The Importance of Intellectual Property Valuations

property valuation accountants

By Peter Haley 

property valuation accounting firm

Did you know that currently approximately 85% of the value in US S&P 500 stock market relates to intangible assets and that 40 years ago intangibles made up less than 20%?  Australia is trending the same way.  Most businesses don’t recognise their intangible assets on their balance sheets, hence the difference between the market capitalisation value of a listed company and its net asset backing.  Given their contribution to the overall value of many businesses it is imperative to correctly value the intangible assets if you are going to correctly value the business and the entity conducting the business.

Intangible assets consist of identifiable (intellectual property) and unidentifiable (goodwill).

Traditionally intangible assets are referred to under the broad term of goodwill rather than specifically identify and value individual components.  The reasons for placing a dollar value on individual items of IP include:

  • understanding the drivers of the business
  • secure financial investment
  • establish the amount of damages to seek for infringements of the IP
  • meet legal and accounting standards requirements
  • meet taxation liabilities, e.g. in the case of a restructuring
  • potential sale/purchase of the individual item of IP

Individual items of intellectual property (IP) include:

  • patents
  • copyrights
  • trademarks and branding
  • agreements
  • licenses
  • quotes
  • core technology
  • customer lists
  • systems, processes and formulae / confidential information
  • regulatory approvals
  • data
  • designs
  • software code

In order to value an item of IP it must be:

  • separately identifiable
  • protected (or able to be)
  • transferrable (if to be separately valued)
  • enduring

IP is typically valued under a market value standard of value, i.e. the estimated amount for an item should exchange on the date of valuation between a willing buyer and willing seller in an arms-length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

There are 3 fundamental steps to valuing IP:

  1. Determine the source of the IP
  2. Determine the key benefits associated with the IP
  3. Select the most appropriate approach

IP is typically valued under one of the following methodologies:

  • cost to produce / replacement cost
  • earnings based (capitalisation of profits generated by the IP, value of the royalty stream that could be derived from licencing the right to use the IP)
  • market approach (comparable transactions)

Therefore the valuation methodology options are no different to those employed in valuing businesses generally.

In valuing IP common questions that arise include:

  • What were the costs expended to develop the IP and were those costs reasonable?
  • How identifiable is the IP?
  • Is the IP developed and autonomous (e.g. software)
  • What are the cashflows associated with the IP?
  • What are the future cashflows?
  • Can the cashflows be directly attributed to the IP?
  • What would the royalties be from licensing the IP?
  • Is there a market for the sale of the IP?
  • What are the strengths and life of the item of IP?

The cost, earnings and market approaches have benefits and drawback.  Cost may be readily determined but may not reflect the true economic value.  Whilst the earnings and market methodologies might more accurately determine the economic worth they are typically more difficult to determine due to lack of data and rely on subjective judgements by the valuer in many cases.

Want to know more?

If you would like to know more about the issues raised in this article, please contact Forensic Services Director Peter Haley.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

 

 

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