As people all across the globe become more aware of their intellectual rights and their ability to claim ownership of their creations, debates revolving around the valuation of such intellectual property are gaining traction. Intellectual property is a class of incorporeal property that is identified on the financial statements of corporations that own such intellectual properties.
It is important to distinguish between the “price” of an intellectual property asset and the “value” of an intellectual property asset. While price is the monetary value at which the asset trades in the market or the amount that a willing purchaser is ready to shell out. Value, on the other hand, represents the potential future economic benefits that the asset is likely to produce.
Valuation – though may seem deceptively lucid, the practical nuances and factors that are concomitant with executing valuations make it a complex exercise. Throw in the concept of intellectual property in the mix, it makes the process even more tedious. What makes the valuation of intellectual property assets complex is the fact that it involves a lot of inputs that are based on assumptions and projections. Furthermore, uncertainties around business projections, economic outlook, government policies, and technological disruptions dilute the accuracy of the value of intellectual assets.
FACTORS THAT INFLUENCE THE VALUATION OF IP ASSETS
As noted above, the valuation of an intellectual property asset of an enterprise is a gross product and amalgamation of a lot of factors, and thus, such factors should be kept in mind when intellectual property is valued.
- Valuation Purpose: The purpose or the context for valuing or the benefits that will be accrued by an intellectual property asset indelibly impacts the valuation of the incorporeal property. Thus, factors such as access to technology or cost savings will impact the value.
- Time: The considerable time reference when the intellectual property Is being valued is to be considered. An intellectual property affords an exclusive right to the owner or the licensee of the asset to exploit it for a limited time frame. For instance, a patent affords protection for a period of 20 years before it becomes available in the public domain. Valuation of the asset at different points in time will produce a different outcome. How the asset fit in its own product life cycle and the life cycle of the entity should also be considered.
- Legal Status: The legal status of the asset owned by a firm will impact its valuation. Thus, whether an intellectual property asset owned by an enterprise is registered or unregistered will lead to different valuation results.
- Individual or a Bundle Asset: Another factor that shall have an impact on the intellectual property owned by an enterprise is its status. Whether the asset is a stand-alone asset or part of a bundle of assets, inseparable from the bundle should also be paid attention to.
- External variables: Factors such as the number of competitors in the market, barriers to entry into the market, legal policy framework, technological disruptions, and the degree of consumer preferences shall have an impact on the value of the incorporeal asset.
- Geographical Protection and Jurisprudence: Whether the asset has been afforded protection limited to a particular jurisdiction or it enjoys protection in multiple nation-states will impact the value of the asset. For instance, a well-known mark that has its presence and is protected in multiple countries will be valued significantly higher than an asset that is only protected in a certain jurisdiction.
- Miscellaneous Factors: Other factors such as tax implications, the industry in which the company operates, governmental supervision, investments, and the capital structure are some of the other attributes which can impact the value of the asset.
PURPOSES OF INTELLECTUAL PROPERTY VALUATION
Intellectual Property, an intangible or incorporeal asset is recognized as a legitimate asset on its financial statements by a company. Therefore, assets such as the company’s goodwill, its trademark, or any inventions which have received a patent registration must necessarily be valued. Secondly, if a company wishes to purchase or sell or license out an intellectual property, then a value must be ascribed to the asset in question. Furthermore, when two or more enterprises wish to merge or amalgamate, the intellectual assets of both entities need to be valued. What makes the valuation of Intellectual property more complex in this case is that valuation is to be considered in accordance with that of other tangible assets. Other areas for which IP assets are valued can be for the financing of a project or for securing a loan from a bank, ensuring the intellectual assets, efficaciously managing the overall asset portfolio, and ascertaining the tax implications for the company.
Intellectual Assets are valued from different perspectives based on the underlying cause for which they are being valued. For instance, International Accounting Standards now recognize and require intellectual assets to be valued at their cost in the initial stages. In the later or subsequent years, the asset is required to be valued at cost after any amortization and impairment charges. If an intellectual asset is acquired as part of an acquisition or a business combination, the asset’s cost is defined as its fair value at the acquisition date.
Intellectual Property and its valuation are, as evident from the Korero above, a complex exercise and warrants considering a plethora of factors. Thus, it is not uncommon to see that companies usually hire the services of a certified financial valuer. The company owning an intellectual asset may use different methods – depending on the stage in the life-cycle of the intellectual product, whether the asset is a stand-alone or a bundle of rights, and whether its acquiring value is to be gauged or the future economic benefits that can be expected from it are to be ascertained. In the former case, the company is more likely to use the cost approach, while in the latter case the company, to consider the future stream of cash flows, is likely to utilize the income method.
Intellectual assets bring with them a series of complexities and thus, a streamlined approach to ensure that such assets are valued efficaciously is required. In furtherance, the assumptions and projections must be incorporated in valuation models such that they consider all the factors and their impact on the value of intellectual assets.
2ND YEAR LLB
ILS LAW COLLEGE