What is Intellectual Property Valuation?

 

The practice of assigning a monetary value to a company's intangible assets is known as intellectual property valuation. Trademarks, copyright, and computer software are examples of intellectual property that the companies hold. Patents, industrial designs, and trade secrets are examples of innovative commercial products considered intellectual property.

As technology continues to impact the global economy, many businesses, particularly technology-based ones, are discovering that intellectual property (IP) now accounts for the majority of their value. As a consequence, laws governing the value of the intellectual property are changing all across the globe.

Why the Intellectual Property Valuation?

In recent years, the worldwide tax environment has changed dramatically, with new regulatory rules and greater scrutiny of intercompany transactions forcing many multinational corporations to reconsider their IP ownership structures. According to the Organization for Economic Co-operation and Development (OECD), misallocation of profits generated by intangibles has played a significant role in base erosion and profit shifting (BEPS), as many multinationals have transferred their intellectual property (IP) to low-tax jurisdictions to reduce taxes and maximize profits.

Several factors may necessitate determining the value of the intellectual property. One of the most common causes is that the company or owner of the intellectual property wants to sell it to another party. Another reason for intellectual property valuation is tax reasons when government organizations like the Internal Revenue Service (IRS) want to know how much the property is worth.

The new Statement of Financial Accounting Standard 142, Goodwill and Other Intangible Assets is altering how intellectual property is valued for accounting purposes. Intangible assets are now held on the balance sheet at cost, thanks to the implementation of this standard. Previously, these assets were depreciated over a predetermined length of time. The IRS also wants to know how the intellectual property owner came up with the value in the first place.

Situations when an IP Valuation is required?

Financing and bankruptcy are two additional circumstances in which an IP valuation is needed. Companies have internal valuation requirements and external sources that need to know how much intangible assets are worth. For example, if one of the assets is purchased or sold, IP valuation is required for the purchase or sale to be properly recorded in the company's financial records.

In general, IP valuation is concerned with the asset's fair market value. The fair market value (FMV) is the price at which a willing seller and a willing buyer would agree to swap the asset's ownership. To put it another way, fair market value is the asset's existing worth in a hypothetical scenario. Furthermore, for the intellectual value of the property to be as realistic as feasible, all parties engaged in the transaction must be aware of all facts regarding the intellectual property that are part of the intellectual property valuation.

For example, if a business patents an innovation that saves the company $1 million in U.S. Dollars (USD), the value is equal to the amount saved by the company. However, realistically, a business will not pay for a patent on an innovation that saves money. In actuality, the patent's worth is anywhere between $0 and $1 million U.S. Dollars (USD).