Basics on Intellectual Property Valuation - Definition - Qualitative and Quantitative IP Valuation Tehran December 11, 2017 Christopher M. Kalanje Counsellor, SMEs and Entrepreneurship Support Division, WIPO Christopher.kalanje@wipo.int
2 Road Map Important terms in IP Valuation Why Perform IP Valuation Qualitative IP Valuation Quantitative IP Valuation Take Home
3
Definition: IP Valuation Basic Traditionally IP assets were treated as Goodwill Advent of knowledge economy and high market value of companies as opposed to book value enhanced interest on value of IP
5 Intangible Assets and Enterprise value Source: Annual Study of Intangible Asset Market Value from Ocean Tomo, LLC http://www.oceantomo.com/2015/03/04/2015- intangible-asset-market-value-study/
Important terms in IP Valuation 6 Asset: A resource with economic value that is owned or controlled with the expectation of gaining future benefits Assets can be bought or created Book value: The value at which an asset is carried on a balance sheet Buying price depreciation or amortaization Goodwill: An intangible asset that arises when one company is purchased by another company. An amount paid in excess of book value (usually goodwill represents the value assigned to intangible assets that cannot be identified with fair value assigned to specific intangible assets
7 Important terms in IP Valuation Fair value: sale price agreed to by a willing buyer and seller Intangible Asset: is an asset that is not physical in nature. e.g. goodwill and brand recognition, business methodologies, manufacturing practices, supply contracts, distribution networks, intellectual property
8 Important terms in IP Valuation International Accounting Standard Board: an independent group of experts with an appropriate mix of recent practical experience in setting accounting standards, in preparing, auditing, or using financial reports, and in accounting education IASB sets IFRS Standard; IFRS Standards are required or permitted in 138 jurisdictions IFRS Standards are required for domestic public companies in Iran http://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/
9 Important terms in IP Valuation Liability: A company s legal debts or obligations that arise during the course of business operations Net Present Value: The difference between the present value of cash inflow and the present value of cash outflow Tangible assets: An asset that has a physical form e.g. land, vehicles, equipment, inventory, stocks, bonds and cash. Working Capital: Current assets, net of current liabilities, required to keep an organization operational
10 Qualitative and Quantitative IP Valuation The importance of IP Audit to enterprises IP valuation provide a basis of IP Assets value There are three basic IP Valuation methodologies
11 Qualitative and Quantitative IP Valuation A relatively new area Process of determining value or worth of an asset Often combines objective and subjective considerations Context
12 Qualitative and Quantitative IP Valuation IP valuation triggers include Sale or Purchase of IP Assets Licensing Merger & Acquisition Cost saving, IP asset donation Litigation Joint venture arrangements/strategic alliances Financial Reporting
13 Qualitative IP Valuation Provides guide for rating or scoring IP Assets Analyzes current or intended use of IP The following considerations are important Description of IP asset to be valued The risk profile of the IP Confirm remaining life of the IP or avearge remaining life of the portfolio If a patent, analyze the breadth of patent claim (Narrow or broad) Strength of the existing portfolio
14 Qualitative IP Valuation How is the subject technology differentiated in the market place Complete and mandated due diligence steps Indication of the quality of patents and technology Need to undertake an IP Audit
15
16 Quantitative IP Valuation International Accounting Standard (IAS) 38 prescribe the accounting treatment of intangible assets not dealt in other standards. The Characteristics are Separable; Arises from contractual or other legal rights; Has probable future economic benefit; Its cost can be measured reliably
17 Quantitative IP Valuation Final valuation would depend on the following basic premises of value (How will the asset be used) Value in exchange: worth of the underlying IP asset in terms of its capacity to be exchanged in terms of money Value in continued use: worthiness of the underlying IP asset to its owner on the basis that it continues to generate income to the owner
18 Quantitative IP Valuation Acquisition value: strategic potential of the underlying IP asset e.g. uses in M & A Value in place (best use concept): worthiness of the underlying IP asset as it is. i.e. the said IP asset is not in current use in the production of income. Intended to secure and exploit future growth opportunities
19 Quantitative IP Valuation Quantitative Valuation may be broadly divided into two Static models Estimate value of intellectual assets at a point in time
20 Quantitative IP Valuation Dynamic models Take into consideration the temporal difference in the accumulated intellectual assets (e.g. time value of money and riskiness of the forecast cash flow) Value investments in intangibles each at a time
21 Quantitative IP Valuation Basic Methods Cost Approach: Key assumption there is direct correlation between cost and value It Estimates the value of underlying IP asset basing on History i.e. how much was the cost of creating and developing the underlying IP Reproduction i.e. how much would it cost to reproduce/buy an IP asset of similar utility
22 Quantitative IP Valuation Market Approach (sales comparison approach): Based on the value of similar or comparable assets that have been exchanged, at arm s length, in active market
23 Quantitative IP Valuation Income Approach: Based on the income-producing capability of underlying IP asset Cash flow method Relief from royalty method Incremental profit/excess earning method
24 Quantitative IP Valuation Some limitations of cash flow methods Difference in level of risk overtime is not reflected Some methods are time-consuming and involve costly calculations Clarity is needed on use of risk free discount rate and opportunity cost of capital in determining NPV
25
26 Take Home Important to understand common terms used in valuation of IP IP Valuation is relatively new and evolving subject IP valuation provide a basis of IP Assets value Three basic IP Valuation methodologies The Cost method; Market method and Income method
27 Attribution All images: http://www.pixabay.com