The Ciarb-IPOS IP & Tech Dispute Resolution Conference, sponsored by AlixPartners, was held on 28 August during the 2024 Singapore Convention Week. The conference touched upon a wide variety of topics from mediation involving Intellectual Property (IP) to the rise of AI in IP-related discussions. Michael Peer, Partner and Managing Director of our Singapore office, had the pleasure of moderating a panel on IP valuation at the event. Here is a brief summary of the IP valuation insights that the panel of experts had to share.
Unlocking the hidden value: The essence of IP valuation
IP valuation is the process of determining the value of IP assets. These assets can include patents, copyrights, trademarks, trade secrets, industrial designs and geographical indications. The valuation process analyzes many factors such as the IP's uniqueness, its potential to generate future revenue and the market demand for the products it is related to, among others. From cutting-edge inventions to brand logos, IP valuation allows businesses to put a market value on these critical intangible assets for various transactions.
The focus of IP valuation has historically been to determine the fair value of royalty rates for licensing purposes, but it has since evolved to encompass a wider range of uses. In Singapore, there are three main drivers for IP valuation today:
- In financial reporting: To accurately reflect the value of intangible assets on a company's balance sheet.
- In tax reporting: To justify that potential tax allowances granted for IP rights do not exceed the open market price of these rights.
- In transfer pricing: To ensure transparency in the transfer of intangible assets.
IP valuation is also essential in dispute resolution, as it allows, for example, to determine the value of the damages owed in case of IP infringement or the value of royalties and specific IP assets in arbitration cases. IP disputes are becoming increasingly common, although in most cases IP assets themselves are not the point of contention but rather are indirectly involved as part of company's intangible assets portfolio. Today, most disputes involving claimed damages will inherently feature some form of IP valuation, highlighting the need for companies to accurately evaluate their intangible assets.
Navigating IP valuation obstacles
The undertaking of IP valuation suffers from inherent limitations that experts need to learn to address. For instance, lack of market data in emerging industries can make market-based valuation of IP assets difficult. The subjective nature of IP valuation, particularly regarding future cash flows and risk factors assessment, can also lead to estimates varying widely depending on which method was used.
Another common IP valuation challenge is the volatile nature of the value of IP assets. Several critical factors can indeed greatly influence an IP asset market price over time and need to be carefully considered. For example, technological obsolescence can seriously undermine the value of patents, making IP valuation in fast-evolving tech industries an arduous endeavor. The same goes with changes in intellectual property regulations, which can also have a major impact on IP asset values as it is directly tied to the strength and enforceability of IP rights.
Structural challenges often add to these inherent limitations. Financial institutions can, for example, have reservations about using IP assets as collateral when financing companies due to information asymmetry and a lack of in-house valuation expertise. Meanwhile, they can also be wary of poor IP asset liquidity due to a lack of a well developed secondary market. To address these issues, the Singaporean Government has laid down a comprehensive IP strategy to bolster the Singaporean IP valuation ecosystem. It includes plans to develop standardized IP valuation guidelines, facilitate IP asset transactions, and establish an IP disclosure framework to assist companies in declaring their intangible assets.
Emerging trends
The advent of AI over the past few years has had a tremendous impact on various fields of work, and IP valuation has not been a stranger to this trend. Emerging AI tools such as Automated Valuation Models are allowing valuers to come up with more efficient valuation through the analysis of vast datasets. Does this mean that businesses do not need valuers anymore? In a word, no. While new AI tools are indeed helping valuers to produce more efficient valuation, accurate and timely IP valuation ultimately remains an expert's opinion on value which needs to be comprehensively analyzed, and substantiated in the process of an audit.
The ripples of the AI market impact have also indirect consequences on IP valuation. New AI-powered technologies and processes are rising and falling into obsolescence at an increasing pace, making risk assessment more challenging across many sectors. On the other hand, AI tools are being used to identify infringement risks and uncovering market trends, bolstering businesses' brand and IP management capabilities.
Developments in the international tax space have also caused rising uncertainties for IP-related transactions, especially those between related parties. These developments reflect a global trend towards greater regulation and standardization in the valuation of IP in transfer pricing. Recent publications such as the OECD's transfer pricing guidelines focus on economic substance, arm's length pricing, and alignment with international standards in an attempt to prevent tax avoidance and ensure that IP assets are valued fairly and accurately.
Key takeaway
IP valuation plays a vital role in financial reporting, tax amortization, transfer pricing, and dispute resolution. Today, IP valuation is much more than a financial exercise, it is a strategic imperative that determines the worth of your business' intangible asset portfolio. Despite inherent challenges in the valuation process, the advent of AI-powered tools and recent developments towards a more comprehensive regulatory landscape are enhancing valuation accuracy and efficiency. Do not let your valuable IP go unrecognized. Invest in professional IP valuation and transform your intangible assets into tangible business advantages.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.