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Introduction

The concept of valuation of intellectual property and other intangible assets of a


company is new as compared to other concepts of intellectual property (IP) law.
The value of an IP is a monetary compensation that is expected to be received
from licensing of an IP or from sale or exchange of other intangible assets. The
intangible assets of a company includes goodwill, trademark, technology, know
how, trade secrets etc.
How can we say that IP has a value?
There are various circumstantial evidences to prove the same.
- money and time is spent on registering an IP
- IP protection involves legal and other costs
- A lot of amount is spent on advertising brands- IP contributes to national
economic accounts. What are the areas that require IP valuation?
- purchase and sale of assets
- licensing
- corporate finance
- litigation
- transfer pricing
- financial reporting
How can IP be valued?
There are mainly three methods of valuation of IP.
- cost based method
- market based method
- economic based method
A brief of the valuation methods
Cost based valuation: It can either be based on historic cost or on replacement
cost. A historic cost is the actual cost of creating an IP. This method is not
recommended as there is no correlation between expenditure and subsequent
value of asset. E.g. a product promoted at huge cost does not appeal the
customers. Replacement cost is the cost to replace the asset. It is determined as
to what will be the cost of creating a new trademark or a patent. A major
drawback of this method is that it is not possible to determine an exact future
cost.
Market based valuation: This method can be based on the market price
comparability or on comparable royal rate. Market price comparability- the value
of an IP is determined on the basis of price of comparable IP products.
Comparable royal rate: this requires construction of a business plan around an IP.
The resulting return is then compared to the price of being owner of the asset. If
the price is higher than the return, it is recommended not to buy the asset.
Economic based valuation: This is the most preferred method of valuation. This
method requires identification, separation and quantification of cash flow or
royalty fees to IP and then the capitalization of future cash flow. Quantifying the
future revenue stream can be done in view of exploited or unexploited IP. In case
of capitalization, longer the period of money receipt, higher will be the risk. Risk is
described in terms of discount rate which in turn is based on inflation rate, cost of
capital and premium. A cash flow projection is constructed and discounted to
derive a net present value. This estimated present value is the worth of the IP
asset.
Limitation of IP valuation: a major limitation is that it is based on estimates,
assumptions and judgments than on facts. Thus it lacks accuracy. Since IP
valuation is a new concept and is still at the stage of development, more

experience in this field will help making accurate estimates. It adds to the value of
the company and helps the company make sound economic strategies.
Thus IP valuation is an important concept that helps a company to get the price of
which it is worth.

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