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HOW TO VALUE INTELLECTUAL PROPERTY ASSETS?

One of the biggest problems when an intangible asset is the subject of litigation or a transaction is to appraise its value, which is why intellectual property lawyers are often asked: “How much is my trademark worth?

“How much is my patent worth?” “How much is my name worth?” these questions, as we shall see, are not so easy to resolve, as they involve legal and accounting considerations.

Now, the most concise and didactic answer that can be given to the question of how to value intellectual property assets is contained in the International Accounting Standards (38 and 40) and FRS 13, in which the following factors are set out as determinants for valuing an intangible asset:

Firstly, it is important to assess whether the intangibles subject to this process can, in fact, be considered as assets, which is established through three criteria:

  • Identifiable: an asset is identifiable if (I) may separate from the commercial company by means of transfer agreements, e.g. (franchise, license, etc.) and (II) arises from contractual or statutory rights.
  • The entity must be able to control the intangible asset: this means that the entity must, at the same time, be able to exploit the asset and exclude third parties from the benefits it may yield. This is where it is of vital importance to initiate and complement the innovation, negotiation or registration processes with good legal advice, since a large part of the control that can be exercised over an asset will be of this type, either through obtaining property titles to protect it or through, for example, confidentiality and non-competition contracts to protect the knowledge that is originated or shared with employees of the organization.
  • Finally, the asset must produce future economic benefits in order to be considered as such.

The aforementioned standard states that in order to recognize an item as an intangible asset, it must comply with the requirements already listed and also meet the criteria for its recognition, which are as follows:

  • That the future economic benefits that have been attributed to the asset flow to the entity.
  • That the cost of the asset can be measured reliably: this is done on the basis of the aforementioned principle, taking into account that an intangible asset will initially be measured at its cost.

Once we have identified that we are dealing with an intangible asset, it is important to consider the concept of “Fair Value Standard”, which should be the guiding principle throughout the valuation process, because if it is not taken into account all the results obtained will lack real support, as defined by MFRS 13:

“Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

This tells us about measuring the intangible in an objective transactional context, that is, within its market, understood as a virtual exchange space delimited by temporal and territorial limits. Basically, if the participants of the specific business, in the pursuit of their own interests, are satisfied with the price of the transfer contract, there will be reasonableness in the studies of assumptions, approaches, methodologies, projections and components that are performed to determine the value of the intangible asset.

Finally, there is another concept that serves to bias the value attributable to this type of asset, namely “GOODWIIL” , a residual and non-accounting criterion that can be used to estimate the value generated by intangible assets not expressly addressed by IAS-38, which would be those that generally contribute great value to the company but cannot be separated from it (human capital, organization charts, etc.).

All of the above leads us to the following advice, by way of conclusion:

  1. Correctly identify whether the intangible asset can be considered as an asset, taking into account the cash flow they produce and whether they meet the above criteria.
  2. Risk a lot to gain a lot; but don’t do it alone, seek the right accompaniment, particularly if the conflict is related to a transaction or dispute. Expert advice will allow you to protect and exchange your assets under the best possible scheme.
  3. Please note that there are several valuation methodologies and that this exercise is strictly subjective and technically complex, and will potentially be subject to discussion by administrative entities, counterparties and third parties.
  4. Be strategic in the treatment of intangible assets, reconsider the financial models and plans according to which you currently manage them, look for financing plans and strategic alliances to exploit them efficiently.

So as you can see, valuation of intellectual property assets is not something to be taken lightly and of course, it is absolutely necessary to have expert advisors to guide you in these situations.

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