Successfully getting the approval for a rebranding program by the board and or leadership team may depend entirely on how the costs affect fiscal-year operating income. If a CMO goes into a board meeting and proposes a multimillion dollar rebranding budget with the entire cost hitting the P & L in the current fiscal year, it may be much more difficult to get approval than if he or she takes a financial planning stance that spreads the costs over a number of fiscal periods.
Understanding the CapEx/OpEx breakdown for rebrand budgets
How can this be accomplished? By understanding what costs can be capitalized versus those that must be expensed in the year in which they are incurred. For example, take a situation where there is a $100 million rebranding budget and 65 percent of the costs are attributable to signage that has an estimated life of 10 years. If you assume a straight-line method of depreciation, $58.5 million of the rebranding cost can be spread across years 2-10 ($6.5 million per year), with only $41.5 million hitting the net income in the current fiscal.
Another opportunity to capitalize signage can be realized by bundling individual signs across a facility. While individual signs as standalone items may not meet many companies’ threshold to be classified as capital assets, when taken together as an overall signage program, they may in fact qualify to be capitalized.
There are other important CapEx/OpEx impacts to take into account when estimating the profit impact of a rebranding beyond the actual costs involved in purchasing new branded assets. Continuing with the signage example, if a company disposes of old signs before they are fully depreciated, the remaining undepreciated value of the signs has to be expensed. If this cost is unaccounted for in a rebranding budget, the replacement of old signage may have an unfavorable and unexpected profit impact.
It is critical that the executive accountable for managing the rebranding budget fully understands the impact of CapEx/OpEx splits to ensure that costs are accurately allocated and accounted for. We have had instances where clients had expected that they could capitalize an entire rebranding. That is not consistent with accepted accounting principles as many parts of a rebranding (documents and forms, IT systems, HR materials) don’t qualify as capital expenses.
Likewise, if you’re removing and replacing logos on existing vehicles, you cannot capitalize the expense to rebrand them. It is only when a brand new vehicle is being purchased and branded that the costs associated with the brand application can be capitalized. The logic is that rebranding a vehicle does not extend the useful life of the capital asset (the vehicle), whereas the cost to brand a new vehicle, (for example, the wrap on a new vehicle), are considered part of the purchase price of the asset. Accounting rules state that costs associated with the purchase of a new asset (delivery etc.) are part of the total cost of the asset.
BrandActive helps clients understand the impact of CapEx/OpEx considerations when formulating and controlling rebranding budgets, ensuring that proper assumptions are made and that costs are appropriately allocated. We reflect these impacts in the scenarios we develop for our clients for the different ways they can approach their rebranding. Ultimately, the goal is to ensure alignment between rebranding objectives and commercial realities – the key to any successful rebranding.