Republic of the Philipp ines

AURORA STATE COLLEGE OF TECHNOLOGY

Brgy.Zabali,3200 Baler, Aurora, Philipp ines

DEPARTMENT OF ENGINEERING

Assignment #1
Search the methods of valuing intellectual property and explain each method.

What is intellectual property valuation?

Intellectual property (IP) assets are part of the non-physical property of a business. They
are legally protected and that protection can be enforced in a court of law. IP assets can be
independently identified, are transferrable, and have an economic lifespan.

IP valuation is the process used to evaluate the arm’s length or fair market value of IP
assets. Intellectual property valuation helps to determine not only the value of the IP, but the true
value of the business as a whole. Because IP often represents the most valuable assets a business
possesses, calculating an accurate valuation of the business depends on accurately valuing its
intellectual property.

Why is intellectual property valuation becoming more important?

Establishing the value of IP is critical for determining sales, licensing, or transfer pricing
for IP assets, and for merger and acquisition (M&A) transactions. But IP valuation is
complicated, the result of the difficulty in valuing intangible assets and the changing regulations
governing IP valuation, which vary from one jurisdiction to another. The method by which a
company values its IP can also vary depending on whether the valuation is being performed for
accounting, tax, or transfer pricing purposes.
Why conduct an IP valuation?
In order to be able sell, license or enter into any commercial arrangements based on IP, you need
to be able to put a value on an IP asset. IP valuation is also beneficial in the enforcement of IP
rights, for internal management of IP assets, and for various financial processes.

Prerequisites
To be able to value an IP asset, the asset should meet the following conditions:
 It must be separately identifiable (subject to specific identification and with a
recognizable description)
 There should be tangible evidence of the existence of the asset (e.g. a contract, a license,
a registration document, record in financial statements, etc.)
 It should have been created at an identifiable point in time.
 It should be capable of being legally enforced and transferred.
 Its income stream should be separately identifiable and isolated from those of other
business assets.
 It should be able to be sold independently of other business assets.
 It should be subject to destruction or termination at an identifiable point in time.
 Republic of the Philipp ines
AURORA STATE COLLEGE OF TECHNOLOGY
Brgy.Zabali,3200 Baler, Aurora, Philipp ines

DEPARTMENT OF ENGINEERING

Valuation methods
The principal methods for valuing IP assets are:
 Income Method - The income method is the most commonly used method for valuing
intellectual property. It assigns a monetary value to the intellectual property asset based
on the amount of economic income method it is expected to generate, adjusted for its
current market value. This method is best suited for IP assets with positive cash flows,
cash flows that can be estimated with some degree of certainty for future periods, and
where a risk proxy can be used to obtain discount rates.
 Market method - The market method is based on a comparison with the actual price
paid for the transfer of rights to a comparable intellectual property asset under
comparable circumstances. Because this method is simple and based on market data, it is
frequently used to establish approximate values for use in determining royalty rates, tax,
and inputs for the income method.
 Cost method - The cost method calculates the cost of a similar (or exact) IP asset to
determine the value of an IP asset. When the IP asset can be easily replicated and the
economic benefits of the asset cannot be accurately quantified, the cost method is
especially useful. This method does not take into account any wasted costs, nor does it
take into account any unique or novel characteristics of the asset.

Different intellectual property valuation methods can produce wildly disparate results, which
is why it is critical for companies involved in intercompany IP transfers to select the most
appropriate method. How do you know which one to pick? According to the OECD guidelines,
multinational organizations must choose the most reliable method for IP valuation, similar to
how transfer pricing methods are used to determine fair pricing for related-party transactions.
The most dependable method is not necessarily the one with the best financial outcome for the
company, but rather the method that is fair to both parties in the IP transaction—and defendable
if tax authorities question it.
Many factors must be considered when deciding on the best intellectual property valuation
method to use. Which approach is considered most reliable is determined by the availability of
data, the form of IP being valued, and the market structure. For example, if evidence to execute a
market method is not readily available (e.g., if there are no royalties in the industry that can be
considered equal to what is being valued), the market method is less accurate. Similarly, the
income approach will be regarded as less effective without an accurate estimate of potential IP-
generated earnings. Multinational corporations must weigh all of these variables to decide which
intellectual property valuation model would produce the most accurate results.