Useful Life Valuations of Intellectual Property
Intellectual property generally
encompasses patents, trademarks, copyrights and trade secrets. When a
situation arises that involves the need to value one of these types of
intangible assets, the concept of "remaining useful life" is commonly used
by valuation experts as a solid starting point.
What Is Remaining Useful Life?
Remaining useful life is generally defined as the remaining period over
which intellectual property is expected to contribute to the owner's future
cash flow. It is used in the three primary techniques for valuing
identifiable intangible assets, including intellectual property rights. By
its nature, intellectual property valuation is more complex (and more prone
to disagreement) than the valuation of other asset categories. A valuation
professional will typically review several "life" factors in calculating
remaining useful life.
Statutory, Legal and Judicial Life
Federal law can control--whether through the imposition of regulations
or specified limits--the period during which an owner's rights in certain
types of intellectual property are protected. Government intervention can
shorten an intangible asset's remaining useful life, as can be the case with
food and drug regulations, for instance. Copyrights and trademarks, on the
other hand, are generally granted for specified terms.
Similarly, court action--whether the result of a court ruling or a
litigation settlement agreement--may alter the legal life of an intangible
asset that was otherwise fixed. Naturally, such action must be taken into
account for valuation purposes.
Technological Life
The reality of rapid advances in technology can create situations in
which the practical lifespan for intellectual property is much shorter than
its statutory or legal life. A patented innovation, for example, can be
rendered obsolete by subsequent inventions that vastly diminish the original
patented product’s usefulness--well before the expiration of the patent. A
valuation professional must account for the possibility, or even the
likelihood, that other intellectual property may diminish an asset's
remaining useful life.
Economic Life
In the marketplace, competition and demand for an intellectual property
asset can alter expectations on the part of the asset owner. For instance,
increased competition for an intellectual property asset may be expected to
yield lower sales, adversely affecting remaining useful life. Similarly, if
demand for the asset wanes, royalty payments over time can reasonably be
expected to diminish.
The art of valuing an intangible intellectual property asset lies in being
able to assess--based on the valuation method employed--which "life" is most
applicable to the asset. For instance, if a valuator utilizes a discounted
cash flow model to value copyrighted software, using the lengthy statutory
life of copyright protection would be incorrect if the software's economic
life were only a couple of years in duration.
Functional Life
Examining the history of the functional lives of intellectual property
assets similar to the subject property can provide an estimate of the
subject property’s remaining useful life. For example, a professional
evaluating computer software may look at similar technology and its
functional life in estimating the remaining useful life for the software.
Conclusion
Valuation professionals commonly rely on these "lives" and others to
determine the remaining useful life of an intellectual property asset. We
can help compile various data sources and apply our professional valuation
experience in determining the remaining useful life of an asset.
Contact us
for more information.
This newsletter is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed, please contact
Steve Riddle,
Tom
Thieme,
Rex Collins,
Ken
Stalcup or
Doug
Ayres
of our
Litigation, Valuation & Forensic Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
info@somersetcpas.com
