Intellectual property (IP) is an essential asset for many organizations. It serves as a cornerstone for innovation and competitive advantage. As a controller, understanding how to manage IP valuation is critical to safeguarding your company’s valuable assets.
Here’s a look at everything you need to know about valuing, managing, and leveraging intellectual property to benefit your business.
Understand the Worth of Your IP
Before you can leverage intellectual property to drive growth, you must first understand its value. IP valuation refers to the process of determining the monetary worth of intangible assets, including:
- Patents
- Trademarks
- Copyrights
- Trade secrets
Several nuances are involved in determining an accurate valuation of intangible assets you will not encounter when valuing physical resources. Determining a reliable value for IP can be challenging due to the complexities of estimating future economic benefits.
You can use one of several different methods to value your company’s intellectual property. Each framework has strengths and weaknesses. Here’s a look at the three most common approaches for calculating IP valuations:
1. Cost Method
The cost method estimates the value of intellectual property based on the expenses your company incurred to develop or acquire it. This approach provides a straightforward means for determining value, but it may not capture the actual economic viability of the IP, especially if it has significant future potential.
Consider the cost method if your organization is ready to move on from intellectual property and no longer desires to nurture it via research and development investments. The cost framework allows you to identify the company’s break-even point and can help avoid selling off IP at a loss.
2. Income Method
The income method calculates the value of intellectual property based on the future revenue you expect it to generate. When using this framework, you must forecast cash flows and discount them to present value. Carefully consider variables like market conditions and the competitive landscape to ensure your estimations are as accurate as possible.
3. Market Method
The market method compares your organization’s intellectual property to similar assets sold recently.
IP transactions can be scarce and shrouded in secrecy, making implementing this approach problematic. However, if you can find several comparable transactions, those deals will give you a reasonable estimation of the fair market worth of your IP.
Each method offers a different lens through which to value your intellectual property. Choose the most appropriate method based on the IP’s nature and relevant data availability. You can use two frameworks to obtain a more holistic view of intellectual property’s potential worth.
How to Promote an Accurate Valuation
Accurate IP valuation represents the first step in intellectual property management from a controller’s perspective. To achieve reliable value estimations of intellectual property, you must ensure your accounting practices are consistent, transparent, and compliant.
Here are a few tips to help you implement clear guidelines for recognizing and measuring IP on the balance sheet:
Determine What Assets Are in Play
You must first decide when to recognize intellectual property as an asset on your balance sheets. Typically, businesses will realize IP as an asset when it is:
- Identifiable
- Controlled by the company
- Expected to generate future economic benefits
Take stock of all relevant intellectual property under your company’s control. Categorize the IP by type and then systematically review each piece of IP’s fiscal potential.
If something is readily identifiable, under the company’s control, and capable of yielding future revenue, it should be treated as an asset in your accounting process.
Use Amortization and Impairment
IP’s amortization reflects its gradual consumption over time, reducing its value on the balance sheet. You should establish appropriate amortization schedules based on the IP’s useful life and monitor any indicators of impairment. If the asset’s value declines significantly, you may need to conduct an impairment to adjust its carrying value.
Consider the Capitalization vs. Expense Methods
Finally, you must decide whether to capitalize or expense costs related to an intellectual asset’s development or acquisition. Determine whether the costs contribute to creating or enhancing the identifiable IP. The capitalization method spreads the costs over the asset’s useful life. On the other hand, expanding them affects the current period’s financial statements.
IP Provides a Strategic Advantage — Make Sure You Are Leveraging It
Intellectual property is more than an asset on the balance sheet. By adequately tracking and accounting for the value of an IP, you can use it as a tool for promoting growth and innovation. Intellectual property can catalyze mergers and acquisitions, facilitate licensing and monetization, or elevate your company’s competitive positioning.
You hold the key to unlocking the full potential of the organization’s intellectual property.
