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Innovation performance accounting pp 113–166Cite as

Fundamental Principles in the Valuation of Intangible Assets, Taking the Valuation of Technologies Protected by Patents as an Example

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Abstract

The valuation of intangible assets is playing an ever greater role in valuation practice nowadays. One of the main reasons for this are the fundamental changes that have occurred in important accounting standards, particularly those concerning the treatment of business combinations (especially IFRS 3) and the impairment of assets (especially IAS 36).

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Notes

  1. 1.

    See, for example, IFRS 3 Illustrative examples A–E, SFAS 141 A. 14.

  2. 2.

    As one example among many, see Smith/Parr, Valuation of Intellectual Property and Intangible Assets, 3rd ed., New York, inter alia, 2000, pp. 152, 163 .

  3. 3.

    See, for example, Smith/Parr, loc. cit. .(fn. 2), pp. 164 ff.

  4. 4.

    The Real Options Aproach will not be considered in the context of this study. For more on this approach cf. Copeland/Antikarov, Real Options. A Practitioner`s Guide, New York 2001; Mum, Real Options Analysis, Hoboken/New Jersey 2002; Ernst/Moser, in: Ernst/Häcker/Moser/Auge-Dickhut (eds.), Praxis der Unternehmensbewertung und Akquisitionsfinanzierung. On the application of this approach in the valuation of patents or technologies, see in particular Khoury, Valuing Intangibles? Consider the Technology Factor Method, in: les Nouvelles 2001 pp. 87–90; Kidder/Mody, Are Patents Really Options, in: les Nouvelles 2003 pp. 190–192; Kossovsky/Arrow, TRRU Metrics: Measuring the Value and Risk of Intangible Assets, in: les Nouvelles 2002 pp. 139–142; Pries/Astebro/Obeidi, Economic Analysis of R & D Projects: Real Options vs. NPV Valuation Revisited, in: les Nouvelles 2003 pp. 184–186; Razgaitis, Valuation and Pricing of Technology-Based Intellectual Property, Hoboken/New Jersey 1999, pp. 223 ff.

  5. 5.

    See, for example, Smith/Parr, loc. cit. (fn. 2), 163 f. In connection with the valuation of patents, cf. also Goddar, Die wirtschaftliche Bewertung gewerblicher Schutzrechte beim Erwerb technologieorientierter Unternehmen, in: Mitteilungen der deutschen Patentanwälte 1995 pp. 357–366. Khoury/Lukeman, Valuation Of BioPharm Intellectual Property: Focus On Research Tools And Platform Technology, in: les Nouvelles 2002 p. 50, and more recently Drews, Patent Valuation Techniques, in: les Nouvelles 2007 pp. 365 ff.

  6. 6.

    Cf. Khoury/Daniele/Germeraad, Selection and Application of Intellectual Property Valuation Methods in Portfolio Management and Value Extraction, in: les Nouvelles 2001 p. 81.

  7. 7.

    Examples are Anson/Martin, Accurate IP valuation in multiple environments, in: Intellectual Asset Management, February/March 2004 pp. 7–10; Poredda/Wildschütz, Patent Valuation – A Controlled Market Share Approach, in: les Nouvelles 2004 pp. 77–85.

  8. 8.

    See also Smith/Parr, loc. cit. (fn. 2) pp. 163 f., Khoury/Daniele/Germeraad (fn. 6), p. 79.

  9. 9.

    Cf. Smith/Parr, loc. cit. (fn. 2), pp. 164 ff..

  10. 10.

    For one analysis of the market approach among many, see Moser/Auge-Dickhut, Unternehmensbewertung: Marktpreisabschätzungen mit Vergleichsverfahren, in: FB 2003 pp. 10 ff.; id., Unternehmensbewertung: Zusammenhang zwischen Vergleichs- und DCF-Verfahren, in: FB 2003 pp. 213 ff.

  11. 11.

    Cf., for example, Smith/Parr, loc. cit. (fn. 2), pp. 170–173, Reilly/Schweihs, Valuing Intangible Assets, New York et al. 1998, pp. 101 f.

  12. 12.

    For the strict requirements of an active market: e.g. IAS 38.8, Smith/Parr, loc. cit. (fn. 2), pp. 170–173.

  13. 13.

    See also Khoury (fn. 4) p. 88, Khoury/Daniele/Germeraad (fn. 6) pp. 77–86, Woodward, in: Wild (ed.), Building and enforcing intellectual property value. An international guide for the boardroom 2003, London 2002, pp. 49 f.

  14. 14.

    For details on the cost approach, see Smith/Parr, loc. cit. (fn. 2), esp. pp. 197 ff., Reilly/Schweihs, loc. cit. (fn. 11), esp. pp. 118 ff.

  15. 15.

    On this and the following, cf., for example, Reilly/Schweihs, loc. cit. (fn. 11), pp. 96 f., Smith/Parr, loc. cit. (fn. 2), p. 164.

  16. 16.

    The historical costs incurred in procuring or producing the asset to be valued are not taken into account separately in the cost approach.

  17. 17.

    Cf. Khoury/Daniele/Germeraad (fn. 6) p. 80; Khoury (fn. 4) p. 88; Woodward (fn. 13) p. 50.

  18. 18.

    For the different types of intellectual property, see Goddar (fn. 5) pp. 357–360.

  19. 19.

    Similarly also Smith/Parr, loc. cit. (fn. 2), pp. 155.

  20. 20.

    See, for example, Smith/Parr, loc. cit. (fn. 2), pp. 55 ff., 333 ff.; Kidder/Mody (fn. 4), p. 190, and, for a fundamental consideration, Sullivan/Edvinsson, A Model for Managing Intellectual Capital, in: Parr/Sullivan (eds.), Technology Licensing. Corporate Strategies for Maximizing Value, New York, 1996, pp. 249 ff.

  21. 21.

    On the following, see also Bea/Haas, Strategisches Management, 2nd ed., Stuttgart 1997, pp. 154 ff.

  22. 22.

    For the connection between corporate strategy , research and development strategy and patent strategy, see Wijk, Measuring the Effectiveness of a Company’s Patent Assets, in: les Nouvelles 2001, pp. 25–33. Some fundamental reflections on the subject can be found in Germeraad/Harrison/Lucas, IP Tactics In Support Of The Business Strategy, in: les Nouvelles 2003, pp. 120–127.

  23. 23.

    In order to simplify the terminology here, uses and business processes will be disregarded. It goes without saying that the comments also apply to claims of that kind.

  24. 24.

    On this subject, see also the other conditions for grant, viz. novelty and the inventive step (PatG – German Patent Act sections 1 para. 1, 3 para. 1, 4) and their reference to the state of the art.

  25. 25.

    For a definition of the term “technology”, see, for example, Boer, The Valuation of Technology, Business and Financial Issues in R & D, New York 1999, pp. 4 ff.: “Technology is the application of knowledge to useful objectives. It is usually built on previous technology by adding new technology input or new scientific knowledge”.

  26. 26.

    See, for example, Bea/Haas, loc. cit. (fn. 21) pp. 79 ff.

  27. 27.

    For competition strategies, see, for example, Bea/Haas, loc. cit. (fn. 21) pp. 167 ff.

  28. 28.

    The latter are also referred to as early-stage technologies, cf. Smith/Parr, loc. cit. (fn. 2), pp. 495 ff.

  29. 29.

    Bea/Hass (fn 21) 155.

  30. 30.

    For the concept of the product life cycle, cf. Bea/Haas, loc. cit. (fn. 21), pp. 112 ff.

  31. 31.

    On this complex of problems, cf. again Goddar (fn. 5).

  32. 32.

    Examples are Pitkethly, The Valuation of Patents, A review of patent valuation methods with consideration of option based methods and the potential for further research, Oxford 1997, p. 2; Poredda/Wildschütz (fn. 7) p. 77.

  33. 33.

    See, for example, Reilly/Schweihs, loc. cit. (fn. 11), pp. 434 ff., Smith/Parr, loc. cit. (fn. 2), pp. 215 ff.

  34. 34.

    Cf. Section 5.2.4.1

  35. 35.

    When calculating this future income, the consequential effects for other assets which are necessary in order to exploit the technology (“complementary business assets”) also have to be taken into consideration.

  36. 36.

    Sullivan/Daniele, in: Parr/Sullivan (fn. 20), p. 35; cf. also section “Ways of Exploiting Patents”.

  37. 37.

    To simplify the wording, we shall merely speak of business units in the following. The comments nevertheless also apply without restriction to entire enterprises.

  38. 38.

    As is also suggested by Smith/Parr, loc. cit. (fn. 2), pp. 356 f., though they speak of the “debt free net income”.

  39. 39.

    An increase in the working capital may also come about as a result of higher levels of accounts receivable which may be a consequence of the higher prices involved in the differentiation.

  40. 40.

    As is also discussed in Reilly/Schweihs, loc. cit. (fn. 11), pp. 159 ff. The terminology is not uniform in the literature. Some authors also speak of the incremental cash flow method or incremental revenue analysis.

  41. 41.

    The decisive point is that income is understood in the sense of the free cash flow. Not clear in AICPA, Practice Aid Series: Assets Acquired in a Business Combination to Be Used in Research and Development Activities: A Focus on Software, Electronic Devices, and Pharmaceutical Industries, 2001, 2.1.10.

  42. 42.

    In particular Smith/Parr, loc. cit. (fn. 2), pp. 215 ff.

  43. 43.

    Cf. AICPA (fn. 41), 2.2.10; Woodward (fn. 15) p. 49; Smith/Parr, loc. cit. (fn. 2), p. 218.

  44. 44.

    Cf. Smith/Parr, loc. cit. (fn. 2), pp. 222 ff.

  45. 45.

    Cf. Khoury/Daniele/Germeraad (fn. 6) pp. 82 ff.

  46. 46.

    E.g. by AICPA (fn. 41), 2.1.10 and 16.

  47. 47.

    For the allocation of this synergy effect to the goodwill, see Reilly/Schweihs, loc. cit. (fn. 11), pp. 381 f.; Smith/Parr, loc. cit. (fn. 2), pp. 24–27.

  48. 48.

    Cf. Smith/Parr, loc. cit. (fn. 2), pp. 215 ff.

  49. 49.

    The approach is also applied in particular in the valuation of trade marks.

  50. 50.

    See, for example, Anson/Suchy, Intellectual Property Valuation. A Primer For Identifying and Determing Value, Chicago 2005, pp. 35 f.

  51. 51.

    On this subject, see, for example, Hellebrand/Kaube, Leitsätze für technische Erfindungen, 2nd ed., Cologne et al. 2001; IPRA, Inc., Royalty Rates for Technology, 3rd ed.; id., Royalty Rates for Pharmaceuticals & Biotechnology, 5th ed.

  52. 52.

    E.g. Royalty Source (http://www.royaltysource.com).

  53. 53.

    As by Khoury/Daniele/Germeraad (fn. 6), p. 81; Anson/Suchy, loc. cit. (fn. 50), p. 35.

  54. 54.

    Cf. Reilly/Schweihs, loc. cit. (fn. 11), pp. 441 f.

  55. 55.

    Cf. also Smith/Parr, loc. cit. (fn. 2), p. 339.

  56. 56.

    Critical comments on “rules of thumb” can be found in Smith/Parr, loc. cit. (fn. 2), pp. 366–368, who state: “Rules of thumb cannot be dismissed summarily, but their use must be viewed with caution ...”

  57. 57.

    A detailed presentation of this rule can be found in Goldscheider/Jarosz/Mulhern, Use of the 25% Rule in Valuing IP, in: les Nouvelles 2002, pp. 123 ff.; criticism expressed by Smith/Parr, loc. cit. (fn. 2), pp. 366–368.

  58. 58.

    Smith/Parr, loc. cit. (fn. 2), p. 366, speak of “self-fulfilling prophecies” in this context.

  59. 59.

    It is presumably in this latter respect that Smith/Parr, loc. cit. (fn. 2), p. 368, also see its most important field of application.

  60. 60.

    The β factor of a security i is defined as the covariance between the expected return on that security and that of the market portfolio divided by the variance of the return on the market portfolio.

  61. 61.

    See Moser/Schieszl, Unternehmenswertanalysen auf der Basis von Simulationsrechnungen am Beispiel eines Biotech-Unternehmens, in: FB 2001 pp. 530–541.

  62. 62.

    For a fundamental consideration, see Smith/Parr, loc. cit. (fn. 2), pp. 227–236, 356–362, 558–562.

  63. 63.

    See ibid.

  64. 64.

    A description of how to determine the risk-specific interest rate and the problems involved will be provided in the context of the illustrative example (see section “Calculating the Asset-Specific Rate of Return”).

  65. 65.

    This makes it possible to calculate the useful life of the asset to be valued: since the terms of the patents exceed the useful life of the technology, the latter determines their useful life. That is thus 8 years.

  66. 66.

    See Reilly/Schweihs, loc. cit. (fn. 11), p. 188.

  67. 67.

    The approach is explained under section “Calculating the Asset-Specific Rate of Return”.

  68. 68.

    See Goddar (fn. 5).

  69. 69.

    In order to simplify the comments, these assets will be referred to in the following as “supporting assets”.

  70. 70.

    We shall therefore disregard the fact that, in addition to other intangible assets, it is usually also necessary to have a work force (cf. 2.3).

  71. 71.

    In this case, a step-up factor of 1.4238 results.

  72. 72.

    Cf. AICPA (fn. 41), 5.3.54 ff.

  73. 73.

    Cf. Reilly/Schweihs, loc. cit. (fn. 11), pp. 176 ff.

  74. 74.

    In order to simplify matters, the following comments will merely speak of risk mark-ups. The comments of course also apply to those cases in which a risk mark-down has to be made.

  75. 75.

    The tax amortisation benefit was calculated on the basis of this asset-specific rate of return. If, on the other hand, the calculation of the tax amortisation benefit is based on the weighted cost of capital, a figure of EUR 160.95 million before tax amortisation benefit is arrived at – that is the same as the directly calculated residual value before tax amortisation benefit – with an asset-specific rate of return of 10.54 %.

  76. 76.

    This is precisely the amount by which the sum of the fair values of all the assets according to Table 5.14 exceeds the total value of the business unit according to Table 5.9.

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  1. University of Applied Sciences, Erfurt, Germany

    Ulrich Moser

  2. Boehmert & Bohmert, Munich, Germany

    Heinz Goddar

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Correspondence to Ulrich Moser .

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  1. FB 3 Wirtschaftswissenschaften, Stg. Betriebswirtschaft, FH für Technik und Wirtschaft, Treskowallee 8, Berlin, 10318, Berlin, Germany

    Wilhelm Schmeisser

  2. Rolls-Royce Deutschland Ltd. & Co. KG, Eschenweg 11, Dahlewitz, 15827, Germany

    Hermann Mohnkopf

  3. FB 3 Wirtschaftswissenschaften, Stg. Betriebswirtschaft, FH für Technik und Wirtschaft, Treskowallee 8, Berlin, 10318, Berlin, Germany

    Matthias Hartmann

  4. FH München, Lothstr. 64, München, 80335, Germany

    Gerhard Metze

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Moser, U., Goddar, H. (2010). Fundamental Principles in the Valuation of Intangible Assets, Taking the Valuation of Technologies Protected by Patents as an Example. In: Schmeisser, W., Mohnkopf, H., Hartmann, M., Metze, G. (eds) Innovation performance accounting. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-01353-9_5

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