Valuation of IP

Summary of key concepts

• IP is a specialised type of intangible asset that enjoys special legal recognition and protection. As such, similar valuation methods and economic analysis procedures apply to IP, as do intangible assets.
• To be able to separately recognise, value and record your IP, you must be able to:
  - Identify your IP as a separate, stand-alone asset;
  - Sell or transfer your IP;
  - Protect your IP; and
  - Recognise your IP is enduring in nature.
  
• IP is recorded on the basis of fair value, although the process of valuing IP is not a quick or easy task.
• There are a number of advantages in separately identifying your IP. These include providing a true reflection of business value, providing a tool to measure and manage key assets, providing security for lenders, gaining tax benefits, and reducing goodwill in acquisitions. Despite this, many Australian companies neglect to value their IP.
• The valuation of IP is gaining increasing recognition. There are a number of examples of transactions both in Australia and overseas where the value of IP, particularly brand names and trademarks, has been a major factor in the determination of purchase consideration.
• According to Australian Accounting Standards, most intangible assets may only be recognised on acquisition. Identifiable intangible assets will be recorded at their fair values on the acquisition date. Goodwill is the residual of the cost of acquisition incurred by the entity over the fair value of the identifiable net assets acquired.
• If it can be established that the IP or other identifiable intangible asset does not have a depreciable amount, that asset need not be amortised.
• The AASB is currently considering revising the current Australian Accounting Standards so that they are more in line with international standards.
• There are numerous methods appropriate for the appraisal of value for IP. The following are the most commonly used approaches:
  - Relief from royalty;
  - Excess profits or notional maximum royalty payable;
  - Capitalisation of earnings;
  - Net present value of incremental cash flows;
  - Gross profit differential;
  - Premium sales price;
  - Market based;
  - Comparable market transactions;
  - Cost based;
  - Brand Strength; and
  - Real Options.