IP as a corporate Asset : valuation and Accounting challenges

Abstract

The recognition of the rights attached to some forms of intellectual property is a contested domain in legal frameworks such as trade related aspects of intellectual property rights agreement.

In this article, we explore the discourse of accounting in the recognition of intellectual property as an asset according to the new International accounting standards.

Introduction

In today’s knowledge – driven economy, valuing corporate asset is challenged by its intangible nature. The uncertainty of future cash flows,and the difficulty in finding comparable market. IP including Patents, copyright, Trademark, Trade secret and has become a core business asset, particularly in the digital economy.

Types of Intellectual property under Intellectual property rights (IPR)

1. Patents —- patents are legal rights granted to investors , allowing them exclusive use of an invention for a set period.It is covered under patent Act,1970.They can range from technological innovations to unique processes that offer a competitive edge.
2. Trademarks —- trademark are identifiers like logos, brand names, that distinguish a business product or services from competitors. For example – well recognised trademark such as Apple logo, Nike logo and many others, which are protected under Trademark Act, 1999.
3. Copyrights —- copyright protect original work of author including literature,music, dramatic work, artist work, cinematographic work and software. It is protected under copyright Act, 1957.
4. Trade secret —- Trade secret refers to proprietary knowledge such as formulas, recipies. Trade secrets are protected through confidentiality agreements and legal framework.

What is IP valuation: Types of Assets

Definition of an asset

An asset is a resource that is controlled by an entity (such as a company or as a business) as a result of past events. (For example – purchase or self creation)and from which future economic benefits are expected.

Types of Asset

Fixed assets: Fixed assets which include plant, machinery and equipment, land and buildings, vehicles and other tangible property used by a business. Fixed assets considered to be the brick and mortar of a business and were seen as the main contributors to its wealth/ value.

Value of an IP asset

The value of an IP asset derived, in essence, from its ability to exclude competitors from a particular market. The economic right is based on exclusivity of use , that is the ability to control the use of the IP asset.

For an IP asset to have a quantifiable value, it should:

•  Generate measurable amount of economic benefits to it’s owner/ user.
•  enhance the value of other assets with which it is associated.

IP valuation methods: cost methods

The intention is of establishing the value of an IP asset by calculating the cost of developing a similar IP asset either internally or externally.

It seeks to determine the value of an IP asset at a particular point of time by aggregating the direct expenditures and opportunity costs that involved in its development.

Key challenges in IP valuation

1. Lack of market comparables: unlike tangible assets, which can be based on comparable market transactions, intangible assets often lack a standardized benchmark. This is true for mid – sized businesses, where properitary knowledge or brand value may be unique within their niche market.
2.  Subjectivity in valuation methods: valuation process may commonly use three main approaches, which can be difficult to apply to intangible assets:

• Income approach: Based on future earnings potential (i.e. discounted cash flows analysis)
• Market approach: comparing simple transactions
• Cost approach: Estimating the cost of recreating the asset.

Rapid Technological and market changes

For business in sectors such as technology , healthcare , and manufacturing, in-tangible assets especially intellectual property can quickly become obsolete due to innovation or shifting industry trends.

Accurately forecasting the long – term value of these assets is difficult, yet crucial for both buyers and sellers in M&A deals.

Good will and synergies estimation

Good will represents the excess value paid over the fair market value of a company’s net asset, often linked to brand strength, customer loyalty and, or operational synergies.

However, the estimation of goodwill can be highly subjective , and it’s value may fluctuate post transaction depending on integration success and business performance.

Conclusion

IP valuation is vital but challenging, strategic and Accounting practice that informa business decisions but, faces difficulties due to a lack of standardization methods.

While IP provides competitive advantage, accurate valuation requires using income, market, cost approaches to support internal management.

Reference

1. Intellectual property Rights
2. Copyrights Act,1957
3. Patent Act, 1970
4. Trademark Act, 1999
5. World Intellectual property organisation ( WIPO)
6. Online websites.

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