Valuation of intellectual property involves assigning a value to intangible assets such as trademarks, copyrights, and patents. It may be required for selling, tax, accounting, financing, or bankruptcy purposes. Fair market value is the current value of the asset in a hypothetical situation. All parties involved in the transaction should be aware of all the details about the IP to make it as realistic as possible.
The valuation of intellectual property consists of assigning a value to the intangible assets of a company. Intellectual property includes creative items owned by companies, such as trademarks, copyrights, and computer software. Innovative trade items, such as patents, industrial designs, and trade secrets, are also considered intellectual property.
The need to assess the value of intellectual property may arise for a variety of reasons. One of the main reasons is if the company or the owner of the intellectual property wants to sell it to someone else. Another reason for the valuation of intellectual property is for tax purposes, when agencies like the Internal Revenue Service (IRS) want to know the value of the property.
The introduction of Rule 142 of the Statement of Financial Accounting, Goodwill and other intangible assets is also changing the approach to the evaluation of intellectual property for accounting purposes. With the introduction of this standard, intangible assets are recorded on the company’s balance sheet at cost. Previously, these assets were managed using a set depreciation period. In addition, the IRS also wants to know how the owner of the intellectual property determined the value in the first place.
Two other situations where an IP valuation is required are for financing purposes and bankruptcy. Beyond external sources needing to know how much intangible assets are worth, companies also have internal needs to value property. For example, if one of the assets is bought or sold, then an intellectual property valuation is required for the proper recording of the purchase or sale in the company’s accounting records.
In general, the valuation of intellectual property refers to the fair market value of the asset. Fair Market Value (FMV) is the price that a willing seller and a willing buyer would exchange to transfer ownership of the asset. In other words, fair market value is the current value of the asset in a hypothetical situation. Additionally, all parties involved in the transaction should be aware of all the details about the IP that is part of the IP valuation to make it as realistic as possible.
For example, if a company patents an invention that could save the company $1 million US dollars (USD), then the valuation would be the amount of cost savings to the company. However, realistically, a company is not going to pay for a patent on an invention that equals its cost savings. In reality, this puts the value of the patent somewhere between $0 United States Dollars (USD) and $1 million United States Dollars (USD).
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