Published by Vinay Pandya
Compiled by Neel Vora
Asset- An asset is a resource that is under the control of an entity for eg. a company or a business as a result of historical occurrences/ past events and from which it is anticipated that it will receive future economic benefits.
The non-physical property of a business is its intangible assets. They were historically regarded as a company’s “Goodwill,” or the price paid for a company that was higher than the fair market value of all of its identified net assets. Numerous intangible assets were included under “Goodwill,” including consumer loyalty, a strong brand name and reputation, employee caliber and morale, and IP assets.
The fact that intellectual property assets are created by law sets them apart from other intangible assets, which are a subset of intangible assets. As a result, IP assets are protected by law and are subject to legal enforcement. These are transportable, independently identifiable, and have economic value (in contrast to their legal life, which is generally longer than their economic life). The fact that IP assets are created by law sets them apart from other intangible assets, which are a subset of intangible assets. As a result, IP assets are protected by law and are subject to legal enforcement. These are transportable, independently identifiable, and have economic value (in contrast to their legal life, which is generally longer than their economic life).
The Intellectual Property Assets are as follows:
Intellectual property protection is critical to fostering innovation. Without protection of ideas, businesses and individuals would not reap the full benefits of their inventions and would focus less on research and development. Making the correct use of IPR has proven to be beneficial for big brands across the globe.
One major example of Trade Secrets is Coca-Cola. Its success is considered to be a result of its safely guarded recipe, which produces a distinctive and refreshing soft drink. The company has given tremendous effort in keeping this recipe a secret and till now it is one of the closely guarded and best-kept trade secrets in the business world.
A successful example of Trade Mark is Amazon. “Amazon” is a trademark that is used by them for many of their goods and services. Trademarks are often displayed on Amazon’s Product Detail Pages in the form of product and brand names listed on a Product Detail Page. It has benefited Amazon and the brands that register too.
IP valuation is a process to determine the monetary value of IP assets. In order to be able to sell, licence or enter into any commercial arrangements based on IP, you need to be able to put a value on an IP asset. Intellectual property rights valuation or IPR Valuation is one of the most critical areas of finance that comes into play during the sale and purchase of companies and during solvency, merger, and acquisition transactions. IP valuation is also beneficial in the enforcement of IP rights, for internal management of IP assets, and for various financial processes. The more critical this process is, the more complicated it gets. Since it has no physical presence, quoting its true value becomes very difficult. Moreover, another influencing factor is ever-changing regulations that vary from one jurisdiction to another.
There are various methods for IP valuation. It is broadly divided into three categories, i.e., Income Method, Market Method, & Cost Method. Further classification is shown below:
Income approaches focus on the future cash flow derived from a particular piece of IP. As with all income valuations the need to accurately forecast future cash flow is of paramount importance. This is the most common technique used in Intellectual Property valuation. The following variables are needed when using an income approach:
- An income stream either from product sales or licensure of the patent
- An estimate of the duration of the patent’s useful life
- An understanding of patent specific risk factors and incorporating those into the valuation
- A discount rate.
Discounted Cash Flow Method:
A fundamental method of determining the value of a patent that accounts for the actual contribution of the intellectual property to the profitability of the product is the discounted cash flow method. This method is used for valuation of all types of income producing assets. The discounted cash flow method evaluates the future stream of revenue net of the relevant incremental costs from using the intellectual property, and compares that to the present discounted value of cash flow from using the next best alternative. This yields the maximum royalty that a manufacturer would be willing to pay for the right to use the patented technology.
Relief from Royalty Method
Relief from royalty is based on deprival value theory and looks at the amount of income that a company would be “deprived” of, if it did not own the intellectual property in question but was required to rent it from a third-party instead. The royalty represents the rental charge, which would be paid to the licensor if this hypothetical arrangement were in place.
This method is useful because the market size and expected market share are generally accessible information. In addition, the method is also intuitive in that the value of a property is defined as a rental charge other companies would pay to use it. One significant drawback of the relief from the royalty method is that a rental charge can always be assumed, when in reality one may never materialise. The plain fact is that some patents may be of little value and thus are not worthy of a rental charge.
This method uses the market behaviour as a base to quote a value to the IP of a company. The price paid for the transfer of similar rights in another comparable transaction is used to influence the IP valuation of another transaction.
To do a valuation with this method, one needs to have:
- An active market (price information, arm’s length)
- An exchange of an identical IP asset, or a group of comparable or similar IP assets
- If the IP assets are not perfectly comparable, variables to control for the differences
In this valuation technique, the valuation of an IP is conducted by enumerating the cost of a similar IP asset. This method comes in handy when the IP asset in question can be easily reproduced and its economic benefits cannot be easily quantified. The cost method is generally the least used method as, in most cases, it is considered suitable only as a supplement to the income method (if the valuation is not for bookkeeping purposes).The method is normally used in situations where the subject IP is currently not generating any income.
In an era of globalisation, IP rights must be protected and regulated at an international level. The U.S. Department of State explains why countries protect inventions; literary and artistic works; and symbols, images, names, and designs used in commerce on a Web site it dedicates to this subject. Countries protect IP “because they know safeguarding these property rights fosters economic growth, provides incentives for technological innovation, and attracts investment that will create new jobs and opportunities for all their citizens’. For eg: Harry Potter is one of IP’s most protected fictional characters, it falls under the contour of both trademark and copyright laws. Harry Potter was the key for JK Rowling to open her account in “Gringotts Wizarding Bank” filled with wealth forever. This undoubtedly encourages everyone to create original work using their human intellect but also teaches them the importance of recognizing the IP rights that are associated with their work. Without recognizing the IP rights surrounding Harry Potter, JK Rowling could not be one of the most loved authors of all time.
Not only does it help in effectively exploiting the intellectual property (through licensing, securitization, etc. and raising money for future investments, which is a boon for start-ups, low cash sectors and small enterprises, it also solidifies the relevance and economic strength of IP in this age.
Despite having various purposes and benefits, the growth of this concept and its usage have been disappointingly low in India, especially in MSMEs and the agricultural sector, two groups that could immensely benefit from the valuation of their IP, and gain a much stronger position in the market, as far as bargaining power is concerned. Thus, one of the key focuses, moving forward must be to educate and change the mindset of (at least) the target groups on the monetary relevance of IP and IP valuation.