Making marketing investment visible: Strengthening accountability through external reporting

Research at the University of Liverpool examines how making marketing investments more visible through external reporting can strengthen marketing accountability and support better decision-making both within firms and in financial markets.

Background

Marketing is a major strategic investment, helping firms build valuable marketing assets such as brands and customer relationships that support future growth. Yet these investments – and the value they create – are often difficult to see in companies’ external reporting.

This limits the information available to investors and other stakeholders to assess marketing’s contribution to future performance, but can also influence how marketing is measured, managed and funded inside firms.

Financial reporting has struggled to keep pace with the growing importance of intangible marketing assets.

Under International Financial Reporting Standards (IFRS), internally generated brands, customer lists and similar assets generally cannot be recognised on the balance sheet, while expenditure on advertising and promotional activities is normally treated as a current expense rather than investment. As a result, firms can invest substantially in building brands and customer relationships, while their financial statements provide limited visibility of either the value created or, in some cases, the marketing investment itself.

Marketing spending (eg advertising) is not always reported separately and may instead be aggregated within broader expense categories, such as selling, general and administrative expenses (SG&A).

Evidence from the US shows that a non-trivial proportion of public firms engaged in advertising – including high-profile advertisers such as Apple – do not separately disclose their advertising expenditure, highlighting considerable discretion in how visible marketing investment becomes to external stakeholders.

The issue has become particularly timely because the International Accounting Standards Board (IASB) is undertaking a comprehensive review of IAS 38, the standard regulating intangible asset reporting. Its current work explicitly considers investors’ information needs relating to recognised and unrecognised intangible assets and the expenditure associated with them, alongside possible changes to recognition requirements.

While such debates naturally focus on the information needs of investors and other external users, external reporting can also shape what firms measure, scrutinise and manage internally.

Our research

Research by Marketing experts Dr Peter Guenther and Dr Miriam Guenther considers both dimensions of marketing accountability:

• External accountability: How greater visibility strengthens accountability to financial-market stakeholders
• Internal governance: How greater visibility influences marketing decision-making, efficiency, funding and organisational standing inside firms.

Using large-scale longitudinal company data and variation in firms’ reporting practices, they examine what happens when marketing investments and the assets they create become more visible and accountable through external reporting, and investigate the consequences for both financial-market stakeholders and the way marketing is governed inside firms.

The findings show benefits on both sides. Greater asset visibility can help financial markets better assess marketing’s contribution to future firm performance, reducing financing costs and improving the information reflected in share prices. At the same time, greater external accountability can influence how marketing is managed internally.

Across their research, making either the value of marketing assets or advertising expenditure more visible is associated with improvements in marketing efficiency. Greater visibility of advertising expenditure can also make marketing budgets less vulnerable to abrupt cuts and strengthen marketing’s organisational standing within the firm.

Importantly, the research suggests that meaningful improvements in marketing governance do not necessarily depend on recognising internally generated marketing assets on the balance sheet. Making marketing expenditure itself more transparent can also strengthen accountability and generate positive internal consequences.

External reporting is therefore more than a communication mechanism for investors: by determining what becomes visible and subject to scrutiny, it can shape how marketing is measured, managed, funded and valued within firms.

The impact

The research is beginning to inform discussions about how external reporting could provide greater accountability for marketing investments and the assets they create.

The authors have begun direct dialogue with accounting standard setters, including the Research Director of the Australian Accounting Standards Board (AASB), about the implications of their findings and the information that would be useful in considering future reporting requirements.

These discussions have highlighted the practical challenges associated with recognising internally generated marketing assets on firms’ balance sheets, while identifying potentially more feasible routes to greater accountability, such as improving the disclosure of marketing expenditure.

This engagement is helping translate the research from evidence about the consequences of marketing accountability into practical questions about how external reporting could be improved.

Working in partnership

The authors are engaging with accounting standard setters to ensure the research addresses questions that matter in practice.

Discussions with Dr Eric Lee, Research Director at the Australian Accounting Standards Board (AASB), have helped explore both the opportunities and practical challenges associated with improving the reporting of marketing investments and assets.

This dialogue is particularly valuable in identifying reporting approaches that could be feasible for firms and useful to standard setters. This is helping move beyond the question of whether internally generated marketing assets should be recognised on the balance sheet, towards a broader consideration of what information about marketing investment companies could realistically be expected to provide.

What’s next

The next step is to examine more systematically how companies currently communicate their marketing investments and the assets they create. This includes exploring different:

• Reporting channels, from annual reports to investor and analyst communications
• Formats, including quantitative measures and qualitative narratives
• Types of information, ranging from marketing expenditure and marketing assets to customer and sustainability-related activities.

Working with standard-setting stakeholders, the authors aim to identify where current reporting leaves important information gaps and which forms of disclosure could provide useful and practicable ways of strengthening marketing accountability.

They plan to translate the resulting evidence into recommendations for standard setters and other stakeholders considering how the reporting of intangible marketing investments could be improved.