RICS draft guidance note - Valuation of Intellectual Property Rights, Guidance Note, 2nd ed

RICS draft guidance note - Valuation of IP Rights, 2nd edition

Disclosing the extent of investigation and the basis of value

Restrictions in scope

Paragraph 20.3 (i) of IVS 101 (see also VPS 2 section 1 of Red Book Global Edition) states:

'Any limitations or restrictions on the inspection, enquiry and/or analysis in the valuation assignment must be identified ... If relevant information is not available because the conditions of the assignment restrict the investigation, these restrictions and any necessary assumptions or special assumptions ... made as a result of the restriction must be identified.'

As required by Red Book Global Edition, any assumptions or special assumptions must be identified and recorded both in the terms of engagement and in the report (VPS 1 section 3.2 (k) and VPS 3 section 2.2 (i)).In addition, paragraph 20.7 of IVS 102 states:

'If, during the course of an assignment, it becomes clear that the investigations included in the scope of work will not result in a credible valuation, or information to be provided by third parties is either unavailable or inadequate, or limitations on investigations are so substantial that the valuer cannot sufficiently evaluate the inputs and assumptions, the valuation assignment will not comply with IVS.'

The value of IP assets is influenced by the strength of the underlying legal rights and their commercial utility, which is determined by their functional and economic characteristics. Hence, the valuation of these assets should use multidisciplinary inputs.

In accordance with PS 2 section 2 of Red Book Global Edition, before undertaking a valuation of IP, RICS members must consider whether they are competent to identify and assess the relevant characteristics of the subject asset, and/or whether other expert opinion is required.

As legal, technical and market factors can materially influence the value of IP, it is important for the user of a valuation report to be informed of the extent to which these factors have been assessed, or if they are covered by special assumptions.

Where an intangible asset is international in its use, or potential use, and the rights are dependent upon statutory protection, expert legal advice may be required. A valuer should disclose whether ownership of the subject IP has been determined through a legal assessment or whether this is a specific assumption of the report.

Assessment of the functional utility of patents and other categories of tech-IP may require a high level of technical expertise. Disclosure should be made as to whether there have been any limitations to the scope of the functional assessment of the tech-IP, including matters such as the breadth and validity of the claims and freedom to operate.

The future economic performance of brand-IP is influenced by the attitudes of buyers of the branded products and services. RICS members should disclose whether there have been any limitations to the scope of the market and functional assessment of the brand-IP.

Segmenting the valuation analysis

The legal rights protecting an intangible asset can vary by jurisdiction. Differences in the pool of IP constituting the subject asset can influence earnings capability and risk, so it is appropriate to carry out the valuation at a level of segmentation that is aligned with differences in the underlying rights.

In addition to legal considerations, the functional and market assessments that support an IP valuation can be better assessed by market segment (for instance, region or product category) rather than at an aggregate level.

In considering these factors, the appropriate level of segmentation for a particular engagement is also influenced by the purpose and scope of the valuation.

Basis of value

IVS describes alternative bases and premises of value. The value of IP assets can vary considerably under different ownership and commercial circumstances as a result of:

the economic potential of the IP being influenced by access to assets required for its commercialisation

the lack of efficient markets for most categories of IP and

the fact that exclusive rights conferred by IP only generate value if the owner is willing and able to enforce it.

In accordance with VPS 4 of Red Book Global Edition, RICS members must ensure that the basis and premise of value is appropriate for the purpose of the valuation. A valuer should also consider the implications for the valuation methodology and assumptions. (Appendix A comments on the specific importance of the basis and premise of value in valuations carried out for the purpose of IP financing.)