The Valuation of Intellectual Property for Various Purposes - Term Paper Example

Some approaches to valuation have evolved from others for evaluation, potentially confounding finance tools with those for measuring internal performance indicators; for example, where human resources may be regarded as the "knowledge assets" of a company (Andriessen, 2004, p.233). Other methods appear to have emerged primarily for external reporting of financial information. From the critical perspective, an evident reason for this accelerated activity is the growing importance of intangibles in the modern economy.

Near the end of the 20th century, 79% of jobs and 76% of the American GNP were from weightless enterprise (Contractor, 2001, pp. XI-XII). There also is a greater call for valuations in modern business practice, including the purchase and sale of brands, international transfer pricing, mergers, and the formation of alliances. The proliferation of many methods and labels, all chasing many metrics, seems to be working against a common understanding of the fundamentals in the valuation of intellectual property.

Even the word value has several meanings in English. For instance, Black's Law Dictionary details more than 40, all stemming from Black's view of value as a measure in a transaction: value is defined as the monetary worth or price of something; the amount of goods, services, or money that something will command in an exchange (Black's Law Dictionary, 1999). This equates value to the price achieved in a transaction. Different parties may have a different sense of the value of the item to be transacted; marketing professionals would have us believe value is determined by equation worked out, per situation, in each buyer's mind: "value is the combination of price, quality, convenience, service, ownership experience, and every other factor in the buying decision" (Calloway,2003, p.153). In many cases, this may produce results that differ in the mind of the buyer and the mind of the seller.

Indeed, the likelihood for a transaction will increase when the perceived value of the item, to the buyer, exceeds the value suggested by the seller. To this extent, these varying ideas of market price, perception, and different parties may be resolved by thinking of value as the point at which the bid and ask prices converge. NYU Stern School of Business finance professor Aswath Damodaran, a leading authority on valuation, suggests value resides in the future: "The value of a firm is based upon its capacity to generate cash flows and the uncertainty associated with those cash flows.

The value of a firm is still the present value of the expected cash flows from its assets" (Damodaran, 2001, p.11). From the critical perspective, this introduces a new set of variables, revolving around not the present circumstances of the market, but its possible future circumstances. It also creates a distinction between assets that are (a) aggregated in the form of a go-forward business, producing income as a firm, (b) individually for sale, to the extent they may be separated from their present use, or (c) dormant in a business that has ceased operations, where no income is presently being generated.

But what if item that is not able or meant to produce income in the future Gordon V. Smith, a leading author in the field of valuation, combines all variations into a single definition: