- Intellectual property valuation
Valuation is considered as one of the most critical areas in
finance; it plays a key role in many areas of financesuch as buy/sell, solvency, mergerand acquisition. Furthermore, intellectual property(IP) valuation is considered as one of the most important managementstrategic issues.Who|date=January 2008
intellectual propertyis an intangible asset, that is, it is intangible as well as it cannot be defined or specified by its physical parameters. It is created by human intellectual or inspirational activity. Therefore, the intellectual property must be defined in some discernible method to be protected by the laws.
As a subset of intangible assets, the intellectual properties are classified into particular
categoriesin which they have some similarities in terms of nature, feature, method of creation, and legal protection. The most widely accepted classification among the academics as well as the valuation analysts Who|date=January 2008 is:
Creative( e.g., trademarks, copyright, computer software)
Innovative( e.g., patents, industrial designs, trade secrets)
There are numerous individual reasons or motivations for conducting an
intellectual property valuationor economic appraisalanalysis. It is prepared, for example, for transactions, pricingand strategic purposes, financing securitizationand collateralization, taxplanning and compliance, and litigations support.
Factors driving the intellectual property
The intellectual properties derive their value from a wide range of significant parameters such as
market share, barriers to entry, legal protection, IP’s profitability, industrialand economicfactors, growth projections, remaining economic life, and new technologies.
The valuation process necessitates gathering much more information as well as in-depth understanding of
economy, industry, and specific business that directly affect the value of the intellectual property. Therefore, such information may be gathered from external and / or internal sources. Finally, the information is devoted to be turned into financial models to estimate the fundamental value of a particular type of intellectual property based on such adapted International Valuation Standards.
Uniform Standards of Professional Appraisal Practice(USPAP)
International Valuation Standards Committee(IVSC) (50 Countries)
US Generally Accepted Accounting Principles(GAAP)
International Financial Reporting Standards(IFRS)
Financial Accounting Standards Board(FASB)
The valuation analysts use numerous approaches in order to reach a reasonable indication of a defined value for the subject intangible assets on a certain date which is referred to as the valuation date. The most common approaches to estimate the fundamental or fair value of the intellectual property are defined as the following :- 1. Cost Approach: The
costapproach is based on the economic principle of substitution. This principle states that an investorwill pay no more for an asset than the cost to obtain, by purchasingor constructing, a substitute asset of equal utility. There are several cost approach valuation methods, the most common being the historical cost, replacement cost, and replication cost.
2. Market Approach: The
marketapproach is based on the economicprinciple of competitionand equilibrium. These principles conclude that, in a free and unrestricted market, supply and demandfactors will drive the priceof an asset at equilibrium point. Furthermore, it provides an indication of the value by comparing the price at which similar property has exchanged between willing buyers and sellers.
3. Income Approach: This approach estimates the fair value of intellectual property by discounting the future economic benefits of ownership at an appropriate discount rate.
Economics and patents
International Valuation Standards Committee
* [http://www.wipo.int/sme/en/documents/valuationdocs/index.htm This is list of intellectual property valuation articles compiled by the World Intellectual Property Organisation]
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