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Home > Balance Sheets Best Practice > The Value and Management of Intellectual Property, Intangible Assets, and Goodwill

Balance Sheets Best Practice

The Value and Management of Intellectual Property, Intangible Assets, and Goodwill

by Kelvin King

Executive Summary

  • Intellectual capital is recognized as the most important asset of many of the world’s largest and most powerful companies.

  • It is the foundation for the market dominance and continuing profitability of leading corporations.

  • It is often the key objective in mergers and acquisitions, and knowledgeable companies are increasingly using licensing routes to transfer these assets to low-tax jurisdictions.

  • Accounting standards have traditionally not been helpful in representing the worth of intellectual property rights (IPR) and intangible assets in company accounts.

  • Future winners will be those who own and effectively manage intellectual capital, which asset—such as a brand, patent portfolio, etc.—has become possibly the most critical success factor. No sector has been untouched by IPR.


The role of IPR in business is insufficiently understood. It is probably undervalued, undermanaged or underexploited, and there is little coordination between the different professionals dealing with an organization’s IPR. You probably need to have a better understanding about intellectual capital and its ownership, acquisition, and use. You probably need a practical source of knowledge and guidance about intellectual property and other intellectual capital in a commercial context. You might be a chief executive of an intellectual capital company, or a brand-based business, or both. You might be a manager of such a business, or a research director, or academic. Maybe you are a student on a management program, or an accountant, a corporate finance professional, an investor, or a venture capitalist. In your studies intellectual capital will not have been a core subject. Whatever the reason, you need to understand intellectual capital, especially IPRs, to do your job better or to be more successful in your career. IPRs are both important and complex. Therefore the questions to be addressed are often:

  • What are the IPRs used in the business?

  • What are their value (and hence level of risk)?

  • Who owns it (could I sue or could someone sue me)?

  • How may it be better exploited (e.g. licensing in or out of technology)?

  • At what level do I need to insure the IPR risk?

The Benefits of IPR Management

You cannot “manage” without having some understanding of value, and the benefits of good IPR management include:

  • Increased returns on capital invested in the business, particularly capital tied up in intellectual property.

  • Increased shareholder value.

  • A thorough understanding of the alignment of intellectual property development or acquisitions and business strategic objectives.

  • The ability to make informed decisions about intellectual property development or acquisition.

  • The creation of new and diverse revenue streams from intellectual capital, and especially from underused intellectual capital.

  • The ability to distinguish between valuable intellectual capital (perhaps within a large portfolio) and so protect it fully, and intellectual capital of no significant value, which might be sold or abandoned.

  • Achieving lower overall costs associated with intellectual capital development or acquisition, protection, and utilization.

  • Creating internal awareness of the importance of intellectual capital to success.

Current Big Issues for IPR Valuation

  • Accounting standards.

  • Corporate governance.

  • Litigation (defence and attack).

  • Fairness opinions.

  • In-process R&D.

IFRS 3 Business Combination Valuation Allocations, IAS 38 Recognition of IPR in Accounts, and IAS 36 Valuation Impairment Tests

Purchase accounting must be applied to all acquisitions (business combinations are also treated as acquisitions, and there is no more merger accounting). Many intangible assets that would previously have been subsumed within goodwill must be separately identified and valued. Explicit guidance is provided for the recognition of such intangible assets, and IFRS 3 includes a list of assets that are expected to be recognized separately from goodwill.

The valuation of such assets is a complex process and nearly always requires specialist intellectual property (IP) valuation skills, and frequently an IP lawyer to undertake the categorization which the valuer requires. Examples of intangible assets to be separately recognized and categorized within the purchase cost are set out in the regulations and include those which are: marketing-related (trademarks, brands, domain names, newspaper mastheads), customer-related (customer lists and contracts), artistic-related (television programs, photographs, films, publications), contract-based (e.g. licensing and royalty agreements, contracts for numerous situations such as advertising, construction and supply), and technology-based (patents, computer software, databases, trade secrets, etc.).

IFRS 3 is mandatory for all new transactions from March 31, 2004.

Additionally, under IAS 36 valuations need to be independently tested for impairment by the valuer on a regular basis. Obviously one of the valuer’s first questions will be (with advice from the IP lawyer, or patent or trademark attorney): Has there been any diminution of the legal nature of the originally categorized IP?

Corporate Governance

Statute and case law is being developed which will compel boards of directors to accept that they must undertake and lead IP decisions rather than leave them to management.

  • Sarbanes–Oxley: The provision of valuation services for audit clients is prohibited.

  • Caremark International 1996 imposed on directors the duty to ensure adequate reporting.

  • A Walt Disney case in 2003 and Research in Motion (the Blackberry case) establish the potential liability of directors in respect of IP.

  • Find case references at

Back to Table of contents

Further reading


  • King, Kelvin. The Valuation and Exploitation of Intangible Assets. Welwyn Garden City, UK: EMIS Professional Publishing, 2003.
  • Sykes, John, and Kelvin King. Valuation and Exploitation of Intellectual Property and Intangible Assets. Welwyn Garden City, UK: EMIS Professional Publishing, 2003.


  • Sexton, Donald E. “Valuing brand equity.” The Advertiser (March 2000).
  • Torres, J. M., and N. Kossovsky. “Intangible assets and shareholder value.” Intellectual Asset Management 32 (October/November 2008): 18–22.


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