IP Valuation - A Pandora's Box

Two European trademark blogs, MarkenBlog and Class 46 referred to a publication in Germany’s business newspaper Handelsblatt on the effect of the proposed new "Bilanzrichtlinien modernisierungs gesetz” (Accounting Directives Modernizations Law). According to the two blogs this introduces new accounting rules for small and medium sized companies how and when to report development costs of their intellectual property on their corporate balance sheet.

As we all know valuation of IP is always the biggest stumbling block in deals where patents are either sold, licensed or securitized. Most intangible assets generate premium returns for the business that owns them, either through an increase in revenues or through a reduction in costs. It’s the subject where a multiple companies make their money, adding to the confusion. There over a 100 different methods of valuating intellectual property and it’s no wonder that many don’t see the wood for the trees anymore.

Different compelling arguments have been advanced for a better understanding and appreciation of the value of IP and its potential impact on business value. Intangible assets (patents, marks, know-how, licenses..) play increasingly a key factor for firms’ economic performance. They are particularly important for early stage-technology based companies as IP is viewed as the primary contribution to earning power and future value.

And of course, not only are there accountants, IP valuators, IP management companies but also lawyers seeking revenues from their own, proprietary methods of valuating patents[1], some seek proprietary gains from patenting their own valuation method (see patent application WO/2005/019964 for a “System and method of Valuation of Intellectual Property".

More than ever there is a dire need to coordinate global efforts to “standardize” the valuation methodology as this is one of the major impediments to increase the value and tradeability of intellectual assets.

The Canadian Institute of Chartered Accountants, provided updates on the Global Reporting Initiative in 2006 mentioned several topics to be dealt with in achieving such “standardization” are:

** The challenge that intellectual capital creates for accounting;
** Possible responses to this challenge – why the "intangibles approach" is of questionable value; ** Restating the challenge to accounting;
** Proposals to the international accounting community

The German Institute for Industry Standards (Deutsches Institut für Normung e.V) is working on a standard for patent valuation (“Grundsätze ordnungsgemäßer Patentbewertung”) together with Steinbeis in Hamburg, whereas banks are working on a standard to valuate IP for financing purposes. None of these initiatives have led to a worldwide standard yet.

It can be doubted whether the final rescue will come from accountants, as the IASB (International Accounting Standards Board) who contemplated to undertake an active project on intangible assets (that is, excluding goodwill) jointly with the FASB in December 2007, was rejected, stating “that properly addressing the accounting for intangible assets would impose a large demand on the Board’s limited resources.”

So who’s going to take the lead? We expect this to be the ISO (International Organization for Standardization) after DIN submitted its standard proposal in December 2007.

Interesting resources on developments in standardizing accounting and valuation principles of intangibles assets, or intellectual capital:
** Intellectual Capital Forum
** IHS: ANSI Seeks Comments on Proposal for ISO Work Item on Patent Valuation
[1] See for a very interesting interview with Baruch Lev on this subject: “Interview with Baruch Lev: Accounting, Reporting and Intangible Assets”