intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, co ...

valuation - or economic appraisal - is prepared, for example, for transactions -

merger Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...

and acquisition -

pricing Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acq ...

and strategic purposes,

financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...

and

collateralization In medicine, collateralization, also vessel collateralization and blood vessel collateralization, is the growth of a blood vessel or several blood vessels that serve the same end organ or vascular bed as another blood vessel that cannot adequate ...

tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...

planning and

compliance Compliance can mean: Healthcare * Compliance (medicine), a patient's (or doctor's) adherence to a recommended course of treatment * Compliance (physiology), the tendency of a hollow organ to resist recoil toward its original dimensions (this is a ...

, and litigation support. Intellectual property derives its value from a wide range of parameters such as usefulness,

market share Market share is the percentage of the total revenue or sales in a market that a company's business makes up. For example, if there are 50,000 units sold per year in a given industry, a company whose sales were 5,000 of those units would have a ...

barriers to entry In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or ha ...

, legal protection, profitability, industrial and

economic An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...

factors, growth projections, remaining economic life, and new

technologies Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, science, ...

, all of which will inhere in the valuation.

Approaches

The valuation process necessitates gathering much more information as well as in-depth understanding of

economy An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...

, industry, and specific business that directly affect the value of the

. Therefore, such information may be gathered from external and / or internal sources. Finally, the information is devoted to be turned into financial models to estimate the fundamental value of a particular type of intellectual property based on such adapted International Valuation Standards. *

Uniform Standards of Professional Appraisal Practice Uniform Standards of Professional Appraisal Practice (USPAP) can be considered the quality control standards applicable for real property, personal property, intangible assets, and business valuation Business valuation is a process and a set of proc ...

(USPAP) *

International Valuation Standards Committee The International Valuation Standards Council (IVSC) is an independent, not-for-profit, private sector standards organisation incorporated in the United States and with its operational headquarters in London, UK. IVSC develops international techn ...

(IVSC) (50 Countries) * US Generally Accepted Accounting Principles (GAAP) *

International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...

(IFRS) *

Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...

(FASB) The valuation analysts use numerous approaches in order to reach a reasonable indication of a defined value for the subject intangible assets on a certain date which is referred to as the valuation date. The most common approaches to estimate the fundamental or fair value of the intellectual property are defined as the following: # Cost approach: The

cost In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in whic ...

approach is based on the economic principle of

substitution Substitution may refer to: Arts and media *Chord substitution, in music, swapping one chord for a related one within a chord progression *Substitution (poetry), a variation in poetic scansion * "Substitution" (song), a 2009 song by Silversun Pic ...

. This principle states that an

investor An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...

will pay no more for an asset than the cost to obtain, by

purchasing Purchasing is the process a business or organization uses to acquire goods or services to accomplish its goals. Although there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly bet ...

or constructing, a substitute asset of equal utility. There are several cost approach valuation methods, the most common being the historical cost, replacement cost, and replication cost. # Market approach: The market approach is based on the

principle of

competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, ind ...

and equilibrium. These principles conclude that, in a free and unrestricted market,

supply and demand In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...

factors will drive the

price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...

of an asset at equilibrium point. Furthermore, it provides an indication of the value by comparing the price at which similar property has exchanged between willing buyers and sellers. Data on such similar transactions may be accessed in several public sources, including specialized royalty rate databases. #Income approach: This approach estimates the fair value of intellectual property by discounting the future economic benefits of ownership at an appropriate discount rate. #Direct approach: The direct approach is based on the current value of shares of

in an Intellectual Property (IP) Share Market.'Lyons-Weiler, J. 2009.', The Scientist
''Time for an IP Share Market?''. #Using the pay-off method on top of the four above mentioned methods is a way to enhance the valuation and analysis of intellectual property Collan, M. and Heikkilä, M., 2011, Enhancing Patent Valuation with the Pay-Off Method, Journal of Intellectual Property Rights, 16, 5, 377-384
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References

{{reflist

External links

List of intellectual property valuation articles compiled by the World Intellectual Property Organisation

Patent valuation with the pay-off method, downloadable article
Intellectual property law Valuation (finance)

Approaches

See also

References

External links