standard is ing ip valuations

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Standardising IPvaluations: whether,what and how

There is an increasing recognition that ideas,knowledge, know-how, innovations and otherintangibles are fundamental sources of valuein business. But identifying and measuringthat value is complicated, with more than 50methods currently available to do so. In thecase of intellectual property, a valuable formof intangible to the business and financialcommunities, there is a particular interest inimproving the consistency, quality andusefulness of valuations.

The valuation of IP matters to a largenumber of professional groups. They includebusinesspeople, valuation professionals,accountants, academics, consultants,regulators, tax authorities and valuationthought-leaders. But there is no generalagreement among them on how the valuationof intangibles should be conducted.

Several attempts have been made overthe past decade to develop standards forvaluing intangibles (see Box B for someexamples), but none has had a visibleimpact on IP valuations or significantlyimproved the quality and consistency of IPvaluation reports. Why not? What are themajor issues that have prevented thedevelopment of IP valuation standards?

Although none of the previous attemptsto standardise IP valuations has succeeded,each one furthered our understanding of

Valuing IP is complex, with morethan 50 different methods currentlyin use. Given the growingimportance of IP to so manyorganisations, perhaps now is thetime to re-think whether globalvaluation standards make sense

By Dr Patrick H Sullivan

intangibles and the characteristics thataffect their value. With that greaterunderstanding in hand, and given theimportance of IP to an increasing number businesses, it seems time to investigatethree fundamental questions related tostandardising IP valuations:• Does it make sense to standardise IP

valuations?• If so, what should be standardised?• How could valuation standards be

created and implemented successfully?

The answers to these questions depenon the perspective of the person asked andthe professional communities within whicthey operate. The different, and sometimenarrow, interests and focus of eachcommunity have made it impossible forthem to agree on any one standard for IPvaluation. Further, the tendency of businesses to consider IP valuation mainlywithin the context of the financialaccounting paradigm has been a majorimpediment to the development of crediband useful valuation standards.

Although standardisation affects divercommunities, the one most directly affectis the IP valuation community itself. Forthis reason it seems reasonable to begin anexploration of standardisation through theeyes of this community.

For credible views on the threefundamental questions above, I sought theopinions of respected academics andpractitioners who have made significantintellectual contributions to the field of intellectual property valuation, both intheory and in practice. Six such peopleagreed to be interviewed (see Box A). Thisarticle presents the views of these experts(referred to here as the panel). Myinterviews with them were conductedserially with each independent from the

IP valuatio

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IP valuation

others. No one thought leader expressed allof the ideas presented here, although therewas remarkably little disagreement on the

basics. The collective perspective thatemerges from their views may establish acontext and criteria for future attempts tostandardise IP valuations.

Standards and standardisation

There are two broad types of standards:rule-based standards and principle-basedstandards (I use standards in this context tomean guidelines and definitions, such asISO 9000 for quality systems and ISO 400for film speed). Rule-based standards areoften found in environments where there isboth a need and a capability to enforce thestandard. Principle-based standards are

often used in professional environmentswhere definition and understanding of accepted professional behaviour (more thanenforcement) is often the main issue.

Traditionally, there has been a boundarybetween technical standards organisationsand professional standards organisations,although the lines between them arebeginning to blur. On the technical side,perhaps the premier organisation is theInternational Organisation forStandardisation (ISO), formed to: “Facilitatethe international coordination andunification of industrial standards.” ISO ismade up of member bodies that are “mostrepresentative of standardisation” in theircountries. Only one organisation from eachcountry is accepted for membership in theISO. So, for example, in the United States themember body is the American NationalStandards Institute (ANSI); in Canada it isthe Canadian Standards Council; and in Japanit is the Japanese Standards Association.

The need for an ISO standard is usuallyexpressed by an industry sector, whichcommunicates this need to an ISO nationalmember body. The latter proposes the newstandard to the ISO as a whole. Once theneed for an international standard has beenrecognised and formally agreed, the firstphase involves defining the technical scopeof the future standard. This phase is usuallycarried out in working groups of technicalexperts from countries interested in thesubject matter. Although the ISO and itsmember bodies have typically focused ontechnical and industrial standards, theyhave more recently become involved withmanagement systems standards.

In contrast to technical standardsorganisations, professional standardsorganisations focus on the ethics, methodsand practices in specific professions.Examples include the accounting profession

(in North America they are the US FinancialAccounting Standards Board (FASB), theCanadian Institute for Chartered

Accountants (CICA) and Mexico’s Instituto

de Contadores Publicos); the legal profession– the professional standards committees of the national bar associations; and themedical profession – the professionalstandards committees of the nationalmedical associations; to name but a few.Each profession establishes its ownstandards, some relating to ethics, others tomethods of operation and still others tospecific practices.

Is the IP valuation communitysufficiently organised and cohesive towarrant the establishment of either a rule-based or a principle-based set of standards

such as those described above? The IPvaluation community spans differentdisciplines, each with its own perspective. Itis a fragmented community populated bypeople trained in accounting, economicsand finance; IP valuation has not yetachieved the degree of cohesion necessaryto call itself a profession. A standard for IPvaluation developed around the context of any one of its constituents (accounting,economics or finance) could be entirelywrong for the others.

Standards are more easily implementedwhen they are reinforced. A good example of reinforcement is found in the Canadianaccounting profession, which uses fourmain sets of standards:• Financial reporting standards –

standards for measurement anddisclosure.

• Auditing standards – dealing withmatters concerning the process of auditing.

• Ethical standards – a code of professional conduct for accountants.

• Certification standards – defining thebody of knowledge and thecompetencies that accountants areexpected to possess.

The first two sets of standards are theresponsibility of an independent standard-setting organisation and the professionitself manages the latter two. The fourdifferent categories of standards aremutually reinforcing. The auditingstandards reinforce the financial reportingstandards; the ethical and certificationstandards ensure that accountants arequalified and motivated to live up to thefinancial and auditing standards, as a failureto maintain one’s knowledge or to actethically can cut a career short.

In short, standards of practice or

Dr Daan Andriessen

Professor of Intellectual Capital at

InHolland University

Six thought leaders in the field of intangibles

valuation whose views on IP valuation issues

are discussed here:

• Dr Daan Andriessen: Professor of

Intellectual Capital at InHolland University

and author of Weightless Wealth

• Dr Baruch Lev: Professor of Accounting

and Finance at New York University;

author of two books and many articles

on intangibles and their value

• Rob McLean: President of MatrixLinks,

author of Re-Discovering Measurement,

and adviser to the Canadian accounting

profession on intellectual capital and

value measurement

• Russell Parr: President of Intellectual

Property Research Associates Inc (IPRA);

author and co-author of 10 books on

intangibles and valuation

• Gordon Smith: Chairman AUS, Inc.,

author and co-author of several books

on IP valuation; Adjunct Professor and

director of IP Institute at Pierce Law.

• Dr Alexander Wurzer: Managing Director

of PATEV; Director of the Institute for

Intellectual Property Management at

Steinbeis University, and author of

several books and articles on IP

valuation.

Box A: The panellists


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Selected list of organisations and activities

that have attempted to develop IP valuation

standards:

• Brookings Institution Project on

Licensing Executives Society (LES)

“Gold Standard” Project

• US Financial Accounting Standards

Board (FASB) Statements 141 and 142.

• Value Measurement and Reporting

Collaborative (VMRC)

• International Valuation Standards

Committee

• German Institute for Standardization,

General Principles of Proper Patent

Valuation

• International Organizations for Standards

• International Financial Accounting

Standards Board (IFASB)

Box B: Standardisation attempts

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performance may work best when they canbe developed in concert with otherstandards that reinforce the desired

conduct.

What is the generic process for valuingintangibles?Whether estimating price or worth,professionals who seek to value IP follow ageneric process. Before doing anycalculations they identify the factors thatdefine the context of the valuation at issue(see Box C). They identify the method thatwill be used, the parameters involved, thedata required for the calculation andinformation about the markets, as well asany external factors deemed to be pertinent.

Professional valuators recognise that

valuation is as much an art as a science,meaning that while there are protocols andaccepted procedures (the science), thedecisions that precede calculation areperhaps more crucial to a successful IPvaluation activity than the calculationsthemselves. Making those judgements (theart) is inherent in the process and must beconsidered in any standardisation procedure.

Why should IP valuations bestandardised?The reasons for standardising IP valuationsdepend largely on the perspective of theperson asked. People outside the IPvaluation community – for example,regulators, tax authorities and accountingstandards setters – answer differently fromthose inside it. Regulators are interested inlevelling the playing field, ensuring that IPvaluation information is understandable andavailable to all interested parties. Taxauthorities want IP valuations to beconsistent, credible and conducted in accordwith their own standards; financialaccountants need valuations to comply withGenerally Accepted Accounting Principles(GAAP) or International Financial ReportingStandards (IFRS). But professional IPvaluators, people inside the IP valuationcommunity, have different concerns. Thefocus of IP valuation professionals is onimproving the quality and consistency of IPvaluations, whereas the focus of thoseoutside the community is on ensuring thatIP valuations be conducted within uniqueframeworks associated with their differentperspectives and IP contexts.

The panel, largely (but not unanimously)agreed that an IP valuation standardisationprocess should be led by the IP valuationcommunity. The arguments forstandardisation were identified as follows:• The need to create a common language:

The terms often used in the valuation intangibles are not used uniformly. Thword value itself is used to mean sever

different things. A standard shoulddefine the relevant terminology in ordto provide clarity in communicationsand minimise the chances of misunderstanding.

• The need to improve the consistency ovaluations and valuation reports:Because there are so many methods anso many IP valuators, with differentprofessional training and levels of understanding, there is littleconsistency in how valuations areconducted and what IP valuation reporcontain. Some include backgroundinformation, the sources of data used

and the details of business judgementsOthers provide little more than the typof IP being valued and a value estimateIP valuation standards could improveconsistency by defining what a standaIP valuation report should contain.

• The need to minimise unethical andincompetent valuations: Professionalvaluators are implicitly entrusted to ustheir professional knowledge and skill provide the best valuation estimatepossible. But some intentionally abusethat trust; while others may be well-intentioned but lack knowledge andexperience. Standards would help tominimise unethical and incompetentvaluations by defining a set of ethicalprinciples and behaviours to which IPvaluators are expected to adhere.

• The need to define required valuatorknowledge: People who are new to thefield of IP valuation may lack anadequate understanding of the nature oIP – the special considerations relatedto valuing IP, how IP is used in businesand the different kinds of value it canprovide. In the absence of standardsdefining the level of knowledge andknow-how necessary for valuing IP, supeople blithely enter where others fearto tread. A standard could require orrecommend a particular level of knowledge and understanding on thepart of the valuator.

• The need to let clients and users of avaluation know what to expect: Clientand users of valuation results shouldknow something about IP value andvaluation, as well as what to expect frothe person conducting the valuation.This might include educationalinformation about the value andvaluation of intangibles, examples of what a valuation report is expected to

Rob McLean

President of MatrixLinks



IP valuation

contain, information about the level of knowledge required of IP valuators andinformation about what the profession

has codified as its code of ethics.

The panel identified three majorarguments against standardisation:• The number of factors that are specific

to each intangible makes standardisingtheir valuations impossible.

• Standardisation could oversimplify whatis inherently a complex process.

• We should avoid arriving at only one viewof valuation – one that is North Americanor European centric, for example. Such asingular view of IP valuation could causepeople to make assumptions about thevalue of IP that are not necessarily valid in

all corners of the world.

What can be standardised?The panel agreed that potential standardsshould provide the highest level of guidanceand direction while avoiding detailed control.Standards at the micro-level, or valuation byrote, would recognise neither the manypossible contexts for a valuation nor theneed for judgement in the valuation process.Such a standardised approach would havelittle credibility and probably few advocates.

The panel recognised a need forflexibility in what is to be valued. Panelmembers pointed out that new forms of intangible enter our world every day. Only afew years ago, for example, websites anddomain names were unknown, yet todaythey are common items for valuation.Because the items to be valued are changingconstantly, any standards developed shouldfocus on principles that can be adapted tonew needs and situations. Excessivelydetailed, low-level or rule-based standardswould stand in the way of that.

Nevertheless, the panel thought it couldbe possible and desirable to standardise thefollowing:• Ethical guidelines for valuators: There

are currently no generally agreed ethicalstandards to which valuators in the IPvaluation community must adhere.There are individual professional groupswithin the IP community that havedeveloped standards of behaviour fortheir members, but these are neitheraccepted nor necessarily practisedbeyond the borders of the groups’membership lists.

• Terminology: Too frequently, valuationreports contain terms and phrases thatare undefined, ambiguous or unique toan industry or area of business. Aglossary or dictionary of commonly

used terms would minimisemisunderstandings.

• The identification of elements that

constitute the context of the valuation:It is now common wisdom in the IPmanagement community that IP (andother intangibles) are operationallypassive, having no value by themselves.It is only when these intangible assetsare teamed with other (often tangible)assets, operational capabilities or usesthat their value can be released. Thecontext within which an IP asset is useddefines the nature and amount of valueit can provide to a specific owner oruser. Although our understanding of context is still evolving, the panelprovided an understanding of the

elements that currently appear to defineit (see Box C). Standards could requirethat the context of an IP valuation beincluded in any valuation report.

• The content of a valuation report:Clients often complain that IP valuationsare inconsistent. In part, this is truebecause there is no broad agreement onthe appropriate or necessary content. AnIP valuation standard could listappropriate and desirable contentcategories, with examples.

How should valuation standards becreated and implemented successfully?The panel deemed several items to beparticularly important in developing IPvaluation standards that are viewed ascredible by professionals within and outsidethe IP field. These were: oversight of thestandards development process; broad-based professional participation; and anunderstanding of the steps to be followedduring the standards development process.

Oversight of the processThe credibility of standards would beenhanced if they were developed under theauspices of a body, enterprise or activityheld in high regard by those who conduct IPvaluations. Several such bodies exist, eachoffering advantages and disadvantages. Butin the view of the panel, there is no onebody with sufficient focus, credibility andreach to sponsor an IP valuationstandardisation effort. The panel concludedthat a consortium of organisations mightappropriately sponsor the development of IP valuation standards.

Professional participation in thestandard-setting processThere was agreement that even if IPpractitioners were to lead the effort, they

Russell ParrPresident of Intellectual Property Research

Associates Inc (IPRA)

Gordon Smith

Chairman AUS, Inc


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must invite the other stakeholdingindividuals, societies and enterprises to thetable. The list of interested stakeholders

includes, but is not limited to:• Regulators (eg, the US Securities and

Exchange Commission).• Taxation officials (national, federal,

state, provincial).• Standard setters (accounting standards

boards; eg, FASB, CAcSB, IASB).• Professional organisations, such as the

American Institute of Certified PublicAccountants (AICPA); the CanadianInstitute for Chartered Accountants(CICA); the Licensing Executives Society(LES); ASAM; CFAI; the existing businessvaluation communities, such as AICPA’sBusiness Valuators (ABV), Canada’s

CSV’s (Chartered Business Valuator), the(American) and the (International)Society of Appraisers, et al.

• Representatives from the capital markets.

The panel largely agreed, however, thatthe effort should be primarily intended for(and led by) IP professional valuators. Theirreasoning is that if practitioners do notdevelop standards for their own profession,someone else will do so. Standardsdeveloped by other professions could verywell be incomplete, inadequate or skewed;and IP valuators might be less inclined toadhere to standards developed by others,regardless of their adequacy.

Steps in the processThe standardisation effort might be dividedinto parts, with the IP valuation communityfocusing its efforts on improving the qualityand consistency of IP valuations andvaluation reports. Other concerned groups,such as the business community, the legalcommunity, the regulatory interests and thecapital markets, could develop and codifytheir own IP valuation standardisation needs.The IP valuation community could thenintegrate their efforts with the interests andneeds of these customers of IP valuations.

Ensuring complianceThere is a spectrum of possible approachesto compliance. At one end of the spectrumcompliance is voluntary; at the other endcompliance is required and policed.

At the voluntary end of the spectrum,there is no reasonable way to ensureabsolute compliance with any standard of practice; whereas at the enforcement end of the spectrum, policing is required.Valuation standards must be reasonableenough that a professional valuator wouldsee them as advantageous and would

willingly adhere to them. Standards that ainappropriate, onerous or simply notcredible would soon be abandoned by all.

Those who favour a stricter approach tathe view that because there will always bepeople who flout standards, there should besome sort of an oversight group or committto which ill-informed or unscrupulous actomay be brought for review and education, oreven possible censure. Lacking such oversigof professional conduct, these people argueis difficult to see how compliance could beachieved.

The panel took no view on the questioof compliance, except to express a hope thany standards would be so well conceived to be accepted by all as worthwhile and gobusiness practice.

How to organiseAlthough the large number of concernedstakeholders in this effort creates thepossibility for an unwieldy organisation, tpanel did not provide specifics for how theffort might be organised. The panel agreethat a steering group should guide theprocess, though it did not agree on itsmake-up. One view was that the steeringgroup should comprise only members of tIP valuation community, working closelywith a more widely constituted workinggroup made up of members of stakeholderorganisations. The counterview was that tsteering group should include both IPvaluation community members and otherstakeholder representatives.

Summing upThe valuation of intellectual property is mocomplex than valuation of real or tangibleproperty. Numerous business, academic,regulatory, professional bodies andindividuals have a stake in the valuation of They view it through lenses that are polarisby the needs of their own community.

Developing any standard from thecollective perspective of such a broad fieldof interested entities and individuals will difficult. One practical alternative appearsto be the potential development of IPvaluation standards from the perspective othe IP valuation community, the group modirectly concerned with the quality andconsistency of valuation results. Otherinterested groups, individuals andorganisations might adapt that standard tomeet the needs of their own communities

The thought-leaders interviewed for tharticle agreed that any attempt atstandardisation must avoid oversimplifyingthe process, which requires a series of

judgements on the part of the valuator.

The context of an IP valuation may include a

number of factors, among them:

• The purpose of the valuation estimate

(eg, tax, external performance reporting,

sale, licensing or litigation), as well as

any purposes for which the valuation

specifically may not be used.

• Identification of the beholder, the person

from whose perspective the valuation

estimate is viewed (eg, external

beholders, such as potential investors,

shareholders, prospective purchasers; or

internal beholders, such as the CEO, the

CFO, chief legal officer, licensing officer,

chief R&D officer).

• The definition of value used; for example,

worth – value in use to a specific

beholder; or price – a historical or future

estimated selling price.

• Any premises that should be understood

to affect value (eg, whether the business

is a going concern, has filed for

bankruptcy and so on).

• Timeframe of the value estimate (past,

current or future).

• The standard of measurement (market

capitalisation, value in exchange, value

in an accounting framework).

• The unit of measurement (eg, currency,

indices, ratios, vectors).

Box C: Potential valuation contexts

Dr Alexander Wurzer

Managing Director of PATEV



IP valuation

Individual panellists pointed out that thereare several issues that standards couldusefully define. First, a glossary of commonly

used terms and phrases would minimisemiscommunication. Second, the consistencyof valuations and valuation reports could beimproved by defining what kinds of information they should include. Third,valuation reports should identify anddescribe the context for the valuation.Fourth, a standard should include a code of ethical behaviour outlining acceptablebusiness and valuation activities. Fifth, astandard should describe the minimum levelof knowledge and know-how necessary for IPvaluators to do their job. And, finally, becauseclients and users of valuation informationshould be made aware of what to expect from

an IP valuator and an IP valuation report, astandard should include information such asthis that could be provided to clients andusers of IP valuation reports.

Most panellists posited that the chancesfor success in developing and implementingIP valuation standards would be enhanced if it were done under the auspices orsponsorship of a credible body or authority.But they reached no consensus on whatgroup would be sufficiently authoritative toprovide such credibility.

The two different kinds of standard-setting bodies, technical and professional,each deal with different kinds of standards,with different dimensions of standardisationand with different audiences. Technicalstandard-setting bodies, such as the ISO,have considerable experience developingrule-based technical standards for products,but they have little knowledge or experiencewith setting principles for a professionalactivity such as IP valuation. Using aprofessional standard-setting body is not anoption in this case, however, because IPvaluation is still in its infancy and lacks aprofessional oversight body.

In the final analysis, there are twoconclusions one may draw about asponsoring body: first, that it is desirable;and second, that no one existing bodyappears adequate for the task. A consortiumof sponsoring bodies might therefore beneeded to provide credibility to an IPvaluation standard-setting activity.

Alternatively, any standardisation effortthat is led by the IP valuation communitymust be populated with participantspossessing sufficient knowledge andexperience to be credible themselves.

If the focus of the IP communityparticipants is to be on improving qualityand consistency, then perhaps it makessense to ask each of the several other

interested communities (eg, legal and capitalmarkets) to define the contexts withinwhich their community would like to have

valuations conducted. Perhaps such abifurcation would allow each community tofocus on what it is able to influence, leavingthe others to do the same.

Towards an IP professionAlthough there are several conclusions onemay draw from the preceding discussion,two are unequivocal:• IP valuation standards would be useful,

particularly if they were focused onprinciples rather than on detailed rules.

• At a minimum, such standards shouldfocus on improving both the quality andthe consistency of IP valuations and

valuation reports.

On the question of how such standardsmight be developed and implemented,however, there is not yet a clear path. Thereis not yet an IP valuation profession, oreven a common understanding of what orwho constitutes the IP valuationcommunity. Still, it appears that businessand regulatory communities have a needand a desire for some sort of standard forvaluation activity and performance. Perhapsit is time to discuss whether to formalise anIP community (as distinct from the broadervaluation and assessment community) as astep towards the ultimate development of an IP valuation profession.

Because there is no single organisationcapable of credibly and effectivelysponsoring an IP valuation standardisationeffort, a consortium of several potentialsponsoring bodies could be created toprovide the necessary oversight. Althoughtoday the IP valuation community is acommunity in name only, the importance of IP valuations and the concomitantdesirability of an IP valuation professionmean that the development of an IPprofession should be a topic for futurediscussion.

Dr Patrick H Sullivan is President and

founder of ICMG LLC, and co-founder of the

ICM Gathering. He is the author of several

books and many articles on IP management

and on the valuation of intangibles

Anyone wishing to comment on or react to

the thoughts in this paper may contact the

author at [email protected]

The author gratefully acknowledges Bill

Swirsky, Sharon Oriel, and John Raley for

their constructive comments and suggestions

Business and

regulatorycommunities havea need and a desirefor some sort ofstandard forvaluation activityand performance

standard is ing ip valuations

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