Intangible Assets and Intellectual Property

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1 Intangible Assets and Intellectual Property High Level Task Force on Valuation and Capitalization of Intellectual Assets UNECE, November 18-19, 2002

2 International Standards Most Commonly Used/Referenced Standards Uniform Standards of Professional Appraisal Practice (USPAP) RICS Appraisal & Valuation Manual (Red Book) (Royal Institute of Chartered Surveyors) The European Group of Valuer s of Fixed Assets (Blue Book) (TEGOVOFA) (9 European Countries) International Valuation Standards Committee (IVSC) (50 Countries)

Institute of Chartered Surveyors) The European Group of Valuer s of Fixed Assets (Blue Book)

3 Intangible Asset The assets are fulfilling an economic demand for the service it provides or which it houses. The assets have a significant remaining useful life expectancy. Responsible ownership and competent management are expected. Continuation of the existing use by present or similar users is practical. Functional utility of the assets for their present use is given due consideration. Economic utility of the assets is given due consideration.

Responsible ownership and competent management are expected.

4 Valuation Methods Cost Approach Market Approach Income Approach

5 Valuation Methods Cost Approach The cost approach considers the value of an asset to a knowledgeable, prudent investor, to be that amount currently required to create an asset of equal utility, less measurable depreciation.

prudent investor, to be that amount currently required

6 Valuation Methods Cost Versus Value Cost is not equivalent to value. If economic benefits are not earned from ownership of the asset, the value will be low regardless of the amount of investment required to develop the asset. On the other hand, if economic benefits are earned, then value should be significant.

will be low regardless of the amount of investment required to develop the

7 Valuation Methods Sample of Cost Approach - Computer Software System Application Number of Programs Lines of Code (000) Man Days Required to Reproduce Fully- Burd. Man Day Costs Total Cost to Reproduce (000) Estimated Amount Obsolete Indicated Value (000) Cost ,125 $400 $450 50% $225 Fixed Assets General Ledger % 110 Personnel % 93 Payroll % 238 Quality Control TOTAL $1,200 $896 TOTAL FAIR MARKET VALUE (Rounded) $900

Man Day Costs Total Cost to Reproduce (000) Estimated Amount Obsolete Indicated Value (000) Cost 61 45 1,125 $400 $450 50% $225

8 Valuation Methods Market Approach The market approach is used to estimate value through analysis of recent sales of comparable assets, businesses, or investment interest.

9 Valuation Methods Requirements for Application of the Market Approach to Intangible Assets or Intellectual Property: The existence of an active market Past transactions of comparable intangible assets Sufficient access to market information Arm s length transactions between independent parties

market Past transactions of comparable intangible assets Sufficient

10 Valuation Methods Example of Market Approach - Leasehold Interest Valuation Year Warehouse Square Footage 35,000 35,000 35,000 35,000 Annual Base Rent Per Sq. Ft. $3.00 $3.00 $3.00 $3.00 Contract Annual Base Rent as Adjusted (1) $3.00 $3.105 $3.214 $3.326 Annual Market Base Rent Per Sq. Ft. $5.50 $5.50 $5.50 $5.50 Market Base Rent As Adjusted (1) $5.50 $5.693 $5.892 $6.100 Rental Advantage Per Sq. Ft. $2.50 $2.588 $2.678 $2.774 Annual Rental Advantage $87,500 $90,580 $93,730 $97,090 Discount 12% Present Value $82,688 $76,450 $70,676 $65,342 Total Present Value $291,156 Concluded Value $295,000 (1) Reflects a contractual C.P.I. adjustment of 3.5% per year.

50 $5.693 $5.892 $6.100 Rental Advantage Per Sq. Ft. $2.50 $2.588 $2.678 $2.774 Annual Rental Advantage $87,500 $90,580 $93,730 $97,090 Discount Rate @ 12%.945.844.754.

11 Valuation Methods Income Approach Defined Income approach is a general term that implies future monetary benefits that accrue from the ownership of an asset.

12 Valuation Methods Income Approach Applied to Intangible Assets or Intellectual Property: The future benefits of ownership must be measurable in monetary terms Discounting future monetary benefits to present value at a discount rate commensurate with the degree of risk associated with the realization of the projected benefits Can be indefinite, or have a limited life

monetary benefits to present value at a discount rate commensurate with the degree of risk

13 Present Value Income Approach Applied Income received in the future is worth less than current income Discounting the income stream derived from an intangible asset or intellectual property is generally done considering an estimate of the Weighted Average Cost of Capital (WACC) of the business

an intangible asset or intellectual property is generally done

14 Present Value Weighted Average Cost of Capital (WACC) requires: Estimating the cost of equity Estimating the cost of debt Establishing target market value weights for the capital structure

15 Present Value For Intangible Assets: Risk is the degree of certainty or uncertainty to the realization of expected future returns Intangibles are generally riskier than businesses Investors in risky assets require some additional return above the WACC rate as compensation for bearing the risk - equity based returns are usually considered

businesses Investors in risky assets require some additional return above the WACC

16 Present Value Cost of Equity: As derived from publicly traded companies, e.g. Capital Asset Pricing Model (CAPM) Venture Capital

17 Present Value Ranges of Equity Return Requirements: Start-up % First % Second % Third % Fourth %

18 Asset Remaining Life Measuring Economic Life For Intangible Assets: Appraisers rely on the following as a means to estimating remaining life for intangible assets: Contractual terms Mortality studies based on: Retirement or turnover studies Statistical models (Iowa Curves) Product Life Cycle Industry Practice Buyer/Seller Expectations Technological Changes Legal (Laws)

Mortality studies based on: Retirement or turnover studies Statistical models (Iowa Curves)

19 Patent Valuation Relief From Royalty Approach Year Projected Revenues (000) Relief From 1% (000) After-Tax Relief From Royalty (000) Discount 14% Present Value (000) 1998 $185,900 $1,859 $1, $1, ,100 1,971 1, ,900 2,089 1, ,400 2,214 1, ,700 2,347 1, ,800 2,488 1, ,700 2,637 1, ,500 2,795 1, ,300 2,963 1, ,100 3,141 1, Total $7,698 Rounded $7,700

822 972 2000 208,900 2,089 1,253 0.721 904 2001 221,400 2,214 1,328 0.632 840 2002 234,700 2,347 1,408 0.555 782 2003 248,800 2,488 1,493 0.

20 Patent Valuation Cost Savings Approach Year Projected Volume (000) Savings per unit of volume ($.10) After-Tax Savings ($000) Discount 20% Present Value (000) ,000 $10,000 $6, $4, ,000 15,000 9, , ,000 17,500 10, , ,000 18,500 11, , ,000 19,000 11, , ,000 20,000 12, , ,000 21,000 12, , ,000 21,000 12, , ,000 21,000 12, , ,000 21,000 12, ,041 Total $42,212 Rounded $40,000

694 6,246 2000 175,000 17,500 10,500 0.579 6,080 2001 185,000 18,500 11,100 0.482 5,350 2002 190,000 19,000 11,400 0.

21 Representative Listing of Types of Intellectual Property Valued Patented Know-how Unpatented Know- How In-Process Research & Development Formulas Technology Licenses/ Rights of Use Trade Secrets

22 Representative Listing of Types of Intangible Assets Valued Leasehold Interests Franchises Contracts Non-Compete Agreements Customer Relationships/Lists Employment Contracts Distributor Network Favorable Financing Distribution Network Workforce Trademarks Tradenames Computer Software Licenses Copyrights

23 Valuation in Emerging Market Economies Service with short history Insufficient consistency in applying valuation standards Lack of valuation experience Positive, but also negative valuation s impact on development of local economy

24 Suggested UNECE Actions Create awareness of Governments of importance of proper intangible asset valuation and its impact on development of national economy Support program to train local appraisers to increase the reliability and quality

25 Associates Established in 1896 Yearly Revenues of approx. 95 Million US $, out of which 65% is in the USA, 35% International Yearly Assets Valued for more than 360 billion 59 Offices in 20 Countries, out of which 34 are outside the continental USA References covering 85% out of the 1,000 World s Largest Companies Management/Employee Owned Company

26 AAA International Network Noth America Europe Asia Latin America United States Milwaukee New York Atlanta Chicago Dallas Princeton San Francisco Seattle U.K. Birmingham Manchester London Russia Moscow St. Petersburg Czech Republic Prague Germany Berlin Austria Wien China Beijing Hong-Kong Shanghai Shenzhen Japan Tokio Venezuela Caracas Africa Morocco Casablanca Canada Montreal Toronto Vancouver Mexico Mexico City Italy Bari Milano Pesaro Padua Rome Torino Spain Barcelona Madrid Sevilla Hzngary Budapest Croatia Zagreb Griece Athen Portugal Lissabon Thailand Bangkok Philippines Manila

27 Worldwide Operating Valuation and Consulting Company

THINK Global: Risk and return

THINK Global: Risk and return Changing context of real estate returns in a globalised world Data generating art This document is solely for the use of professionals and is not for general public distribution. Using data from Fig.1