Focus on Intellectual Property InsightsEditor for This Issue: Robert P. Schweihs
Intellectual Property Insights
The Identification and
Valuation of Intellectual Property
John C. Ramirez and Robert F. Reilly
There are only four types of intellectual property: trademarks, patents, copyrights, and trade secrets. Each of these four types of intellectual property are legally created by and protected by a specific federal or state statute. Each of these intellectual property types also has a number of related general intangible assets. First, this discussion will focus on the procedures and factors that valuation analysts (and other financial economists) consider in the identification of intellectual property assets. Second, this discussion will focus on the generally accepted approaches and methods that valuation analysts (and other financial economists) use in the valuation of intellectual property assets.
Patrick B. Schweihs and Robert P. Schweihs
The creation and development of commercial intellectual property (IP) is a costly process. In order to generate a fair rate of return on the IP creation investment, the legal boundaries around the subject IP have to be drawn. If those IP legal boundaries are breached, then legal protections are available to the IP inventor, owner, and operator. This discussion describes the available legal remedies when an IP suffers from infringement.
Reasons to Conduct an Economic Analysis of Commercial Intellectual Property
Valuation analysts are often asked to perform an economic analysis of an intellectual property for a variety or reasons. These economic analyses may include: valuation, royalty rate estimation, economic damages and/or lost profits, intercompany transfer price, and remaining useful life (RUL) measurement. The fair value of intellectual property for financial accounting and reporting purposes is one reason to analyze the characteristics of an intellectual property. That financial accounting reason has recently received a lot of attention in the financial and business press. This discussion summarizes some of the other reasons (and audiences) for performing an intellectual property economic analysis. The characteristics of the intellectual property may be analyzed differently, and a different quantitative conclusion may be appropriate depending on the reason why the intellectual property economic analysis is conducted.
Yield Capitalization Method Terminal Value Estimation Models
The yield capitalization method is a common intellectual property income approach valuation method. When applying the yield capitalization method, the valuation analyst projects the economic income earned by the intellectual property (IP) owner/operator over the expected remaining useful life (RUL) of the subject IP. Most business entities are expected to operate for a long time. When using the yield capitalization method to value a business entity with a perpetual life, first, economic income is typically projected for a finite time period (usually for one business cycle). Second, a “terminal value” is estimated to account for the perpetual nature of the subject business enterprise income stream. Similarly, when the yield capitalization method is used to value an IP that does not have a finite RUL, then a terminal value calculation is used to estimate the value of the terminal period income generation. This discussion describes several direct capitalization models commonly used by valuation analysts to estimate the terminal value related to an IP economic income stream.
Intangible Asset Valuation Insights
The Identification of
Commercial Intangible Assets
Robert F. Reilly and John C. Ramirez
All qualified plans (including employee stock ownership plans, or ESOPs) are affected by legislative changes (Congress), regulatory changes (IRS and Department of Labor regulations and interpretative guidance), and judicial decisions (case law) on an ongoing basis. This discussion summarizes the key events that have occurred during 2006 and early 2007.
Generally Accepted Intangible Asset Valuation Approaches and Methods
John C. Ramirez, Robert P. Schweihs, and Robert F. Reilly
Valuation analysts are routinely called upon to value commercial intangible assets (including intellectual property assets) for a variety of client reasons. These reasons often include: pricing an intangible asset sale or license, opining on the fairness of a sale/license transaction, financial accounting for a transaction, financing based on the intangible asset value, solvency/insolvency analysis of the subject business enterprise, substantiation of federal income tax deductions, intercompany transfers or transfer prices, estimation of lost profits or economic damages in litigation claims, corporate planning for intangible asset development and commercialization, and corporate governance/protection of intangible assets. In all of these instances, the valuation analyst applies generally accepted approaches, methods, and procedures in the intangible asset valuation analysis. This discussion summarizes these generally accepted valuation approaches, methods, and procedures.
Generally Accepted Goodwill Valuation Methods
John C. Ramirez and Robert F. Reilly
As previously discussed in this Insights issue, goodwill value is one of the four common categories of commercial intangible assets. However, unlike other intangible assets, which can be separately identified, goodwill value is generally not as easy to quantify. This characteristic of goodwill value often leads to complexities in the identification and valuation of the goodwill intangible asset. This discussion introduces the many reasons why valuation analysts are asked to conduct a valuation of goodwill. And, this discussion summarizes the generally accepted valuation methods that valuation analysts use in the analysis of goodwill value.
Estimating the Value of Celebrity Goodwill in Matrimonial Cases
Lisa H. Tran and Charles A. Wilhoite
Does celebrity status have value? Some observers believe that celebrity status is goodwill and should be valued along with other assets, especially in matrimonial settlements. Some observers believe that celebrity goodwill is a fiction. This polarity of views, heightened by the absence of professional guidance from the courts, presents a challenge to valuation analysts with respect to the identification and valuation of this intangible asset. This discussion describes the current issues related to celebrity goodwill. These issues include the generally accepted methods available to value celebrity goodwill and the limited number of judicial precedents regarding the analysis of this matrimonial asset.
Attrition Analysis: Estimating the Remaining Useful Life of Customer Relationships
A remaining useful life (RUL) analysis is an important procedure of the valuation of most intangible assets. This is true regardless of which of the generally accepted intangible asset valuation approaches or methods are used. There are several generally accepted methods for estimating the RUL of intangible assets. This discussion will focus on the application of the attrition analysis method for estimating the RUL of the customer relationships intangible asset.
Business Combinations: Summary of SFAS No. 141(R)
Alexis A. Dawicki
The Financial Accounting Standards Board (FASB) recently issued a revision of Statement of Financial Accounting Standards No. 141, Business Combinations. The revised statement, Statement of Financial Accounting Standards No. 141(R), addresses how companies should account for merger and acquisition transactions. This Statement continues the FASB movement toward fair value accounting (as opposed to historical cost basis accounting) in financial statements. Acquirer corporation managements should consider the implications of SFAS No. 141(R) when they are negotiating and structuring merger and acquisition transactions that will close after December 15, 2008.