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Valuing Intellectual Property (IP)
Dr. Patrick H. Sullivan
22 November 2006
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Accounting Firms•PwC- Value Reporting•Deloitte- In The Dark•KPMG•E&Y•GT•BDO•Other
Individuals:• Roland Burgman• Hubert St.Onge• Leif Edvinsson• Rob McLean• Pat Sullivan
Valuation Is Of Interest To A Number of Groups and Individuals
Consulting Firms•Accenture- High Performance •IBM Consulting –CFO audience•Deloitte Consulting•ICMG•Other
Institutional Investors
Academics• Kaplan• Christensen/ Raynor• Chesborough• Lev• Teece
Institutes:• AICPA - EBR• CICA –• CPAA• IDW• SAICA•Other:
Publications/ Journals•International Journal of Learning and Intellectual Capital
Associations:• IFAC(PAIB )-• LES• AAA -CPE Session• CAAA• ICM Gathering / IP Forum• FEI• CFA Institute• GRI – Sustainability Guidelines
Governments:• Scotland• Canada• Denmark/Europe
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What Is Intellectual Property?
•“Intellectual Property” has been defined by a series of international treaties stretching back into the 19th century.*
•These treaties created an evolving set of definitions and frameworks and two international secretariats, placed under the supervision of the Swiss Government.*
•At the 1969 diplomatic Conference in Stockholm, the World Intellectual Property Organization (WIPO) was created. All previous secretariats and activities were folded into WIPO.*
* Source: WIPO Handbook, Chapter 1.
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What Is Intellectual Property (Cont’d)?
Intellectual property is an intangible.
Intangibles
Tacit
Knowledge
Codified
Knowledge
IP
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What Are Intangibles?
Market-relatedTrademarks, trade namesService marksTrade dressNewspaper mastheadsInternet domain names
Customer-relatedCustomer listsCustomer contractsCustomer relationships
Artistic-relatedPlays, operas, balletsBooks, other literary worksMusical worksPictures, photographs Video & audiovisual material
Contract-basedLicensing agreementsAdvertising or service contractsLease agreementsConstruction permitsOperating and Broadcast rightsEmployment contracts
Technology-basedPatented technologyComputer softwareUn-patented technologyDatabasesTrade secrets, secret formulas
Source: U.S. Federal Accounting Standards Board
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What Are The Valuation Characteristics of Intangibles?
There are a number of important characteristics of intangibles that make them different from tangibles.
Two of these differences are particularly significant:
- Intangibles have value only in contextTangibles have intrinsic value
- Intangibles may generate multiple value streamsTangibles have only one value stream
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What Is Value
Oscar Wilde described a cynic as, Oscar Wilde described a cynic as, ““. . . A man who knows the price . . . A man who knows the price
of everything and the value of nothing.of everything and the value of nothing.””
To the economist, value is a measure of the utility derived fromownership of an item.
Value is not the same as price - price is the amount someone is willing to pay for an item.
Value is not the same as cost - cost is a measure of what is required to produce an item.
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How Is Value Measured?
Measures ofValue
Value-Based
-Value Category-Alignment with Visionand Strategy
-Satisfaction-Quality of Knowledge
Vector-Based
-Rate of Increase-Rate of Decrease-Backlog-Market Share Forecast-Coverage-Comprehensiveness-Stock price
Non-$
-# Evals/Unit Time-# of Staff-Age-Remaining Life-# Units
$-Based
-$ Invested-$ Revenue-Forecast Income-Costs to date-Forecasted Costs-Profits
Qualitative Quantitative
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Accounting Perspectives on Value
Intangible
“Accounting”Perspective(book value)
“Market”Perspective
(FMV)
ReplacementValue
Bankruptcy Value
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An Overview of Recent Measurement Thrusts
Principal focus on what we should
“disclose”
Principal focus on how we should
“measure”
Issue-specific General
SocialAccountability Sustainability GRI
ICStatements
PIP
DanishGuidelines
EU Standards
OECD AustralianGuidelines
IntangiblesReporting
Wissensbilanz
Japan
EBRCICA MD&AOFRs
IASBManagementCommentaryInfo for
better markets
Info for better
markets
Info for better
markets
IASBMeasurement
Project
VMRC/NPI
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VMRC Study of Intangibles Measurement
Looked methodically at intangibles measurement
• Classified the approaches
• Identified existing measurement approaches
• Explored “measurement fundamentals”
• Developed criteria frameworks based on the measurement fundamentals
• Embedded the criteria in online tools
• Tested the criteria by applying them to various measurement approaches
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Methods Examined
Hermes Pensions Management LimitedMarket cap, Value StreamsHermes Principles
GRIIndicatorsGlobal Reporting Initiative
Burgmann, AccentureMarket capFuture Value Management
St. Onge, ArmstrongCapitalsEnterprise Capital Model
AICPAIndicatorsEnhanced Business Reporting
Stern StewartMarket CapEconomic Value Added
IC CommunityIndicatorsDolphin Navigator
NTF Group (AU)CapitalsCustomer Value Measurement
SMSCapitalsCustomer Value Management
CognosIndicatorsCognos Scorecards / Dashboards
B. H. Hall (et al.)IntangiblesCitation-weighted patents
CelemiCapitalsCelemi Monitor
NCI Research (see Andriessen)IntangiblesCalculated Intangible Value
SandvikCapitalsBusiness IQ
Brand FinanceMarket capBrand Valuation
Kaplan, NortronIndicatorsBalanced Scoreboard
ACPQIndicatorsAPQC Performance Measurement
NashValue streamsAccounting for the Future (AFTF)
Innovator(s)CategoryMethod
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Methods Examined (Cont’d)
MERITUM projectCapitalsIntellectual Capital Report
StamCapitalsIntellectual Capital Monitor
BounfourIntangiblesIntellectual Capital Dynamic Value
ViedmaCapitalsIntellectual Capital Benchmarking System
BrookingsCapitalsIntellectual Capital Audit
Denmark Ministry of IndustryCapitalsIC Reporting
Intellectual Capital SwedenCapitalsIC Rating
Nordic Industrial FundCapitalsIC Monitor
CelemiCapitalsIC Evaluation
Sullivan, McLeanValue StreamsIntangibles Value Stream Modelling
AlleeIntangiblesIntangible Value Framework
SullivanIntangiblesIntangibles Valuation
LevIntangiblesIntangibles Scoreboard
SveibyIntangiblesIntangible Assets Monitor
ICAEWIntangiblesInside Out
MÕPhersonIntangiblesInclusive Value Methodology
Watson WyettCapitalsHuman Capital Index
VariousCapitalsHuman Resource Accounting
RoosCapitalsHolistic Value Approach
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Methods Examined (Cont’d)
Patent Value PredictorIntangiblesPatentValuePredictor
SiemensIndicatorsPatent Assets Monitor
Meyer MonitorIndicatorsMeyerMonitor
EUCapitalsMeasuring and Accounting Intellectual Capital (MAGIC)
EYI, LowIndicatorsMeasures that Matter
CICAIndicatorsMD&A Guidelines
SveibyMarket CapMarket Value of Intangibles
VariousMarket CapMarket to book ratio
LevMarket capKnowledge Capital
Marr, SchiumaCapitalsKnowledge Audit Cycle
Konrad GroupIndicators, CapitalsKonrad Group
KPMG (Bray)IndicatorsKey Performance Indicators
AICPAIndicatorsJenkins Report
Roos et al.CapitalsIntellectual Capital Index
StandfieldIntangiblesiValuing Factor
SveibyCapitalsInvisible Balance Sheet
StandfieldMarket capInvestor Assigned Market Value
Danish Patent OfficeIntangiblesIP Score
Sullivan, McLean, McCulloughCapitalsIPM Benchmarking
MouritsenCapitalsIntellectual Capital Statement
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Methods Examined (Cont’d)
Brookings InstitutionIntangiblesUnseen Wealth
ICAEWIndicators21st Century Annual Report
Anderson, McLeanValue StreamsTotal Value Creation
RSA LondonIndicatorsTomorrowÕs Company
TobinMarket capTobinÕs Q
Dow, A.D. LittleIntangiblesTechnology Factor
EkosIndicatorsSustainability Value Measurement
VariousIndicatorsSustainability Reporting
DenmarkIndicatorsStakeholder Accounts
VariousCapitalsSocial Responsibility Reporting
EdvinssonCapitalsSkandia Navigator
Various (see CICA)Market capShareholder Value Measurement
SAPIndicatorsSAP Value Measurements
PL-X Systems (and others)Value streamsReal options
QRPIndicatorsQRP Scorecard
PerformanceSoftIndicatorsPBViews
Cranfield School of Management, Accenture
IndicatorsPerformance Prism
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Methods Examined (Cont’d)
AndreissenIntangiblesWeightless Wealth Toolkit
PWCIndicatorsValueReporting
Verna AlleeCapitalsValue Networks
ICM GatheringCapitalsValue Extraction
KPMG (Andreissen)IndicatorsValue Explorer
Libert, Boulton, SamekIntangiblesValue Dynamics
E&YValue streamsValue Creation Index
LevIndicatorsValue Chain Scoreboard
PulicIntangiblesValue-added Intellectual Coefficient
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Dimensions Explored
– What management issue does each approach support?
– How the intangibles measurement problem is defined?
– How the solution is described?
– What it is that is measured?
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A Tool for Analyzing Measurement Approaches
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They Are All Different!
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Each and Every One Was Different!
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What Did We Learn?
1. When a Company receives a valuation of an intangible, it cannot understand what the valuation means unless it knows something about the valuation method used.
- there is information it needs to know in order to evaluate the meaningfulness of the valuation.
2. That the context for each measurement approach determines its applicability to the measurement circumstance a firm may face.
3. That there are five dimensions that can help a company define whether a measurement of value makes sense for them.
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The Five Dimensions For Interpreting A Value Measurement
1. Purpose of measurement:• Value?• Performance?
2. What is it that is being measured?• Objects (e.g., assets)• People• Enterprises
3. Perspective or Reference Point• Owner• Buyer• Shareholder• Fair Market
Book Value4. Timeframe
• Past• Present• Future
5. Unit of measure and scale• Value, Vector, Non-currency, Currency• Internal benchmark, relative to owner or buyer, relative to Market Cap
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Additional Learning
• When a company wishes to value an intangible, the selection of an appropriate method is important.
• In order to identify the methods that apply to the management issue under examination, there are 10 questions one must answer in order to select the “best”methods.
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The 9 Questions for Selecting a Valuation Method
1. Detailed Objectives (Value or Performance measurement)2. Perspectives for Value Measurement3. Reference points for Performance Measurement
• Internal• External-in-trade• Market Cap
4. Timeframe (Past, present, future)5. Units of Measure6. Measurement Scale / Standards7. Required confidence level (How accurate must it be?)8. What is being measured (nominal measurement object)9. Underlying basis for measurement (real measurement
object)
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A Useful (and free) Resource
• When you want to learn about one or more of the approaches to measuring intangibles, you can access on-line tools at:
• http://npi.valuemeasurement.net• http://openmeasurement.net
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OK, So What Do You Do?
• First of all, recognize that most of the time, intangibles are valued using a “fair market value” methodology.
– We all understand that for intangibles, FMV has no meaning– Nevertheless, that is often how they are valued
• When you want to know the value of an intangible, we recommend the value streams method.
– It will more fully and accurately identify the multiple value streams that are possible”:
• For you• For a potential purchaser or licensee
• When presented with someone else’s valuation, remember to ask the 5 questions to learn what the value means (and to whom)
• When your firm wants to value an intangible, use the 9 questions to help you define which valuation method makes the most sense for your context.
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Questions?