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Are Companies Valuing Intellectual Assets

UNDER SARBANES-OXLEY (SOX), public companies must disclose to the Securities and Exchange Commission matters that may materially affect financial performance. One such matter might be the lapse of a trademark or copyright into the public domain.

While SOX does not explicitly require businesses to report the value of intellectual property (IP) or other intangible assets, experts suggest that companies at least be capable of putting a value on IP and assign that value when it is appropriate.

There are cases where reporting IP value is mandatory, however. Under standards issued by the Financial Accounting Standards Board, the value of IP must be listed on a balance sheet when a company is involved in a business combination such as a merger or acquisition, explains Gary Bender, an IP valuation expert at Ernst & Young in San Francisco. It then has to report that value each year thereafter, since expirations, legal judgments, and other factors might change the value.

Bender says that it’s good business to have a firm handle on intellectual property and be able to value it. Those numbers can prove useful if, for example, shareholders sue the company, alleging that intangible corporate assets were sold at fire-sale prices. Yet many companies are unprepared or ill-equipped to do so, says Michael Moberly, president of Knowledge Protection Strategies, in Memphis. “In my experience, companies are literally avoiding as best they can putting a value and recording a value,” Moberly says.

Many companies haven’t even inventoried their intellectual assets. Naomi Fine, president and CEO of Pro-Tec Data, a California information-protection firm, finds that companies are confused about what constitutes intellectual property, such as proprietary procedures and processes, testing data, and planning strategies.

The answer isn’t clear-cut. Among the ways Fine uses to classify material as IP is by determining whether it generates revenue or would lose value if the data got out to competitors or the public.

Given its amorphous nature, assigning a value to IP is tricky. “It’s really an open area,” says Fine. “We have 100 years of history of valuing assets in litigation, and there’s still no standard.”

When IP must be given a value in litigation, courts may look at the cost of developing the IP, what a competitor would have paid to acquire it, or losses incurred due to its compromise. In less formal settings, company estimates of the value of IP assets may be little more than rough guesses, says Moberly.

Various formulas exist to help value IP assets, but none of them suits every situation. For example, says Bender, calculating the value of a trademark versus the value of a nonexclusive license to use the trademark calls for different formulas. But Bender cautions that companies need not assign value to IP just for the sake of doing so. Instead, they should always have the capability of assigning value, which begins by inventorying and categorizing their IP.