March 6, 2017
What Business Leaders Need to Know About IP Valuations
What Is Considered Intellectual Property (IP)?
Intellectual property refers to creations of the mind that have value. Under IP law, the creators of intellectual property can protect the value of their creations by applying for and receiving a patent, trademark, copyright, or some other form of property protection. For IP to have value and deserve a patent or some other form of protection, the idea or creation must be entirely new–not just an extension of a previous creation.
What Is the Difference Between Patents, Trademarks, Copyright, and Other IP Forms of Agreement?
Protecting IP comes in many forms. Patents, trademarks, and copyright agreements are some of the most common. The protection of inventions, such as a new cell phone design or semiconductor, can be ensured through a patent. As far as terminology is concerned, patents are reserved for inventions, trademarks typically protect names and symbols, and copyright references a longer-term form of protection that encompasses all forms of media-printing, recording, performing, translation, broadcasting, and adapting.
How Is IP Valued?
Three methods exist to ascertain the value of intellectual property: the cost approach, the income approach, and the market approach. The cost method is performed by measuring and summing the historical costs of developing the property and registering for the patent. This includes all expenses that have occurred and can be reasonably and directly attributed to the intellectual property. Some examples may be wages, materials, PP&E, filing fees, and a variety of other common expenses. Under the income approach, the expected future cash flows directly attributable to the IP are estimated and then discounted back to present value. Finally, the market approach is a relative valuation approach that determines a fair value for the intellectual property by comparing the subject IP asset to previous transactions where similar IP assets were acquired.
When Is an IP Valuation Performed?
Although IP Valuations are not always necessary, it can be important for businesses to have an IP valuation performed for a variety of reasons, including for compliance issues as well as for strategic planning. Intellectual property has the ability to generate economic returns and an IP valuation provides a unique solution to determining how great a business can expect its IP economic returns to be.
How Do Patents, Trademarks, Copyright Agreements, and Other Forms of IP Protection Amortize and Affect my Taxes?
Depending on the life of a patent, trademark or copyright agreement, depreciation may be accounted for on a company’s financials. Instead of recognizing the development of a patent, trademark or copyright agreement as an expense, these assets are often capitalized and amortized over the life of the intangible asset for tax purposes. Amortization of intangible assets is a tax deductible expense, thus lowering tax liability over the amortizable life of an asset.
Additional Resources :