Fair value of intellectual property. An options‐based valuation of nearly 8,000 intellectual property assets

AuthorNir Kossovsky
Publication Date01 Mar 2002
Journal of Intellectual Capital,
Vol. 3 No. 1, 2002, pp. 62-70.
#MCB UP Limited, 1469-1930
DOI 10.1108/14691930210412863
Fair value of intellectual
An options-based valuation of nearly
8,000 intellectual property assets
Nir Kossovsky
The Patient and License Exchange, Pasadena, California, USA
Keywords Valuations, Intellectual property, FASB
Abstract Intellectual property (IP), a significant source of intangible value, has been felt by
some to be resistant to fair valuation and more amenable to estimations of intrinsic value. With
the recently issued Financial Accounting Standards Board guidelines for IP that promote fair
valuation, practitioners and clients alike may seek additional methods to determine the fair value
of IP quickly and cost effectively. In this study, nearly 8,000 IP assets were valued using TRRU1
Metrics. The data show a log normal distribution of IP value. Furthermore, the assets valued in
this study showed a mean of $20.76 million, a median of $5.19 million, and a mode of less than
$8 million. When viewed as a real option the features of a patent that behave like a financial
instrument are exposed. When these features are used to drive options-pricing algorithms, a
method for calculating an indication of value of IP with greater objectivity and transparency
becomes operationally practical. Suggests that professionally calculated indications of IP value
based on TRRU1Metrics may yield valuation results that, similar to indications of value
calculated with the Black-Scholes options pricing formula, satisfy the tests of reasoned judgment,
objectivity, and market-price verisimilitude.
The increasing dependence of corporate value on both underlying financial
assets and intangible assets with rapidly changing values has created risks to
investors. These risks arise from the fact that traditional financial accounting
and reporting methods are not sufficiently responsive to capture the present
value of volatile assets. Consequently reports become unreliable and investing
becomes more risky. Increasing risk raises the cost of capital, reduces liquidity
and impairs economic growth.
The problem is of sufficient magnitude that international accounting bodies
have taken action. The Financial Accounting Standards Board (FASB) and its
counterparts in the UK, together with the joint Steering Committee on Financial
Instruments of the International Accounting Standards Committee and the
Canadian Institute of Chartered Accountants, have all concluded that measuring
financial instruments at fair values is an idea whose time has come (Willis,
2001)[1]. The FASB has extended this line of reasoning to include intangible
assets and recently promulgatedstatements 141 and 142 on the matter[2].
The FASB (1999) describes fair value as ``an estimate of the price an entity
would have realized if it had sold an asset or paid if it had been relieved of a
liability on the reporting date in an arm's-length exchange motivated by
normal business considerations.'' The European Commission (2000) describes
fair value as:
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