Exploring the hidden value of intangible assets
Hidden Value is a great title for the latest UK Intellectual Property Office Report, written by our good friends Martin Brassell and Jackie McGuire. It explores one of the unsolved mysteries of intangible assets, and specifically intellectual property – what is the right approach to the valuation of IP?
It starts with the good news. There is consensus, industry standards and regulation about the various approaches to the valuation of IP: cost, market and income. The bad news is that you get a different answer depending on which approach you take. The report identifies a large number of situations where you might want to value your IP:
- M&A – there are an increasing number of transactions where IP goes to the heart of value
- Litigation – most IP disputes come down to damages, and an appropriate royalty
- Transfer pricing – high on the agenda since the BEPs reforms, which is driving a more practical approach to the internal licensing of intangibles
- Lending – once a holy grail, the idea that banks can use IP as collateral, if only they knew what it was worth
- Insurance – IP is the only major asset class owned by a business that is largely uninsured
And the list goes on. The report concludes that in most of these situations no valuation is obtained. There are a number of possible explanations offered, and these include lack of awareness, expertise and expense. Nigel Swycher, Aistemos CEO, who was a member of the report’s review panel, identifies the issue as follows: “When people hear the word value, they immediately look for the $ sign. That’s not the issue. What we need to address is transparency. If companies were better at explaining the importance of IP to their business, then the entire water table of knowledge would rise, and we would then be in a better place to understand value.”
The work of the UK IPO is to be encouraged. They have a network which includes UK innovators, both large and small, access to government, connections to regulators and influence at the Five IP Offices (US, Japan, China, EPO and Korea), the most influential patent offices in the world. In this context, we would also refer to the excellent work of EY and their Accounting and reporting for long-term value project, which recognises that financial reports no longer communicate what is really driving value within companies – and in this context value is more and different to $. Everyone should join and contribute to these initiatives. The attitude to intangible assets is changing.