For many enterprises intangible assets like IPR have become more valuable than their tangible assets, and are key to their success. They create a basis for enhancing the company’s value. Understanding the economic value of an IP asset can be proved very helpful for various transactions including licensing, sale, donation of IP rights or entering into joint ventures and other collaborative arrangements. The principal methods for valuing IP assets are a) the income method, the market method and the cost method.
The income method is the most commonly used method for IP valuation. It values the IP asset on the basis of the amount of economic income that it is expected to generate, adjusted to its present day value. This method is easiest to use for IP assets with positive cash flows, for those whose cash flows can be estimated with some degree of reliability for future periods, and where a proxy for risk can be used to obtain discount rates.
The market method is based on a comparison with the actual price paid for the transfer of rights to a similar IP asset under comparable circumstances. This method has the advantage of being simple and based on market information, so it is often used to establish approximate values for use in determining royalty rates, tax, and inputs for the income method.
The cost method establishes the value of an IP asset by calculating the cost of a similar (or exact) IP asset. The cost method is particularly useful when the IP asset can be easily reproduced and when the economic benefits of the asset cannot be accurately quantified. This method does not account for wasted costs, nor does it consider any unique or novel characteristics of the asset.