What is Intellectual Property Valuation?

Intellectual property valuation is placing a value on the intangible assets of a business. Intellectual property includes creative items that businesses own, such as trademarks, copyright and computer software. Innovative business items, such as patents, industrial designs and trade secrets are also considered to be intellectual property.

The need to assess the value of intellectual property can be due to a variety of reasons. One of the primary reasons is if the business or owner of the intellectual property wants to sell it to someone else. Another reason for intellectual property valuation is for tax purposes, when agencies such as the Internal Revenue Service (IRS) wants to know the value of the property.

The introduction of the Statement of Financial Accounting Standard 142, Goodwill and Other Intangible Assets is also changing the approach of intellectual property evaluation for accounting purposes. With the introduction of this standard, intangible assets are carried on the company balance sheet at cost instead. Previously, these assets were handled using a stated amortization period. In addition, the IRS also wants to know how the owner of the intellectual property determined the value in the first place.

Two other situations where an intellectual property valuation is required is for financing and bankruptcy purposes. Beyond the external sources that need to know how much the intangible assets are worth, companies also have internal needs for valuing the property. For example, if one of the assets is bought or sold, then intellectual property valuation is required for the proper recording of the purchase or sale in the accounting records for the business.

Generally, intellectual property valuation deals with the fair market value of the asset. The fair market value (FMV) is the price that a willing seller and a willing buyer would exchange to transfer the ownership of the asset. In other words, fair market value is the current value of the asset in a hypothetical situation. In addition, all of the parties involved in the transaction must know all of the details about the intellectual property that is part of the intellectual property valuation in order for it to be as realistic as possible.

For example, if a company patents an invention that could save a company $1 million U.S. Dollars (USD), then the valuation would be the amount of the cost savings to the company. Realistically, however, a company is not going to pay for a patent on an invention that equals its cost saving. In reality, this puts the value of the patent at somewhere between $0 U.S. Dollars (USD) and $1 million U.S. Dollars (USD).