Spring 2008
Focus on Intellectual Property Insights
Editor for This Issue: Robert P. SchweihsIntellectual 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.
Intellectual Property
Infringement Remedies
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
Marko Beric
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
Kevin Zanni
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
Jasna Karamehmedovic
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.