Intangible Assets and Intellectual Property

Intangible Assets

and

Intellectual Property

High Level Task Force

on Valuation and Capitalization

of Intellectual Assets

International Standards

Most Commonly Used/Referenced Standards

Uniform Standards of Professional Appraisal Practice

(USPAP)

RICS Appraisal & Valuation Manual (Red Book)

(Royal Institute of Chartered Surveyors)

The European Group of Valuer’s of Fixed Assets

(Blue Book) (TEGOVOFA) (9 European Countries)

International Valuation Standards Committee

Intangible Asset

The assets are fulfilling an economic demand for the

service it provides or which it houses.

The assets have a significant remaining useful life

expectancy.

Responsible ownership and competent management are

expected.

Continuation of the existing use by present or similar

users is practical.

Functional utility of the assets for their present use is

given due consideration.

Valuation Methods

Cost Approach

Market Approach

Income Approach

Valuation Methods

Cost Approach

The cost approach considers the value of an asset

to a knowledgeable, prudent investor, to be that

amount currently required to create an asset of

equal utility, less measurable depreciation

.

Valuation Methods

Cost Versus Value

Cost is not equivalent to value. If economic

benefits are not earned from ownership of the

asset, the value will be

low

regardless of the

amount of investment required to develop the

asset.

On the other hand, if economic benefits are

earned, then value should be significant.

Valuation Methods

Sample of Cost Approach - Computer

Software

Valuation Methods

Market Approach

The market approach is used to estimate value

through analysis of recent sales of comparable

assets, businesses, or investment interest.

Valuation Methods

The existence of an active market

Past transactions of comparable intangible

assets

Sufficient access to market information

Arm’s length transactions between

independent parties

Requirements for Application of the Market

Approach to Intangible Assets or Intellectual

Property:

Valuation Methods

Example of Market Approach

-Leasehold Interest Valuation

Year 1 2 3 4

Warehouse Square Footage 35,000 35,000 35,000 35,000 Annual Base Rent Per Sq. Ft. $3.00 $3.00 $3.00 $3.00 Contract Annual Base Rent as Adjusted (1) $3.00 $3.105 $3.214 $3.326 Annual Market Base Rent Per Sq. Ft. $5.50 $5.50 $5.50 $5.50 Market Base Rent As Adjusted (1) $5.50 $5.693 $5.892 $6.100 Rental Advantage Per Sq. Ft. $2.50 $2.588 $2.678 $2.774 Annual Rental Advantage $87,500 $90,580 $93,730 $97,090 Discount Rate @ 12% .945 .844 .754 .673 Present Value $82,688 $76,450 $70,676 $65,342

Total Present Value $291,156

Concluded Value $295,000

Valuation Methods

Income Approach Defined

Income approach is a general term that

implies future monetary benefits that accrue

from the ownership of an asset.

Valuation Methods

The future benefits of ownership must be

measurable in monetary terms

Discounting future monetary benefits to

present value at a discount rate commensurate

with the degree of risk associated with the

realization of the projected benefits

Can be indefinite, or have a limited life

Income Approach Applied to Intangible

Assets or Intellectual Property:

Present Value

Income received in the future is worth less than

current income

Discounting the income stream derived from an

intangible asset or intellectual property is generally

done considering an estimate of the Weighted

Average Cost of Capital (WACC) of the business

Present Value

Estimating the cost of equity

Estimating the cost of debt

Establishing target market value weights

for the capital structure

Weighted Average Cost of Capital

(WACC) requires:

Present Value

Risk is the degree of certainty or uncertainty to

the realization of expected future returns

Intangibles are generally riskier than businesses

Investors in risky assets require some additional

return above the WACC rate as compensation for

bearing the risk - equity based returns are usually

considered

Present Value

As derived from publicly traded

companies, e.g. Capital Asset

Pricing Model (CAPM)

Venture Capital

Present Value

Ranges of Equity Return Requirements:

Start-up

50 - 75 %

First

40 - 60 %

Second

35 - 50 %

Third

30 - 50 %

Fourth

25 - 40 %

Asset Remaining Life

Contractual terms

Mortality studies based on:

Retirement or turnover studies

Statistical models (Iowa Curves)

Product Life Cycle

Industry Practice

Buyer/Seller Expectations

Technological Changes

Legal (Laws)

Measuring Economic Life For Intangible Assets:

Appraisers rely on the following as a means

Patent Valuation

Relief From Royalty Approach

Year Projected Revenues (000) Relief From Royalty @ 1% (000) After-Tax Relief From Royalty (000) Discount Rate @ 14% Present Value (000) 1998 $185,900 $1,859 $1,115 0.937 $1,045 1999 197,100 1,971 1,183 0.822 972 2000 208,900 2,089 1,253 0.721 904 2001 221,400 2,214 1,328 0.632 840 2002 234,700 2,347 1,408 0.555 782 2003 248,800 2,488 1,493 0.486 726 2004 263,700 2,637 1,582 0.427 676 2005 279,500 2,795 1,677 0.374 627 2006 296,300 2,963 1,778 0.328 583 2007 314,100 3,141 1,885 0.288 543 Total $7,698 Rounded $7,700

Patent Valuation

Cost Savings Approach

Year Projected Volume

(000)

Savings per unit of volume ($.10) After-Tax Savings ($000) Discount Rate @ 20% Present Value(000) 1998 100,000 $10,000 $6,000 0.833 $4,998 1999 150,000 15,000 9,000 0.694 6,246 2000 175,000 17,500 10,500 0.579 6,080 2001 185,000 18,500 11,100 0.482 5,350 2002 190,000 19,000 11,400 0.402 4,583 2003 200,000 20,000 12,000 0.335 4,020 2004 210,000 21,000 12,600 0.279 3,515 2005 210,000 21,000 12,600 0.233 2,935 2006 210,000 21,000 12,600 0.194 2,444 2007 210,000 21,000 12,600 0.162 2,041 Total $42,212 Rounded $40,000

Representative Listing of Types

of Intellectual Property Valued

Patented Know-how

Unpatented

Know-How

In-Process Research

& Development

Formulas

Technology Licenses/

Rights of Use

Trade Secrets

Representative Listing of Types

of Intangible Assets Valued

Leasehold Interests

Contracts

Customer Relationships/Lists

Distributor Network

Distribution Network

Franchises

Non-Compete Agreements

Employment Contracts

Favorable Financing

Workforce

Trademarks

Tradenames

Computer Software

Licenses

Copyrights

Valuation in Emerging

Market Economies

Service with short history

Insufficient consistency in

applying valuation standards

Lack of valuation experience

D

Positive, but also negative

Suggested UNECE Actions

Create awareness of Governments

of importance of proper intangible

asset valuation and its impact on

development of national economy

Support program to train local

appraisers to increase the reliability

and quality

⇒

Established in 1896

⇒

Yearly Revenues of approx. 95 Million US $, out of

which 65% is in the USA, 35% International

⇒

Yearly Assets Valued for more than 360 billion €

⇒

59 Offices in 20 Countries, out of which 34 are

outside the continental USA

⇒

References covering 85% out of the 1,000 World’s

Largest Companies

⇒

Management/Employee Owned Company

American Appraisal

American Appraisal

Associates

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