The shifting nature of patent valuation is prompting questions around transparency, prompting debates over whether companies should have to disclose their IP value on the balance sheet and how to communicate effectively with C-suite executives.

This year’s Strategy 300 Global Leaders examines the nuances involved in determining IP value and emphasises that a strong IP strategy is vital, especially at a time when a rise in non-patented assets as subject for valuation is foreseen.

Balance sheet disclosure – helpful transparency or jumping the gun?

According to Chris Donegan of Invention Capital Associates, many inventive companies already reveal the number of patents or trademarks they hold or their brand rankings in annual reports. The valuation of these assets, however, is most often presented as a cost in the R&D budget. “More generally, intellectual property is captured under the amorphous heading, ‘goodwill’.” These approaches avoid trying to claim a definitive or market valuation as a statutory matter, which Donegan thinks is “sensible” due to the highly contextual value of intellectual property.

“This is a very interesting area of discussion,” muse Angela Quinlan, Paul Riley, Kapu Kumar, Paul Seaman and Stephen Pomraning of Key Patent Innovations. They report that many European parties are looking at this issue in detail, including national patent offices and the European Patent Institute’s IP commercialisation committee. “While accurate evaluation of intellectual property is a non-trivial matter and will likely remain a specialist task requiring expert knowledge, standardisation of valuation tools may provide an opportunity for companies to leverage their assets to obtain funding to support growth and further investment.”

Intangible assets often make up a substantial portion of a company’s overall worth in today’s economy. However, the current gap in financial reporting leaves investors and stakeholders with “an incomplete view” of an organisation’s value and potential, says Efrat Kasznik of Foresight Valuation Group. “Disclosing intangible asset values could enhance transparency and improve decision-making for investors.”

Donegan agrees. “I do think that companies that report their IP portfolios in more detail will benefit from an increase in transparency, since capital market analysts will gain better insights, and it will serve disclosers well in licensing discussions.”

However, how this is done is a “governance and strategy issue”. Intangible assets can be volatile and subject to regulatory and judicial changes, and companies may need to account for these through testing for impairment, Kasznik warns.

“The methodologically unstandardised nature of IP valuation actually reflects a much more fundamental issue in the economics of intangibles,” says Jack Lu of IPMAP. “I think the question of whether to disclose the value of intellectual property on the balance sheet would have to be answered based on the specific type of IP asset.”

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IP experts address valuation disconnect and how to build a robust IP strategy