Valuing Intellectual Assets, Research Paper Example

One of the most impactful changes to occur in the recent economy is the growing importance of intellectual capital over physical capital. A company’s value is no longer provided simply by the machines it has and their production capabilities. Today, that worth is also derived by the mental capacities of employees, the system under which the company operates, and assets that have gained legal protection for the company. With this shift in the way companies make themselves valuable and competitive, a problem has arisen over how to properly evaluate these assets. Proposed solutions include historical market data from licensing agreements, judging the price of creating these assets, and attempting to estimate the future benefits of the capital.

Intellectual capital is the intangible assets of a company that provide an advantage in competitive marketplaces. This includes human capital, the total knowledge contained by the individual employees of a company. Also, a company’s methods of operation, or its structural capital, is an asset in that it can improve a company’s efficiency. Intellectual capital also includes any knowledge that can legally be owned and traded, known as intellectual assets. Finally, intellectual assets that have received legal protection are known as intellectual property. Intellectual property is therefore the intellectual assets that have been legally granted to a company as exclusive. This includes patents, copyrights, trademarks, trade secrets, and know-how (Consulting Group, L.C. 2000).

The difficulty in valuing these types of assets is obvious. Physical capital such as a machine can be quickly valued through either through the standard accounting method of depreciating from the market price of the new machine or a more nuanced system in which the production capacity and market value of that production is used. However, quantifying the production value of a staff’s knowledge is extremely difficult. Also, depreciating a company’s structural assets is challenging as such a value is so dependent on the relative position of structural efficiency compared to that of other competing companies. Therefore, the methods for valuing intellectual assets must be different than the methods for physical assets.

One system proposed is to use historical databases of licensing agreements. By evaluating the costs paid for similar items, the theory is that one can produce a good estimated value for the assets they wish to valuate (Consulting Group, L.C. 2000). However, finding enough similar and similar enough products that have publicly reported licensing values can be difficult especially for assets of such intangible nature. Another proposal is to estimate the cost it would take to replace or create an intellectual asset. However, Kelvin King states that this method ignores the time value of money and the cost of maintaining these assets. Surely, the latter is important as a cutting edge structure can become obsolete quickly in a rapidly changing industry. King concludes that in an ideal world, market values suggested by licensing fees can be used. In situations where this is unfeasible, he recommends a more nuanced approach in which the profits and cash flows of an asset are utilized. This method aims to estimate the value that such an asset can be expected to creating through a more theoretical approach than empirical (King).

With the growing importance and the difficulty of measuring the worth of intellectual capital, an opportunity has been created for savvy investors. More accurately judging the value provided by such an important factor can be a huge advantage.

Works Cited

Consulting Group, L.C.. (2000, May 29). Intellectual Property Valuation. Smart Pros. Retrieved           November 3, 2011, from accounting.smartpros.com/x7594.xml

King, K. (n.d.). The Value of Intellectual Property, Intangible Assets and Goodwill. WIPO World Intellectual Property Organization. Retrieved November 4, 2011, from            http://www.wipo.int/sme/en/documents