Intellectual Property
Knowledge underlies the creation of value. Successfully utilizing that knowledge contributes to
the progress of society. Knowledge in business is manifested as intellectual capital, which includes human capital, structural capital, intellectual assets and intellectual property. Human capital is a collection of experience, skill and education of a company.
Structural capital, which includes intangible assets such as process documentation and theorganizational structure itself, is the supportive infrastructure provided to human capital, whichencourages human capital to create and leverage its knowledge. Intellectual assets are thecodified physical descriptions of specific knowledge that can be owned and readily traded. Intellectual assets receiving legal protection become intellectual property.
There are five formsof intellectual property: patents, copyrights, trademarks, trade secrets, and know-how.Companies often fail to capitalize on the opportunities offered by their intellectual propertiesbecause they have never identified all the intellectual properties they own. We have identifiedover 90 types of intellectual properties and intangible assets that a company may own. Anillustrative list has been included as Exhibit I, in order to assist companies to begin the process ofidentifying all of their intellectual properties.
Challenges in Valuing Intellectual Property One of the major difficulties in valuing intellectual property or negotiating licensing agreementsis determining the market royalty rates that should be used. Most consultants traditionallydevelop royalty rates based on three traditional sources: first, from the client, if the client has itsown negotiated licensing agreements; second, from surveys performed by various professionals, generally in cooperation with trade associations; and third, from judicial opinions (court cases) which vary greatly depending on individual fact patterns. The valuer should augment thesetraditional tools through a search of public documents for licensing agreements. The authorshave identified over 1,800 transactions listed in public documents that will allow the reader todocument royalty rates and terms actually used by companies. This direct market evidence is themost compelling evidence available. When analyzing an intellectual property to select an appropriate royalty rate for licensing, manyfactors must be considered. Exhibit II entitled, Checklist of Factors to be Considered inEstablishing Royalty Rates has been included to provide a basic guideline of factors to beconsidered.
Managing the Millennium Intellectual capital is the value generator of the future. To sustain growth, companies in thefuture will have to:. Identify the intellectual capital available to them;. Measure the value of the intellectual capital components;. Structure the means of delivery and potential leverage with otherpotential intellectual capital within the company;. Manage the cash flow and the distribution channels of theintellectual capital;. Protect the intellectual capital by converting it to intellectualproperty;. Manage the intellectual property registrations on a world widebasis;. License intellectual property to and from third parties; and. Assure compliance with all agreements.
Distinction Between Intellectual Property and Intangible Assets Intellectual property is a subset of intangible assets. Intellectual properties, specifically patents,copyrights, trademarks and identifiable know-how, satisfy the definitional requirements ofintangible assets. As will be seen later, valuation methodologies applicable to intangible assetsalso apply to intellectual property. Intangible assets are long - lived assets used in the production of goods and services that, unlikefixed or tangible assets, lack physical properties. Intangible assets represent certain long- livedlegal rights or competitive advantages developed or acquired by a business enterprise. Intangibleassets differ considerably in their characteristics and useful lives and are classified in theFinancial Accounting Standards Board as follows: Identifiability - Patents, copyrights, franchises, trademarks, and other similarintangible assets that can be specifically identified with reasonably descriptivenames.Manner of Acquisition - Intangible assets that may be purchased or developedinternally. Determinate or Indeterminate Life - Many intangible assets that have adeterminate life established by law or by contract or economic behavior.Transferability - The right to a patent, copyright or franchise that can beidentified separately and bought or sold.For valuation purposes, the intangible assets must be readily identifiable and capable of beingseparated from the other assets employed in the business. An intangible asset can be defined byreferring to practical considerations such as whether it is supported by a contract, or by referringto whether it can be economically measured objectively with a determinate life. Intangible assetsthat exist but cannot be specifically identified are included in goodwill.
Attributes of Identifiable Intangible Assets For an identifiable intangible asset to exist from a valuation or economic perspective, it shouldpossess certain attributes. Some of the more common attributes include the following:
• It should be subject to specific identification and a recognizable description.
• It should be subject to the right of private ownership.
ere should be some tangible evidence or manifestation of the existence of theintangible asset (e.g., a contract, a license, a registration document, a computerdiskette, a set of procedural documentation, a listing of customers, recorded on aset of financial statements, etc.)
• It should have been created or have come into existence at an identifiable time (ortime period) or as the result of an identifiable event.
• It should be subject to being destroyed or to a termination of existence at anidentifiable time (or time period) or as the result of an identifiable event.In other words, there should be a specific bundle of rights (legal and otherwise) associated withthe existence of any intangible asset.For an identifiable intangible asset to have a quantifiable value from an economic analysis orappraisal perspective, it should possess certain additional attributes. Some of the more commonadditional attributes include the following:
• The intangible asset should generate some measurable amount of economicbenefit to its owner; this economic benefit could be in the form of an incomeincrement or of a cost savings; this economic benefit is sometimes measured bycomparison to the amount of income otherwise available to the intangible assetowner (e.g., the business) if the subject intangible asset did not exist.
• This economic benefit may be measured in a number of ways, such as net income,net operating income or net cash flow.
• The intangible asset should be able to enhance the value of the other assets withwhich it is associated; the other assets may encompass all other assets of thebusiness, including: tangible personal property, tangible real estate, or otherintangible assets.Some of the more common categories of intangible assets most commonly valued are as follows (see Exhibit 1 for a more detailed list):
• Patents - product or process;
• Brands - consumer goods. brands, trademarks, corporate names;
• Publishing Rights - magazines, books, mastheads, film and music rights;
• Intellectual Property
Unidentifiable Intangible AssetsEconomic phenomena that do not meet these specific attribute tests typically do not qualify asidentifiable intangible assets. Some economic phenomena are merely descriptive in nature. They may describe conditions that contribute to the existence of - and value of - identifiableintangible assets. But these phenomena do not possess the requisite elements to distinguishthemselves as intangible assets. For a typical business, descriptive economic phenomena that do not qualify as identifiableintangible assets may include:
• High market share
• High profitability
• General positive reputation
• Monopoly position
• Market potential and
• Other economic phenomena.
However, while these descriptive conditions do not qualify as identifiable intangible assetsthemselves, they may indicate the existence of identifiable intangible assets that do havesubstantial economic value. They are most often referred to collectively as goodwill..
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