Intellectual property is a valuable asset in the knowledge economy - but can firms determine its value?

ONE OF the main outcomes of the financial crisis and the global recession has been a drying up of credit. The ensuing search for liquidity has meant businesses are looking beyond tangible assets on their balance sheets and towards the value of intangible assets like intellectual property (IP), staff know-how or company reputation.

This switch in focus should be regarded as a natural progression as we move from an industrial-based economy towards a knowledge- based one.

Recognising this link between innovation and growth, it is appropriate to regard IP assets such as patents, trademarks, copyright and design rights as knowledge economy currency. How is this currency valued?

There are over 50 different approaches to IP valuation. That none of them have been adopted on any significant level is testament to the complexity involved and the varying goals of the interest groups behind them.

However, if IP and patents are to become a viable asset class, some form of transparent, credible and intelligible valuation standard is required. In business there is the notion that the value of a company's IP is equal to the sum of its market value, minus the value of its tangible assets.

However, while market value and tangible assets can easily be expressed in monetary terms, this is where their similarity ends.

The market value of a company can change rapidly based on the confidence shareholders have in its future, while the value of tangible assets are determined under different factors by different buyers and based on transaction prices occurring in the past. Given this fundamental difference in value, it is not meaningful to subtract one from the other to determine IP value.

Indeed the bankruptcy of GM has not led to a decrease in the value of its IP. However, there was a concern over IP ownership if the firm did not retain a major shareholding in Opel. Splitting the IP between the firms would be a terrible dilemma.

If the value of IP cannot be so easily computed, how difficult is it to value an individual patent? Financial accounting provides us with three theorems for valuing assets. Market value indicates the price of the asset based on the going rate for similar assets. The obvious problem is that a patent provides a certain market monopoly, and therefore it may be difficult to identify similar assets for comparison. While cross-licensing and auctions try to identify a price, this is rarely regarded as an objective one.

Alternatively, cost valuation uses the expenses generated during development, eg RD, fees for filing and renewal.