscrace
IMC's contribution to brand performance (Baker and Mitchell
2000; Cornelissen 2000; Low 2000), for, as both Ambler
(2000) and Jones (2005) warn, advertising/marketing expenditure will only be considered seriously in the boardroom when
it is presented within an acceptable financial reporting frameJoumal of AJivrniivg. vol. 34. no. 4 (Winter 2005), pp, 25-40.
2005 American Academy of Advertising, All rights reserved.
ISSN OO9I-.13f.7 ! 2005 $9.50 . 0.00.


The Journal of Advertising

work. The present study hopes to advance that worthwhile

cause in some way.
Our approach begins with the contention that the value of an
organization's asset capabilities is highly context-dependent.
For example, although accountancy practices and advertising
agencies both depend heavily on human capital, they do so in
quite different ways. A qualification and experience-based
measure appropriate for a firm of accountants may not be especially relevant in an ideas-based advertising agency. Lave and
Wenger (1991) argue that contextual knowledge is created primarily through the ongoing interactions and improvisations
that an organization's employees undertake to perform their
jobs. Indeed, they state that this learning could be regarded as
a product of a community, that is, as organizational learning
rather than individual learning. There is synergy to the capability measure of an organization, which may be greater than
the sum of the individual parts. This can increase during the
process of learning, and any drop in one component may reduce the total in excess of the individual component's worth.
Because such lessons learned cannot easily be transferred from
one setting to another, any measures developed to value such
assets should consider such contextual settings.
The preceding discussion suggests that even if tangible
assets (such as salespeople, billboards, point-of-sale merchandise, samples, catalogues) and intangible assets (brands, logos,
trademarks, advertising jingles, slogans, patents, and copyrights)' can be valued, what is especially difficult in practice
is the valuation of the associated tacit knowledge and judgment required to combine these differing assets to enhance
the capability of the organization. This paper will explore how
these tangibles and intangibles can be integrated to give a
company a source of comjietitive advantagein other words,
how they should be recognized as the organization s capabilities, rather than as assets or capital in some fixed sense. It will
then provide a practical approach to value and report such
capability values in the IMC and brand management arenas.
Valuation difficulties plague mosc tangible and intangible
assets in their own rights, let alone how they combine to form
asset capabilities. The impetus to consider asset capabilities
as against asset values draws inspiration from a study undertaken by Ratnatunga, Gray, and Balachandran (2004) for the
Australian Department of Defence (DOD). The DOD's publicly available Annual Report has two components: a financial section that follows generally accepted accounting
principles (GAAP), and another section rhat accounts for
Australias defense capabilities in terms of resourcing costs
(e.g., strike capability, surveillance capability, ground-based
air defense capability, amphibious lift capability, etc.).

Ratnatunga, Gray, and Balachandran (2004) offered a valuation approach to link the two DOD reports. This paper seeks
to extend some of the key findings from the DOD study by
applying them in a commercial context, specifically, by providing a theoretical framework for the valuation of marketing activities. (See the Appendix for a glossary of accounting
terms used in this paper.)
Several responses to the intangible asset valuation problem have
been presented in the financial literature (see Keller 2003;
Leadbeater 2000; Ratnatunga 2002; Sveiby 1997), but there is
a distinct lack of theory underpinning these approaches. White
the theoretical foundations of organizational capabilities and
contextual knowledge accumulation (see Lave and Wenger 1991;
Orlikowski 2002; Teece, Pisano, and Shuen 1997) are fairly
well developed, notable gaps exist in terms of valuing the effect of asset combinations in the context of organizational capabilities. Thus, there is a need to develop a theoretical
framework to underpin a model develoj^ed specifically for the
valuation of marketing communication capabilities.
Capabilities are sometimes referred to as the distinction
between "knowing" and "knowledge" (Polanyi 1967; Ryle
1949), or as Schoen (1983) states, "our knowing is in our action"; or, more specifically, the essential role of human agency
in knowledgeable performance is critical (Orlikowski 2002).
This paper extends Schoen's observation further by considering the role of human agency and tangible hardware. For example, does an Apple Mac computer have any value to an ad
agency if there are no trained creative staff to use it? Thus, at
the core of the paper is the theoretical question "Should the
valuation of assets be based on what one has or what one can
do?" We believe that the answer is the latter, and therefore
that marketing activities should be viewed in the context of
what an organization does to enhance its brand equity, and
ultimately, its economic value. For example, Orlikowski
(2002) provides a comprehensive case study of a company that
has developed significant capabilities in global product development. She identified a repertoire of practices that constitute organizational capability, from collective know-how to
repeatedly enacting competence over time. Orlikowski (2002)
suggests, therefore, that "knowing" is not a static embedded
capability or stable disposition of actors, but racher an ongoing
social accomplishment, constituted and reconstituted as actors
engage the world in practice. These same arguments can be
extended to marketing capabilities and brand value.
Teece, Pisano, and Shuen (1997) propose a "dynamic capabilities" approach in which a firm's strategic dimensions are
its managerial and organizational/"rflreww (essentially, its decision-making capabilities); its present competitive positton
(e.g., technological capability and intellectual property, cus-

Winter 2005

tomer base, communication capabilities, supplier relations);

and the paths open to it (technological trajectories and business opportunities). For example, understanding competitive
advantages that accrue from IMC requires viewing firms as a
blend of interacting relationships, resources, organizational
values, and technology. This interaction sometimes creates path
dependencies that lead to unique resources or context-dependent assets, which increiise in value to owners and consumers,
especially if the competitors fmd it hard to imitate such capabilities. Similarly, Lave and Wenger (1991) contend that there
is a strong link between knowledge and society, and that this is
based on the idea that, in its essence, knowledge has a practical
nature. In other words, knowledge, far from being an abstract
matter based on a factual representation of reality, is closely
linked to the context of social practices, which are created, generated, and reshaped within an organization.
Traditional Approaches to Valuing Intangibles
The more traditional valuation responses suggest taking one or
more of three approaches to value tangible assetsthat is, replacement cost, income projections, and market valuation
and extending them to value intangibles. However, Ratnatunga
(2002), Leadbeater (2000), Barsky and Marchant (2()0{)), and
others agree that these approaches do not work well for most
intangibles. For example, assessing the full costs of replacement is quite challenging in terms of marketing assets, as
often the tangible and intangible components are almost inseparable. This is particularly the case where the role of human agency in knowledge performance is salient (see Schoen
1983), such as in an auto dealership. Here, although one can
ascertain the replacement cost ofthe bricks and mortar, catalogues, displays, and so forth, and even, for that matter, the
stock in trade (the automobiles), ascertaining the replacement
cost of the salesperson s product knowledge and flair would
be a very difficult task.
In terms of income projections, this method is also inappropriate in that it is difficult to isolate the income attributable to an intangible, especially where it is wrapped up with
a tangible product. For example, what proportion of a car
dealership's income from sales would be the result of the
salesperson's expertise (intangible) as against that from the
physical asset of the automobile (tangible)?
Alternative Approaches to Valuing Intangibles
More contemporary approaches to valuing intangibles take the
view that while many ofthe assets that make up an organization's
capability may not be visible, they can still be measured and
managed (see MERITUM 2002). The argument is that if managers want to cultivate intellectual and other intangible resources, they need to develop performance measures that link


internal productivity to market value. The question is. How

does one link reasonably objective fmancial statement measures to the somewhat subjective measures of intangibles, such
as intellectual capital or creative capability?
There have been numerous attempts to make this link and
to more reliably value intangibles. First, there are a number
of new approaches to performance measurement and internal
corporate reporting using modified discounted cash flow techniques and accrual accounting adjustments. Second, there are
the index-based measures, such as the balanced scorecard.
These typically attempt to link financial performance to intangible drivers such as employee morale and customer satisfaction (Kaplan and Norton 1992), and then link this fmancial
performance to a company's share market valuation. Third,
there are the measures that attempt to directly value intangibles such as brands, patents, R&D, and customer loyalty by
either linking them to market values if a market exists, or if
not, by obtaining a consensus of their likely market values.
These approaches are not mutually exclusive. Different kinds
of measures might be more relevant to differenc stakeholders.
Some are designed primarily to give managers and workers a
clearer picture of the strengths and weaknesses of their organization and to change the way they think and act. Others
may be designed to help analysts and investors assess the contribution that these intangible assets make to the fmancial
performance of the organization.
Capability Economic Value of Intangible
and Tangible Assets (CEVITA)
An extension of the above alternative approaches to valuing
intangibles is the CEVITA model. The original CEVITA conceptual model was developed to generate strategic financial
statements aimed at enhancing the capability value (in contrast
to the financial accounting value) of defense-related intangible
and tangible assets (Ratnatunga, Gray, and Balachandran
2004). To calculate CEVITA, an organization needed to first
prepare a strategic income statement from which capability
assets could be valued. A variant of this income statement (in
a commercial setting) is illustrated in Figure 1. Here, consensus measures and other key performance indicators (KPIs)
are used as economic levers to convert costs to capability values. These measures are recognized as the many Expense Leveraged Value Indexes (ELVF'^) found in organizations. The
ELVI measure will be explained in detail in a later section of
this paper.
The CEVITA valuation approach recognizes that an asset
may be a factory, a warehouse, a sales booth, or a retail outlet.
Or it could be a Web site or Internet-based channel exhibiting impressive traffic and/or sales. It could be a patent, a training program, a logo, a slogan, or an advertising campaign.
Therefore, to develop strategic value statements, one hiis to


The Journal of Advertising

The Strategic Income Statement







asset value


Revenue from products




Revenue from services

Licences and related sales
Other income (e.g.. advertising
banner fees)








($ 15,000)






















Material costs
(assigned directly)
Resource costs (assigned via activity-based costing)
People resources

Labor (including unions)

Knowledge v/orkers


$ 1.440,000

Organizational process resources

PPE (depreciation)
Overhead (rent, rates, .etc.)












($ 1,000)








($ 18,000)

Innovation resources

R&D (life cycle-based)

Intellectual property






($ 10,000)



Financial resources

Lease costs
Interest expenses

Total expenses

Net profit before tax

Tax expenses (@40%)
Dividend expenses
Retained earnings
Net increase in CEVITA



($ 127.600)

Note: ELVI = Expense Levfragctl Value Indexes; PPE = property, plant. and equipment; NPAT = nee profit afcer tax; CEVITA = capability economic
value of intangible- and tan^jiblc assets.

Winter 2005


first recognize what the capability-based tangible and intangible assets are (some of which are more easily identifiable
than others). Some of the more identifiable (bur still troublesome) key intangibles found in most organizations are summarized below.
The first category of intangibles is comprised of human
capital and customers. Most of the more recent performancemeasurement systems include measures of customer and employee acquisition and retention, life cycle, and turnover. The
challenge is to show how these nonfinancial measures can be
translated into financial measures that could be relevant to
the economic value of the brand in terms of its capabilities. A
strong brand can give a company benefits such as greater customer loyalty, less vulnerability to competitive marketing,
larger margins, and decreased elasticity in customer response
to price increases. Human capital and customer expenses need
to be leveraged to ascertain the asset value being created. R&D,
marketing research, intellectual property, and patents are some
of the other relevant intangibles. Most marketing expenditure occurs in this area, with the specific objective of either
obtaining an immediate sale, or enabling a potential future
sale by enhancing the brand's capability value or equity. Some
R&D is basic research that may be highly risky but that could
provide the basis for substantial long-term growth. Other
forms, such as software development, are aimed at developing products with a short life span. This product development type of R&D differs from research designed to make
production/logistics/supply chain processes more efficient.
Financial accounting regulators often take the view that such
R&D spending (like most marketing spending) should not be
recorded as an asset but treated as a single-period expense.
However, such expenditure could be leveraged to provide a capability in future j^eriods (i.e., a capability economic asset).
Similarly, patents are becoming a focus for intellectual-capital
management within many organizations. Of course, the existence of patents increases the capability of the organization and
must therefore form part of the overall CEVITA measure.

specifically, to those that accrue from marketing activities.

Before doing so, however, two questions arise. First, is there a
need for such a model in a commercial context? Second, is a
model developed specifically for the valuation of defense capabilities valid in other contexts? For the reasons that follow,
we believe that the answers to both questions is yes.
With regard to the first question, Keller (2003), along with
many others, has made the observation that business owners
want ro do more than just report historical financial transactions. They are looking for advice that will help them better
manage their business and better measure their performance
against additional, nonfinancial criteria and standards, in order to to show a more complete picture of their value. Keller
(2003) states that the current transactions-based financial reporting model is too focused on things that have already happened (and therefore cannot be changed) and ignores the future
events that a company can work toward to create future value. In
recent times, an ever-increasing number of organizations and commentators have challenged the current financial accounting-based
valuation model. For example, PricewaterhouseCoopiers (2002)
reports that top executives at multinational companies consider
nonfinancial performance measures, such as development of
brand equity, product and service quality, and customer satisfaction and loyalty, to be more important than current financial
results in creating long-term shareholder value.
Regarding the second question concerning the validity of extending the model, Ratnatunga, Gray, and Balachandran (2004)
state that some of the theories used as the starting point of the
DOD valuation approach for defense capabilities originated from
the commercial world; therefore, such an extension (or reversion)
back to the commercial arena could be considered more evolutionary than revolutionary. In feet, many valuation measures that
were considered to be of limited use for defense capabilities can
be (and are) more applicable in the commercial environment.'^

At this point, it is important to define and contrast brand

equity components. Brand equity is the asset, that is, "what
one has," much like a Ferrari FI racing car (tangible asset) or
Michael Schumacher's driving skills (intangible asset). Brand
capability is what can be achieved (or "what one can do") when
these asset categories are combined in a contextual situation,
tbar is, winning the World Championship, Brand capability
value (BCV) is the economic value of the capability (i.e., the
current and future monetary value to Ferrari in winning the
Formula One World Championship).

We have already discussed that it is the highly contextdependent combinations of tangible and intangible assets that
make up an organization's capability, and that often it is the
marketing activities that provide the base of the contextual
capability combinations tbat competitors find difficult to
imitate. Such organizations strive to leverage their IMC expenditures to create capability-related market values, especially in terms of their brand(s). This suggests that there is a
strong and demonstrable link between what an organization
spends in a particular period on marketing and how such expenditure can increase (or if the spend is inadequate, decrease)
brand value. Therefore, we contend that the approach taken
by Ratnatunga, Gray, and Balachandran (2004), where asset
values are calculated via a single-period valuation process using ELVI (similar to the revaluation of a noncurrent asset in

Extending the CEVITA Model

In this section, we explore the possibility of extending the
CEVITA model to the valuation of commercial capabilities.

Brand Capability Value


The Journal of Advertising

traditional financial accounting), is suitable for commercial

applications for organizations seeking to value their strategic
communication capabilities.
The relationship ofthe ELVI to the market consensus value
is demonstrated using the following equation;*

= r.E.


The equation indicates that the change in the economic value

idSldt) of a capability-enhancing asset at tirne / is a function
of five factors:'*
E: the costs/expenses incurred to support the capability;
r: the value-increasing constant (ELVI N o . 1, defined as

the value generated per expense dollar when S = 0);

M: the maximum consensus value of the capability;
S: the current value ofthe capability; and
d: the value-decay constant (ELVI No. 2, defined as the

fraction of value lose per time unit when E = 0).

The equation states that che change (increase) in the capability value will be higher when r, E, and the untapped capability potential are higher, and the value-decay constant is lower.
Although investments in knowledge/learning/communication/training have been used as an indicator to value organizational capabilities, in much the same way as R&D
activities are, some further caution is required in u.sing the
ELVI indexes and the resultant CEVITA measure. The DOD
research study^ indicated that organizations generally focus
on five main components of intangible capability-enhancing assets, that is, innovation assets, human resource assets,
brand image assets, external relationship assets, and internal infrastructure assets. These are the strategic capabilityenhancing assets, which allow an organization to perform.
These include unique technological assets such as software
or code, unique process core competencies, and unique physical assets such as specialized or well-located plants or retailers.
Such organizations leverage these assets to create capabilityrelated market values. Although some of these assets can be
related to cash flow generation, many subcategories cannot
fully be captured on a cash basis, but still provide value leverage to an organization. Examples of these include;
Lei'eraging Captive Attention-Based


Property managers, sales managers, and Web site developers

have realized there is inherent, unrealized value in the people
trafficking through their building lobbies, elevators, and Web
pages every day. Often this traffic is "captive" and can be converted to end users with a little visual, auditory, and other
cognitive attention-generating methods.

Leveraging Unique Information Assets

Credit card agencies collect unique information assets on credit

card holder spending patterns; Internet-service providers collect unique information on the Web-browsing habits of their
clients; POS (point-of-sale) scanners provide real-time feedback on the impact of promotions on sales. Such information
is a prized asset, particularly given the critically important
role of the database in successful IMC.

Leveraging Trust-Based Relationship Assets

Many firms have found that trust-based relationships can be

leveraged into previously untapped cross-selling and upselling opportunities. Even celebrities endorsing cenain products are visible manifestations of this trust, but the concept has
been extended to one trusted commercial group endorsing another. Thus, professional bodies, at special rates, are now issuing credit cards for members, thus providing additional member
services for the professional body and new cardholders tor the
credit card company. The following types of "trust-based" relationships can be leveraged into valuable assets: unique partners
and alliances, key vendor relationships, unique competitor relationships, unique government relationships, key customer/
buyers, flnancier links, special employee/union relationships.
Leveraging Managernent and Board Experience

Companies, via their management and boards of directors,

often enjoy extensive industry relationships, access to capital,
and other advantages. The right combination of experience is
an asset, creating the foundation for successful execution of a
strategy, and sometimes those competitive advantages are
gained through innovative partnerships and alliances. In other
cases, it can even be the lack of certain barriers to success that
is most valLiable. The following are some examples of such experience-based assets: industry relationships, union relationships,
special reputation, strong leadership, strong teamwork, good
managerial "reserves," access to qLiality interim personnel, access
to personnel for peaks and troughs workflow management, good
employee knowledge or other special characteristics, strong
recruiting capabilities.
Leveraging Unique Organizational Assets

There is a whole host of organizational assets that are recognizable as intangible, but do not neatly fit into the more
conventional intangible assets mold. These arise due to the
unique technological, physical, and financial processes found
in some organizations. Some examples are unique technological assets (domain names, unique software or code, hardware
infrastructure); unique process assets (core competencies, dis-

Winter 2005
tribucion or channel power, economies of scale); unique physical assets (speciali:ced or well-located showrooms or warehouses,
specialized or well-located equipment); and unique financing
assets (ease of access to equity/venture capital or cheap debt).
These asset categories are listed in Figure 2 as the investment side of a strategic balance sheet. Furthermore, for the
balance sbeet to balance, the financing that was used to create
such assets also needs to be shown as a reserve account. This is
no different from the way tangible asset revaluations are treated
in the financial accounts of organizations.^

capability support, the capability value has been leveraged up

by a significant $340,000, or a net ELVI of 2.125. If the objective of the organization is merely to maintain the capability level of its distribution channel, then ciS/Jt can be set to
zero, and thus the equation becomes:
0 = 6 (.67) E - .02 (15,000,000)
3000.000 = 6 (.67) f


Within reason, the more logistical and financial support is invested in a marketing channel (say a Web site), the more capable it becomes. The difficulty, however, lies in estimating
the relationship between the cost and the resultant capability
enhancement. As a hypothetical example, assume that an organization is considering setting up a Web-based communication and delivery channel for on-line promotion, customization,
and order entry for its products (i.e., similar to the Dell business model). The two fundamental objectives of this Web site
would be related to the development of external relationships
required for "order generating" (brand building and sales) and
"order processing" (distribution). Due to the economics of
diminishing returns, however, such external relationship as.sets, like all economic assets, would have a maximum capability potential, no matter how many financial and other
resources were lavished on it. Let us assume that this marketing channel has a maximum (consensus-based) capability potential of (say) $25,000,000. Let us also assume that it has
had 10 years of support from the organization, and its current
capability value is estimated as $15,000,000, based on the
financial, logistical, and facility costs expended on it.
Let us now assume that the organization, based on its past
experience, estimates the value-increasing constant (r) to be 6
if such support is continued, and the value-decay constant (6)
to be .02 if such incremental support is withdrawn. If the
organization in year 11 expends $160,000 () to support the
communications capability of the Web-based channel via installing customer relationship management (CRM) software,
the capability value of the channel will, using the equation
presented earlier, be enhanced as follows:



| = 6(.67).I60.000-300,000=$340.000
Thus, based on these ELVI, by spending only $160,000 on


= = approximately $75,000

This concept is no different from the expenses a company

would need to spend on repairs and preventive maintenance
of its tangible assets (e.g., delivery vehicles). Just to keep the
vehicles running at its current level of economic capability, a
certain level of expenses would need to be incurred.
Note that if the organization in the preceding example spends
only $50,000 on capability support, by applying the capability-enhancing asset equation, the change in economic value (dS/
dt) works out to be a negative $99,000, or a net ELVI of minus
1.98. Thus, all organizations would have a range of net ELVI,
some greater tban 1, some between 0 and 1, and some negative. Hence, the model is not biased only in the positive (capability-enhancing) direction, nor are the resultant values
linear to the amount of expenditure. That is, inputs to the
model will not always produce a positive result, as a campaign
that is not funded at the proper level may result in a weakened
market position for the brand, due to the (poor) creative/
design or (poor) execution/media strategy of that effort.'
This range of positive and negative capability-leveraging
expenses is illustrated in Figure I. Note also that as the negative net ELVI values reduce capability asset values, this is conceptually very similar to the depreciation/amortization of assets
under traditional financial reporting, whereas the positive net
ELVI-related values are similar to the revaluation ot asset values under traditional financial reporting.
We strongly believe that such an approach provides an
important strategic tool in planning for the organization, as
it now is able to determine what expense levels must be included for the maintenance of that particular capability at a
zero-base (see Eigure 2). Similarly, in terms of brand management, an organization would need to expend a minimum level
of money to keep the brand visible in the eyes of customers,
depending on the quality of the creative, the target audience,
the level of competition (i.e., share of voice), and the life stage
of the brand. For example, in the frequently purchased package goods market, this minimum level of marketing expenditure has rraditionally been very high due to low customer
involvement, frequent brand switching, and low technical


The Joumal of Advertising

The Strategic Balance Sheet in a Commercial Organization



Cash-Generating (Operational) Assets

(Mostly Tpdable)

Tangible Assets

inungible Assets
(Appraisals lo
Market Vaiue)



" ' "^


In vestments

Patents &


Resource Assets



Human Capital


Organ riational
' " " ^ ^ Assets



Debt Capital

Share Capital













Buiineis Process


Infrastructure Assets


Intellectual Capital


Business Renewal

Intangible Assets
(Mostly NonTradable)

Tangible Asms

Asseu (Pure
"^ *

Equity Capital

Supplier Capital




Hott: PPE = property, plant, and equipment.

entry barriers. Thus, value-decay constant ((5) of most brands

in this sector is high.
Additional factors can be embedded in our model in a number of long-run value equations and used to estimate the capability-value consequences of alternative expense-budgeting
strategies. For instance, an asset value can be given as a function of
che percentage of repeat-purchase customers and the
rate of churn;
che percentage of customers not committed to the firm
or its main competitor;
che size and rate of growch of the total market;
the relative influence of product characteristics, price,
personal selling, sales promotion, and distribution as
influences of capability value; and
the reiative influence of the "interaction" of product
characteristics and advertising as an Influence on
capability value.^
These measures would differ by industry. The aim would be
to set industry-specific standards for reporting robust, nonfi-

nancial information on asset capability (especially intangibles)

that could be independently audited. In high-tech industries,
with heavy investment in research and development, fair
market values for relared R&D might be highly relevant. In
others, such as fast-moving consumer goods, estimates of brand
value would be more relevant.
It would be a mistake to aim for global standards because
measures relevant to large mature brands would not necessarily
apply to smaller, emerging brands. Instead, the aim should be
to develop measures tailored to particular industries, which
could be adjusted to take into account a company s stage of
development. Figure 1 provides a simple illustration of how
various capability-maintaining and capability-enhancing expenses are leveraged using specific ELVI to obtain asset values.
Where relevant, the already established "traditional" and
"new" valuation approaches discussed earlier should be used
and incorporated into the overall CEVITA valuation. However, in situations where, for whatever reason (theoretical or
practical), any one of the above measures cannot be used, then
the consensus-based ELVI measure should be used. Thus, the
ELVI will often be the measure of last resort.

Winter 2005


Antecedents and Consequences of Brand Recognition







Immediate sales
Future sales




Nok: WWW=World Wide Web,


A.S user-friendly as the approach is, the interdependent nature
of IMC could make the application of the univariate CEVITA
model .somewhat restrictive. While it can be argued thar all
assets need to be integrated to provide a competitive capability
to an organization, IMC, by its very nature, has as its objective
an integrated approach to the marketplace. Thus, for the
CEVITA model ro provide useful informarion for budgering
and performance-reporting purposes, it needs to be extended
in a multivariate manner to deal with the complex IMC interrelationships. We therefore consider IMC tools (see Figure 3)
to be the preconditions (or antecedents) required for the inducement of sales (which are the consequences). These antecedents act
via an intermediate variable, such as brand recognition.
Based on the preceding literature on the conventional wisdom regarding IMC, and the model presented above, it can
be posited that IMC can potentially have both an attirudinal
effect on the brand and a behavioral effect on sales. Thus, the

many ELVI values that constitute IMC effort in an organization first need to be combined to provide brand capability
value, as follows:



The equation indicates that the change in the economic brand

value (dS/dl) of a capability-enhancing IMC campaign at time
/ is a function of seven factors,'^ namely:
E: the costs/expenses incurred to support the capability
of the /'' IMC variable;
r . the value-increasing ELVI constant of the t^^ IMC variable
(defined as the value generated per expense dollar when
S = 0);
M: the maximum consensus value of the brand capability;
S: the current value ot the brand capability;
d^: the value-decay ELVI constant of the i''' IMC variable
(defined as the fraction of value lost per time unit when
E = 0); and


The Journal of Advertising

Projected Contribution of Advertising to Sales
% weight of
task in the
sales process
Selling task
Making contact
Arousing interest
Creating preference
Making specific proposals
Closing orders
Keeping brand wanted
Sales forecast
Brand contribution to so/es




% contribution
to selling task
due to brand


of brand




$10,000,000 (54%)

pj che proportion of funds expended on the i''" IMC variable,

where N = the total number ot IMC variables, and where:

This model uses a multivariate approach to capability asset valuation, and we have termed this the Brand Capability
Value of Integrated Marketing Communication (BCV'"),
which forms one of the components of the overall CEVITA of
an organization. The extension of the univariate CEVITA
model to incorporate IMC processes requires the derivation
of the p^ measure for each IMC task. This will initially also
have to be a consensus measure, until experience in using the
model is developed. One approach to obtaining such p values
initially is to ask those carrying out the above performance
appraisals to first break up the selling process into six separate selling tasks and estimate a percentage for each task indicating the relative weight of the task toward the total selling
process. Next, they could be asked to indicate the contribution of brand equity (i.e., brand recognition) using a "scale"
ot some sort (e.g., rates, weights, percentages) for each selling
task.'" Such an evaluation is obviously based on subjective
estimates, and therefore, che resulcs obtained are a "subjective-squared" figure. Such a figure is not an end in itself, however, but a structuring of the complex process of thought upon
which the various managers will be basing their decisions.
Thus, the figures arrived at must be considered as one of the
inputs in the difficult field of planning-communications strategies and measurement of their effectiveness. Note chat the
selling tasks and cheir relative weights will differ from industry to industry. The techniques outlined above could be used
before the actual sales process begins to enable more objective

setting of percentages. These numbers (for a hypothetical case)

are provided in Table 1.
At the end of an actual sales period, the behavioral techniques could be used again, along with the experience gained
during the period, to attach new weights to the selling task
and new percentages to advertising's contribution toward that
task.'' Deviations could be analyzed, and the more this method
is used, che better both the accounting and marketing functions will understand the true nature of the contribution of
brand capability to the total sales effort. As more knowledge
of chis relationship is obtained, performance standards can be
set, so that an investigation can be initiated if the actual observations are not in line with model expectations.
The estimates provided in Table 1 indicate that the brand
capability contribution to the overall sales target is 1)4%. Thus,
assuming the organization's initial brand capability value is
$10 million, then its potential sales revenue is $18.5 million
(keeping other non-IMC sales-related variables constant).''' This
number will be the starting |X)int for a sales revenue forecast.
Let us now assume thac che marketing director is considering che components (ot antecedents, see Figure 3) required to
maintain or increase this brand capability value (and thus
generate more sales revenue), and has escimated a mix of IMCrelaced variables as per Iteration I in Table 2.
To continue our hypothetical example further, let us also
assume chat the various ELVI values have been obtained for
each ot the IMC variables in terms of its contribution to brand
recognition, and that the multivariate model equation is being used. We can see in Table 3 that if the maximum brand
capability value (M) is set using the consensus approach at
$20 million, and the current brand capability value (5) is initially $10 million (as stated in Table 1), and if, say, $500,000
is expended on IMC activities for the period, then the brand

Winter 2005


Contribution of Integrated Marketing Communication (IMC) Variables to Brand Recognition

IMC variable
Direct marketing
Public relations
World Wide Web



Iteration 3

Iteration 2

Iteration I












Brand Capability I n c r e m e n t a l

IMC variable


ELVI constant

I_Y|TM constant

Percentage of
costs expended
(Iteration 1)




Direct marketing
Public relations
World Wide Web


IMC (integrated
variable contribution
to BCV (brand
C(^)ability value)





Brand copabiWtf incremental value

capability value based on the proportion of funds expended

on each IMC variable is a negative $568,750.
Table 3 thus indicates thar half a million is inadequate to
sustain che capability value of che brand, and as a consequence,
the sales tasks as per Table 1 will be made much harder, reducing rhe sales forecast to $17.5 million as follows:
Initial brand capability value
Less: Brand capability incremental value
Net brand capability
Sales forecast


Therefore, if the organization wishes to maintain the same

BCV, then the model equation will indicate (using the goalseek function in Excel) that $718,540 will need to be expended, to maintain the brand capability at its initial value.
This would be the zero-based level of expenditure on IMC for
brand capability maintenance. This is shown in Table 4. As one
can see, such a model will be extremely useful in helping resolve recurring budgeting problems in marketing generally
(Piercy 1986) and IMC specifically (Ewing, de Bussy, and

Caruana 2000), namely, that of allocating expenditure between

competing IMC variables.
One can see from Table 4 that even this revised expenditure level is still inadequate to maintain some individuai IMC
variable values (e.g., advertising). Thus, the goal-seek function can be utilized again to ascertain the minimum expenditure required to maintain the level of advertising capability.
This works out to approximately $830,000, and the result is
shown in Table 5.
Of course, as this expenditure level also increases the spend
on the other IMC variables (see Iteration 1 in Table 2), the net
capability value of the brand, and hence the sales forecast,
also increase as follows:
Initial brand capability value
Add: Brand capability incremental value
Net brand capability
Sales forecast




The IMC model can also be used to increase brand capability

by expending different proportions of funds on the individual


The Journal of Advertising

Brand Capability Maintenance Value

ELVr" constant

IMC variable
Direct marketing
Public relations
World Wide Web

ELVI constant

Percentage of
costs expended
(Iteration 1)







capability incremental vaiue

IMC (integrated
variable contribution
to BCV (brand
capability value)


Advertising Capability Maintenance Value

IMC variU)le

ELVr" constant

Direct marketing
Public relations
World Wide Web

IMC (integrated
variable contribution
to BCV (brand
capability value)

ELVI^" constant

Percentage of
costs expended
(Iteration 1)







$i 16,667
$ 16.250



Brand capability incremental value

variables. Using the Iteration 2 column from Table 2, keeping the total spend at $830,000, the brand capability value
increases to $313,500 (see Table 6). Using the Iteration 3
column, brand capability value increases to $352,500. This is
because the different ELVI values of the IMC variables impact the capability values differently.
While there are many new measurement systems using mea.sures of human capital, customer relationships, and brand
values, these approaches are plagued by variously restrictive
limitations. Many of these new systems appear elegant but
would require large investments in daca collection. Many
measure "assets" that have no obvious bearing on strategic
values. In contrast, the CEVITA measure, presented via stra-




tegic financial statements, provides a useful and practical way

to visualize and value the intangible capability assets of an
This measure, which uses a number of Expense Leveraged
Value Indexes (ELVI), also overlaps with new performancemeasurement systems such as the balanced scorecard, especially
in the leveraging of expenses to derive capability-enhancing
asset vaiues. One such value is the capability value of brands.
This paper demonstrates how Brand Capability Values (BCV)
can be derived for budgeting and valuation purposes using a
multivariate model incorporating all of the IMC variables that
are the preconditions (or antecedents) required for brand capability enhancement.
Note, however, that we are not suggesting that our approach is complete; rather, it is a work in progress. We believe it has both the theoretical and methodological rigor to

Winter 2005


Brand Capability Growth Sensitivity Analysis
IMC (integrated

IMC variable
Direct marketing
Public relations
World Wide Web

ELVI constant

ELVr" constant

Percentage of
costs expended
(Iteration 2)






Brand capability incremental value

serve as a useful point of departure for enlightened organizations to customize, implement, and refine. Of course, IMC is
a process, not a program (Schultz 1994), and the challenge is
not only to measure value, but also to manage it (Neckermann
2004). Our approach should allow firms to do both. As Jones
(2005) points out, however, marketing communication is
highly context-specific; this is something that we believe we
have been able to capture in our model. Yet for our assertion
to be verified, the brand capability model needs to be implemented and adapted in different organizations and industries.
As Shoebridge (2004) taunts, it is now time for marketers
to stop complaining and start quantifying. We hope we have
provided IMC practitioners with a tool to manage the process
more efficiently and profitably. Finally, it is perhaps worth
reflecting on what we perceive to be the paper's five most
salient contributions:
1. While 'measuring marketing ROI" is unquestionably a
"hot topic" at the moment and the subject of frenetic scholarly activity, the harsh reality remains that until marketers
can master the lingua franca of the boardroom (i.e., finance),
the function will remain marginalized. Ambler's (2000) research reveals the startling fact that boards devote nine times
more attention to spending and counting cash flow than to
wondering where it comes from and how it could be increased.
Similarly, Jones (2005) observes that advertising has fallen
off top management s agenda and that brand management is
being relegated to relative juniors in many organizations. It
is our hope that our approach can help empower marketers by
allowing them to present both budgeting and evaluative processes within a cogent financial framework, thereby giving
marketing more legitimacy and credibility in the boatdroom.
2. Until fairly recently, advertising's defensive or btand
maintenance role has been overlooked (at least, outside of the
United Kingdom, where the Ehrenbergian/weak theory doc-



variable contribution
to BCV (brand
capability value)


trine is most widely accepted). In mature markets, maintaining market share is atguably the most important priority for
(most) established brands today. We provide a method to justify defensive marketing communications expenditure (i.e.,
where customer retention is more of a priority than customer
acquisition). Such an approach has hitherto been lacking, leaving many brand managers feeling compelled to strive for totally unrealistic gtowth strategies, causing them to then
(predictably) "fail" and face further budget cuts. To address
this, we offer a sophisticated "bottom-up," objective-and-task
method for budget setting. Despite the rhetoric, many firms
today still use archaic "top-down" approaches (e.g., percentage-of-sales or share-of-market/share-of-voice), which severely
restrict growth and/or "punish" maintenance.
3. VoTmer Journal of Advertising editor George Zinkhan recently noted that marketing and finance professors live in two
diffetent worlds, seldom interacting, and even constructing
artificial barriers between one another (Zinkhan and Verbrugge
2000). This paper is a tangible example of what can be achieved
when the two disciplines put aside their differences and work
to achieve a true research synergy, one that we hope advances
theory in both disciplines, and fmds application among practitioners at the coalface.
4. As Ambler (2000) points out, many marketers remain
confused as to the difference between brand equity (an asset)
and brand value (a financial metric). This paper provides a
link between the two via a new construct called brand capability (i.e., what one can actually achieve with the asset). It also
outlines the potential role of IMC in enhancing brand equity.
5. Finally, we have substantially extended Ratnatunga,
Gray, and Balanchandran's (2004) univariate valuation model
(applied to the Australian Department of Defence) by constructing a multivariate model with widespread commercial


The Journal of Advertising


Baker, Susan, and Helen Mitchell (2000), "Integrated Marketing Communication: Implications for Managers," papet
1. We define an asset as a cost Incurred that has a "future
presented at the European Society for Opinion and Mareconomic benefit." Current financial accounting reporting stanketing Research conference, "Reinventing Advertising,"
dards do not recognize some of these costs as assets {e.g., adverRio, Brazil, November.
tising costs), many of which are considered as having only
Barsky, Noah P., and Garry Marchant (2000), "Measuring and
single-period economic benefits, and thus are expensed in finanManaging Intellectual Capital," Strategic Finance, 81 (8),
cial accounting reports. However, Ratnatunga, Gray, and
Balachandran (2004) argue that such costs enhance the strategic
Blattberg, Robert, and John Deighton (1996), "Manage Marcapability of an organization and should therefore be considered
keting by the Customer Equity Test," Harvard Business Reas capability assets for future-oriented decision making.
view. 74(4), 5-14.
2. Cash flow measures and market-based measures were not
Cornelissen, Joep R (2000), "Integrated Marketing Communiconsidered relevant for military capability valuation, as assets in
cations and the Language of Market Development," Intersuch contexts were not expected to generate income.
national Journal of Advertising. 20 (4), 483-499.
3. The theoretical underpinning of this model was derived
Damodaran, Ashwath (2002), Investment Valtiation, 2nd ed.. New
from the Vidale-Wolfe (1957) model employed to describe the
York: John Wiley.
sales response to advertising efforts,
Eagle, Lynne, and Phillip Kitchen (2000), "IMC, Brand Com4. Over time, and with experience, these coefficient values
munications and Corporate Cultures," European Journal of
should reflect the value-expense relationships that exist in most
Marketing, 35 (5/6), 677-686.
spending decisions, but remain largely unquantified. The ELVI
Ewing, Michael T , Nigel de Bussy, and Albert Caruana (2000),
essentially attempts to quantify the "qualitative" aspects of the
"Perceived Agency Politics and Conflicts of Interest as Pocost-benefit approach.
tential Barriers to IMC Implementation," 7'"'"'*'^ of Mar5. The DOD obtained these intangible asset categories from
keting Communications. 6 (2), 107-120.
numerous research studies (see Barsky and Marchant 2000;
Fortini-Campbell, Lisa (1994), "Brand Contacts," in Integrated
Leadbeater 2000; Litman 2000; and Ratnatunga 2002).
Marketing Communications Symposium. R. Kaatz, ed., Lincoln6. For a full discussion of the double-entry procedure sugwood, IL: NTC Business Books, 1-5.
gested to record asset capabilities and associated financing costs,
Jones, John Philip (2005), How to Turn Advertising Expenses into
see Ratnatunga, Gray, and Balachandran (2004).
Investments. Singapore: Pearson Education.
7. We thank the guest editors for pointing this out.
Kaplan, Robert S., and David P. Norton (1992), "The Balanced
8. This paper provides a conceptual model of generating caScorecard-Measures That Drive Performance," Harvard
pability values in the context of the interaction effects of marBusiness Revietv. 70 (1). 71-79.
keting communications variables. Extensions of this model can,
Keller, Joyce (2003), "The Evolving Business Reporting Model
theoretically, be applied to the interaction effects of all of the
and Use of Performance Measurement Methodology,'" The
marketing mix variables.
CPA Letter/Education (AICPA; American Institute of Certi9- Over time, and with experience, these coefficient values
fied Public Accountants) (April), G2-3.
should reflect the value-expense relationships that exist in most
Lave, Jean, and Etienne Wenger (1991), Situated Learning: Lespending decisions, but remain largely unquantified. The ELVI
gitimate Peripheral Participation, Cambridge: Cambridge Uniessentially attempts to quantify the "qualitative" aspects of the
versity Press.
cost-benefit approach.
Leadbeater, Charles (2000), New Measures for the Economy, Lon10. For example, the salespersons may say that 70% of the tiisk
don: Centre for Business Performance, Institute of Charof making contact with a customer was made easier because the
tered Accountants of England and Wales.
brand was well known.
Litman, Joel (2000), "Genuine Assets: Building Blocks of Strat11. Here, the salespersons are being asked to determine the extent
egy and Sustainable Competitive Advantage," Strategic Fioi effectiveness of each IMC variable on the enhancement of the brand's
nance. 82 (5), 3 7 ^ 2 .
capability value at the end of the period, that is, the ex post percentLow, George S. (2000), "Correlates of Integrated Marketing Comages (actuals). This will be in the feedback stages of model applicamunication,"Jo/vratf/tf/A^/ctT/ww^ Research. 40 (3), 27-39.
tion, and would help in the ceplanning for the next period.
MEKITUM Guidelines (2002), Guidelines for Managing and Re12. For simplicity, no distinction has been made between the
porting on Intangibles (intellectual capital report), Madrid:
current sales and future sales in this sales forecast.
VodafoneFoundation, available at www.uam.es/proyectosinv/
meritum (accessed October 5, 2005).
Neckermann, Christian (2004), "Don't Just Measure Customer
ValueManage It," working paper, Insidelto 1 Strategy, availAlmquist, Eric, and Gordon Wyner (2001), "Boost Your Marable at www.ltol.com/View.aspx?DocID=28380 (accessed
keting ROI with Experimental Design," Harvard Business
October U), 2005).
Revietv, 79(9), 135-141.
Orlikowski, Wanda J. (2002), "Knowing in Practice: Enacting a
Ambler, Tim (2000), Marketing and the Bottom Line. London;
Collective Capability in Distributed Organizing," OrganiPearson Education.
zation Science, 13 (3). 249-273.

Winter 200^


keting Communications Symposium. Ronald Kaatz, ed.,

Lincolnwood, IL: NTC Business Books, 613.
Shoebridge, Neil (2004), "Ir's No Use Complaining: Get Out There
and Quantify," Australian Financial Review (February 2), 2.
Sveiby, Karl Erik (1997), The New Organizational Wealth: ManBusi>ies.\ Horizom. 43 (5), 11-18.
aging and Measuring Knowledge-Based Assets, San Francisco:
Polanyi, Michael (1967), The Tacit Dimension. New York:
Berretr Koehler.
PricewaterhouseCoopers (2002), "Non-Financial Measures Are HighTeece, David J., Garry Pisano, and Amy Shuen( 1997), "Dynamic
esc-Rated Determinants of Total Shareholder Value," ManageCapabilities and Strategic Management," Strategic Managenient Barometer (April 22), available at www.barometersurveys
ment Journal. 18 (7), 509-533.
.com (accessed October 5, 2005).
Vidale,M. L.,and H. B. Wolfe (1957), "An Operations-Research
Study of Sales Response to Advertising," Operations Research,
Ratnatunga, Janek (2002), "The Valuation of Capabilities: A New
5(3), 370-381.
Direction for Management Accounting Research," Jw/rW
Wang, Paul (1994), "Measuring ROI," in Integrated Marketing
of Applied Management Accounting Research. 1 (1), 1-15.
Communications Symposium. Ronald Kaatz, ed., Lincolnwood,
, Norman Gray, and Kashi R. Balachandran (2004),
IL: NTC Business Books, 32-44.
"CEVITA: The Valuation and Reporting of Strategic Capabilities," Management Accounting Research. 15 (1), 7 7 - Zinkhan, George M., and James A. Verbrugge (2000), "The
Marketing/Finance Interface: Two Divergent and Comple105.
mentary Views of the Firm " Journal of Business Research.
Ryle, Gilbert (1949), The Concept of Mind. London: Hutcheson.
50 (2), 43.
Schoen, Donald A. (1983), The Reflective Practitioner, New York:
Sergio (1999), The End of Marketing as We Know It, New
Basic Books.
Schultz, Don E. (1994), "The IMC Process," in Integrated Mar-

Piercy, Nigel (1986), "The Politics of Setting an Advertising

Budget," InteniatitmalJournal of Advertising. 5 (4), 281-305.
Pitt, Leyland F., Michael T. Ewing, and Pierre Berthon (2000),
"Turning Competitive Advantage into Customer Equity,"


accounting equation: The fundamental mathematical

equation upon which all accounting information is
based: Assets - Liabilities = Owner's Equity {A - L ^ E).

current assets: Asset values that vary in a single accounting period, such as the value of inventory, accounts
receivable, and cash.

accounting-period convention: This convention assumes

that the indefinite life cycle ofthe firm can be subdivided into periods of equal length (usually 12 months),
so as to establish fixed reporting intervals.

DCF: Discounted cash flow, or future cash flows restated in

current money value terms, using the cost of capital as a
discount rate.

accrual accounting: The recording and reporting of all

transactions affecting a firm in a specified period, both of
a cash and noncash nature.
asset: An item of economic value that is owned by the
business and is expected to contribute to the future
revenue-earning capability ofthe business.
balance sheet: A detailed listing of the entity's assets,
liabilities, and owner's equity accounts. It is designed to
illustrate the financial position ofthe firm at a given point
in time, and is usually provided at the end ofthe month or
year. Also referred to as a statement of financial position.
cash flow from operations: Cash flows arising from an
entity's provision of goods and services.
cash flows: These are cash movements during a reporting
period resulting from transactions with parties external
to the entity.

equity: The interest, or claim, of the shareholders of the

entity against the net assets of the business. Equivalent
to total assets less total liabilities.
expense: Money spent to earn income in the current
financial statements: Financial reports, including the
profit and loss account, balance sheet, and cash flow
statement, which are produced by the firm on a regular
basis, and are useful for decision making and resourceallocation purposes.
income: Revenue of the business that is earned through the
sale of goods or the performance of services; also referred
to as revenue.

income projection valuation: Estimation ofthe current

income-generating capacity of an asset.
income statement: See profit and loss account.


The Journal of Advertising

intangible assets: Assets one cannot physically touch,

investment: Money spent on the purchase of assets,
market valuation: The current market price of an asset.
matching principle: The principle that revenue and
expense items pertaining to a particular period must be
properly recognized and compared to obtain the correct
profit (or loss) for the period.
net assets: Total assets less total liabilities. Equivalent to
owners' equity.
noncurrent asset: Long-term assets, also known as fixed
profit and loss account: A financial statement that illus-

trates the trading activities of the firm during rhe specified period. Items are classified as revenue less expenses,
to obtain the net profit or loss. Also referred to as income
statement, revenue statement, or profit and loss statement. This is a statement of financial performance.
replacement costs: Money that will have to be spent to
replace an asset to its current income-generating ability.
reserves: Profits that have been retained within a company
for specific purposes, such as capital reserves (reserves
that are not available for distribution) or revenue reserve
(reserves that are distributable to the shareholders).
tangible asset: Assets that one can physically touch, such
as the plant and machinery.