Income approach
The income approach is the main approach to the valuation of intellectual property and intangible assets. Market-based and cost-based methods can be used to complement income methods. The income approach allows you to link the value of an intellectual property item with the economic results of its use. The methodological basis of the income approach is the principle of expectation, the application of which allows the appraiser to determine the value of the appraised object by calculating the current value of the copyright holder's future income from the use of an intellectual product.
Determining the value of an intellectual property object from the perspective of the income approach is implemented by methods of advantage in profits or expenses, allocation of the share of profit attributable to the object of assessment, the use of options and a group of methods used to assess the value of goodwill.
Depending on the nature of the receipt of cash flows, the market value of the valuation object is determined using discounting or capitalization techniques. Discounting is used when cash flows from the use of intellectual property are uneven.
The sequence of actions when discounting profits is a series of stages:
- 1) a sales forecast is drawn up;
- 2) the economic life of the intellectual property object is determined;
- 3) the costs of producing or maintaining an object of intellectual property are determined;
- 4) profit flows from the use of the intellectual property are calculated;
- 5) the net present (discounted) value of profit flows for the entire period is determined;
- 6) the discount factor is determined by the formula
Where r– discount rate, t– period of income generation.
Income from an intellectual property item is capitalized if the income flows uniformly or changes at the same rates and flows over an unlimited period of time.
The value of an intellectual property item can be determined as follows:
V= Profit from using the asset Multiplier.
The multiplier, in turn, is determined in two ways:
Where r– capitalization rate for a stable operating enterprise; g– profit growth rate.
The second formula for calculating the multiplier is used if profits or cash flows are increasing at the same rate.
When evaluating an object of intellectual property through capitalization, the following steps must be performed sequentially:
- 1) determine the scope of use of the intellectual property object (for example, an invention);
- 2) estimate the volume of use;
- 3) determine the expected average annual profit;
- 4) multiply the calculated profit by the multiplier.
Profit Advantage Method
The essence of the method is that the value of an intellectual property object is defined as the additional profit that the copyright holder receives compared to competitors from the sale of products created with the participation of the valued object. This valuation method is used in situations where the appraiser has the opportunity to determine the amount of additional profit (benefits). Often, the profit advantage method is used to estimate the cost of inventions, a utility model of a device, a trademark, etc.
In situations where it is difficult to determine the profit advantage that results from the use of the intellectual property being valued, appraisers use the profit share method. The size of this share of profit depends on many factors, such as the scientific and technical level of the product, the presence of know-how in it, economic indicators achieved as a result of using the object, and is determined, as a rule, by experts. According to many experts, this share of profit is usually 10–35% of the total profit of the enterprise.
Brand value assessment
By 2012, the auditing firm had gained a strong position in the market. It is necessary to calculate the brand value (name + trademark) if the sales volume is 25 billion rubles. in year. It is known that 45% of the amount was received from audit services, 30% from assessment, 25% from other consulting services.
Market research has shown that it is possible to sell the services of auditors at 15% above the market average, and appraisers at 10% above the market average. The cost of consulting services remains at the market average.
The company's income is expected to grow annually by 5% and the capitalization rate is 15%.
Solution
Let us determine the excess profit that the company receives:
Excess profit =(25 0.45 1.15 + 25 0.3 1.1 + 25 0.25) - 25 = 2.44 billion rubles.
Based on this method, the appraiser reduces the projected earnings generated by the brand at the appropriate discount rate to the net present value.
Brand assessment includes three elements:
- market analysis (in order to determine the conditions in which the company that owns the brand operates and the level of competition);
- financial analysis to identify the revenue generated by the business that uses the brand. It is necessary to establish the revenues related to the product marked with this trademark and identify the share of income provided directly by the brand - the added value brought precisely by the brand. For this purpose, Brand Finance has developed the Brand Value Added™ method;
- identification of risks associated with the brand to determine the discount rate.
It is necessary to determine not only the potential of the brand necessary to create a profit, but also the likelihood of making a profit and the risk of possible losses. As a result, an accurate calculation of the discount rate must be carried out.
Brand Finance has developed a special method for calculating the discount rate through the so-called brendbeta™.
To discount the income stream, a discount rate is used, calculated according to the formula:
R = Rf + brendbeta x (Rm - Rf),
Where:
Rf- risk-free rate;
Rm- average market rate of return.
The first part of the formula is the risk-free rate. It is adjusted taking into account the coefficient calculated using the brendbeta™ method and determined individually for each brand.
The second part of the formula is the calculation of the risk premium. When calculating brendbeta, the evaluator first determines the brand rating using a special table using an expert method (in points):
Each sign receives a rating ranging from 0 to 100 points. The brand ranking process itself can be compared to conventional credit ratings, according to which banks determine the customer's creditworthiness and the rate at which funds will be lent to him.
Accordingly, an average brand, that is, one that receives a rating of 50 points, will also receive an average composite discount rate for a given market sector in a given national market, while a brand that receives 100 points is theoretically risk-free and should be discounted at the risk-free rate. However, in reality, the existence of such a brand is almost impossible.
A score of 0 indicates the highest discount rate, with twice the premium applied to the risk-free borrowing rate.
The proposed graph illustrates the brendbeta™ method.
BrendBeta axis
The stronger the brand, the higher its importance index. brendbeta is determined by the following formula: 2-0.02 x trademark significance index score
Thus, a risk premium is added to the risk-free discount rate, calculated by multiplying the risk premium by the brendbeta™ coefficient corresponding to the brand assessment (rating).
Royalty waiver method
In fact, the Royalty Relief Method is a combination of the comparative and income methods. The basis of the method is the assumption that if a company used a brand under a license or franchise agreement, it would have to pay the licensor (license owner) a certain percentage - a royalty. Since the brand being valued is the property of the company, the royalty is capitalized by the company itself. The amount of discounted potential royalties is an estimate of the brand's value.
The value of the royalty rate is determined expertly by selecting the most likely rate in the event of the sale of a license to use a brand among relevant industry indicators, rates for similar companies, brands, terms of transactions, etc. Most often, statistics have royalty rates calculated from operating profit before tax ; There are also rates based on monetary and physical volume of products sold. The table (TABLE 4) provides examples of royalty rates for various industries.
Table 4.
Industry royalty value 1
The brand's cash income received from royalty payments in each segment of the forecast period is found by multiplying the pre-tax operating profit by the royalty rate. Theoretically, one could choose profit after tax as a measure of income, but then this would need to be taken into account in the royalty rate. The likelihood of selecting the correct royalty rate would be reduced many times over, since it is quite difficult to select companies with the same capital structure, paying taxes the same, etc.
All expenses for maintaining and developing the brand are deducted from the income received. The resulting profit streams are discounted or capitalized (in the case of equal flows throughout the entire duration of the “license to use the brand”, this is a simplified option). The capitalization rate is usually in the range from 20% to 50%. The discount rate is determined depending on industry and individual risks. The net present value of a brand is determined by summing the present flows and the extended flow.
The royalty waiver method has a number of disadvantages. Firstly, the practical application of this method is complicated by the fact that in industry statistics (both in Russia and in the West) it is quite difficult to find a royalty rate that would most fully contain all the parameters of the evaluated brand (branded business). Most often, the rate includes fees for the use of patents, licenses, and cost sharing. Sometimes rates depend on current market conditions. Most companies using the royalty waiver method either have access to such data or use their own accumulated database. That is why this method is common among appraisers.
Secondly, calculating brand value using this method is of little use for the purposes of managing a brand and its value. The resulting value does not reflect the unique value of a particular brand, but only copies the advantages and disadvantages of an analogue brand. In most cases, the method is used when the royalty rate turns out to be easier to determine than the value of the asset being valued.
Premium Profit Method
The method is based on the fact that a branded product is sold more expensive than a similar unbranded one.
The scheme for calculating the value of a trademark or brand using this method is as follows: the difference in price is multiplied by the projected sales volumes of the branded product (in physical terms) during the product’s life cycle. This will be the value of the brand.
In the rare case where branded and unbranded products are sold at the same price, the value of the brand is determined based on the difference in sales volume of these products in monetary terms.
The main disadvantage of this method is the difficulty of finding an unbranded analogue, as well as the influence on the price difference of price variations in different regions, or seasonal fluctuations, or other factors.
Interbrand brand value assessment method
Interbrand is one of the leaders in the Western market in the field of brand valuation. Together with Citigroup 2, Interbrand annually prepares and publishes a ranking of the 100 most “expensive” brands in the world. A prerequisite for inclusion in the rating is the global scale of the company’s operations and a sufficient amount of information about it. The first condition is due to the Interbrand assessment methodology, which is currently not applicable to local brands. Due to the second condition, the rating is not comprehensive: it does not include, for example, such large brands as VISA, BBC, Mars and CNN. In addition to the rating of the brands themselves, a rating of companies that own a portfolio of brands, such as P&G, Unilever, L'Oreal, etc., is prepared separately.
Interbrand's Brand Valuation Model is based on the net present value of a brand and consists of four successive stages 3 .
1) At the first stage (Financial Forecasting), the cash flow that is created by all intangible assets (IMA) is predicted. Cash flow is calculated as follows: projected total revenues are reduced by operating expenses. From the operating profit received, the product of the amount of capital that would be needed to produce an unbranded product of similar properties and the risk-free rate of return is subtracted.
EarningsIntA = Operating Profit After Tax - ,
Where:
Earnings- added profit of intangible assets;
I ntA - Intangible Assets- intangible assets;
Operating Profit After Tax- operating profit minus taxes;
Capital Employed- capital involved;
Risk Free Rate- risk-free rate of return.
Let's take a closer look at the second term. Its fundamental meaning is to separate the profit created by intangible assets, including the brand, from the profit created by physical capital. To calculate the amount of capital involved (Capital Employed) The industry average ratio of the capital involved in the industry to any income indicator is used. Official submissions use Capital-Employed-to-Sales-Ratio. Multiplying this ratio by the sales volume of the company being evaluated, we obtain the desired value, which is considered “natural” for the production of unbranded products.
Interbrand takes the risk-free rate of return on government treasury bonds as the level of return on material factors. The economic meaning of this bet is as follows: these tangible assets will bring such profitability if they operate without the use of any intangible capital. In simple terms: how much will the owner of material assets receive if they work practically on their own.
2) At the second stage (Role of Branding) In the cash flow created by intangible assets, the share created specifically by the brand stands out. To do this, it is determined to what extent the brand influences key demand factors. The calculation is made as a percentage.
3) Third stage (Brand Risk). Brand risk analysis allows you to determine the rate at which projected income is discounted to its net present value. The discount rate is based on the risk-free rate, which is the yield on government bonds for the forecast period, and on a premium determined based on brand strength analysis (Brand Strength), which is characterized by seven special indicators given below (Table 5).
Table 5.
Criteria for calculating the Brand Strength Index
Evaluating a brand from the perspective of each of the seven criteria forms the so-called brand strength index, the maximum value of which reaches 100 points. Next, using a certain S-shaped curve (its equation is the intellectual property of Interbrand), reflecting the relationship between the brand multiplier (discount rate) and the brand strength index, the rate corresponding to the resulting index is determined. The graph (Graph 2) shows that the brand multiplier of the strongest brand (100 points) is 20, while for the weakest it tends to 0.
Schedule 2.
INTERBRAND 4 S-curve
4) Last stage (Brand Value Calculation) is to calculate the brand value. It is equal to the product of brand added value and brand multiplier.
The main advantage of Interbrand's methodology is that it offers a financial assessment of the value of a brand. When the company first published a ranking of the world's most valuable brands in 1989, it was immediately noticed in financial and marketing circles. Before this, the entire set of assessments was represented by non-financial metrics and were variations of the Brand Equity method. Interbrand was able to express the abstract power of a brand in monetary terms, for which its assessments were recognized and accepted by managers of many companies.
It is easy to see that the formula for calculating the value that intangible assets create is reminiscent of calculating the financial indicator of economic added value. This similarity contains significant potential for the use of Interbrand assessment in the financial analysis of a company's activities. Many researchers pay attention to this, however, due to the closedness and opacity of the Interbrand methodology, it is quite difficult to conduct a qualitative analysis of the relationship between these two indicators.
To be precise, the formula for calculating cash flow generated by intangible assets is more like calculating economic profit, since the terms of the expression do not take into account adjusting items (equity equivalents) (Diagram 1).
Diagram 1.
Relationship between accounting profit, economic profit and EVA™
Reflecting the methodology for calculating economic profit, the Interbrand brand value assessment carries the advantages and disadvantages of this financial metric. The latter is that the metric reflects the past (in income) and current (in income and expenses) performance of the company, while the value should evaluate the future. In practice, this disadvantage manifests itself in strong fluctuations in brand values from year to year, which in reality should not happen.
Theoretically, the brand multiplier should reflect the future capabilities of the brand, however, due to the secrecy of the formula for finding it, the question of the correctness of assessing the future value of brands is left open by Interbrand.
Other disadvantages of the methodology include inaccuracies and approximations in the structure of the assessment, as well as its economic inexpediency for making management marketing decisions.
A contradiction arises if we compare the company's economic profit for the period and the cash flow generated by intangible assets and calculated using the Interbrand methodology for the same period. Since the company's cost of capital cannot be lower than the yield on government bonds, it turns out that the economic profit of the company as a whole will be less than the cash flow from the operation of intangible assets, which is actually impossible.
The model also assumes that the brand and material assets exist in different parallels, and this is a rather controversial statement. In most cases, a brand does not exist separately from a product. The consumer associates a brand not only with a certain style, expectations, experience, but also with the quality of the product, the quality of the material from which it is made. By separating tangible assets from the brand, the model thereby understates the value of the brand.
Finally, the Interbrand methodology is blamed for its subjective nature. Both the brand’s share in intangible assets and the discount rate (brand multiplier) are calculated based on expert estimates. In addition, due to its subjective nature, the value of a brand assessed using the Interbrand method undergoes significant fluctuations, although the brand is a fairly stable asset.
Brand evaluation criteria also raise questions. Thus, a local brand can be better perceived by consumers and be more profitable than an international one. Therefore, it can generate more cash flow. The assessment of investments is also conditional: it is clear that there is no direct connection between the amount of expenditure on brand development and its value.
1. Zaitsev Yu.S. "An adjustment to standard royalty rates to account for differences in the profitability of licensees' and manufacturers' products in the source countries of these rates." - Magazine "Moscow Appraiser" No. 1 (8), February 2001.
2. The British company Interbrand method exists in two versions: Interbrand/Citigroup and Interbrand/Financial World. In the first case, Citigroup only provides information, and Interbrand prepares calculations. Financial World independently calculates the value of brands using the “brand multiple” provided to them by Interbrand. In fact, the methods are very similar to each other. The work will present the Interbrand/Financial World method.
3. Interbrand World's Most Valuable Brand's 2001 Methodology. - Interbrand (www.interbrand.com).
4. IEllwood Iain, The Essential Brand Book, Kogan Page, 2000.
This method consists of calculating the benefits from using an IP object by determining the cost savings resulting from its use. Thus, creating a gain in production costs, the IP, in fact, contributes to the profit of the enterprise.
At its core, the cost advantage method is similar to the profit advantage method, with only one difference - in this method, benefits are calculated not from an increase in the enterprise's income items, but from a decrease in expense items.
The cost benefit method is applicable only in cases where we are talking about two types of products that are similar in their technical and economic indicators or about two production methods (technological processes) of the same product. This method is not applicable in cases of release of new types of goods.
To calculate the gain in cost, two cash flows are compared: with the use of the IP object and without the use of it.
The cost benefit method is implemented in several stages.
1. Cost savings are calculated for the entire volume of products produced per year. The calculation is made for a number of years, during which the benefits of owning the IP object are expected to be used.
2. From the amounts received, expenses associated with ensuring the confidentiality of information are deducted, and risks associated with the possibility of competitors using such advantages are taken into account. Risk accounting consists of reducing the expected savings by subtracting “fines” determined by experts.
3. The resulting savings, i.e. profit is adjusted to the accounting year
4. The present value of cost savings for the entire period of use of the IP object is determined.
The value of the value of the assessed intangible asset and IP is calculated using the formula:
where Pji is the profit received from the sale of the j-th product in the i-th year;
Ci is the price of a unit of goods in the i-th year;
Cji is the cost of the j-th product during its production with and without the use of intangible assets produced in the i-th year;
Qji is the volume of production of the j-th product in the i-th year;
T - period of production and sale of goods;
r - discount factor.
Profit splitting method
When using this method, the assumption is made that the profits generated by intangible assets and IP should be divided between the licensor and the licensee. There are two options for calculating this method.
Split method (profit margin is stable)
Profit is stable, equal in size and accrues over an indefinite period of time.
The calculation includes the following steps:
1) The estimated profit that can be obtained from the sale of a unit of product produced using the license is determined. When a licensee produces under a license a new product that has not previously been produced, the expected profit is determined by the formula:
Pr = C - C, (23)
where Pr is the profit received from the sale of a unit of production under a license, den. units;
P is the selling price of a unit of production for the entire period of validity of the technology transfer agreement, denominated. units;
C - cost per unit of production, den. units
When assessing the value of a license used to produce goods previously produced by the licensee without the use of new technology, the calculation is carried out differently:
Pr = Pr1 - Pr2 = (C1 - C1) - (C2 - C2), (24)
where Pr1, Ts1, C1 are profit, sales price and cost per unit of products produced using the license, respectively, den. units;
Pr2, Ts2, C2 - profit, selling price and cost per unit of products produced using the technology previously available to the licensee, respectively, den. units
Profit is defined as the difference between the price and the cost of production, and the price and cost are stable values.
2) The average annual amount of additional profit received from the use of the license by the licensee is calculated (monetary units):
Prsg = Pr * Qsg, (25)
where Qсг is the estimated average annual production for the period of validity of the license agreement, pcs., kg, linear. m, m3, etc.
3) The licensor’s share in the average annual volume of additional profit of the licensee is calculated (monetary units):
Plr = Prsg * D, (26)
where Plr is the licensor’s profit, den. units;
D is the licensor’s share in the average annual volume of additional profit received by the licensee, %.
In the world practice of technology transfer, D is, as a rule, in the range of 10 - 30% of the additional profit of the licensee.
4) The capitalization rate is calculated - R.
5) The cost of the license is estimated by capitalizing the licensor’s share in the average annual volume of additional profit of the licensee:
Split method (profit margin is unstable)
The license cost is determined by the formula:
where i is the specific year of production under the license;
T - validity period of the license agreement;
Kd - discount factor (current value factor).
The most difficult thing in the profit splitting method is to determine the licensor's share.
Determining the share in the cost of products (technology) attributable to the use of IP objects in it
The main factors influencing the licensor's share include:
Territory under license, i.e. a list of those countries in which the licensee is granted the right to use intellectual property in accordance with the terms of the license agreement;
Scope of rights under the license, i.e. exclusive or non-exclusive rights are granted;
The degree of legal protection of IP for the territory provided for in the agreement;
Patent purity of products under license;
Volume of transferred technical documentation.
The licensor's share in additional profit from the sale of products using an object of industrial property, namely an invention or utility model, can be determined using the following coefficients:
Achieved result ratio;
Complexity coefficient for solving a technical problem;
Novelty factor.
The coefficient values are given in Appendix 1.
The main feature is understood as a new essential feature, presented in the distinctive part of the claims in the form of: an operation in the method, an element in the design, an ingredient in the composition. If the object of the invention is a substance obtained chemically and having a structure that does not belong to any of the structures known in chemistry, the value of the coefficient is taken to be 0.8.
The share of profit attributable to the invention or utility model used in the object (product) is calculated as the product of three coefficients. To determine the profit from the use of an invention, the amount of total profit from the object (product) in which the invention is used is multiplied by the product of the coefficients characterizing this invention:
D = P * * * , (29)
where D is the profit from the use of the invention;
P is the total profit from the technical object.
If an object (product) uses several inventions, utility models, then the total share of profit attributable to all inventions, utility models, the beneficial effect of the use of which is expressed in profit, is first determined, and then from this total share the shares attributable to each used invention or utility model.
To determine the total share of profit attributable to all inventions, the maximum value for each of the coefficients is selected from the values established for each invention. The maximum value of the coefficients can relate to either one of the inventions or two or three different inventions used in the object of technology.
Based on the maximum values of the coefficients, the profit attributable to all inventions or utility models used in the object is determined:
Dtotal = P * max * max * max , (30)
The profit attributable to the i-th invention or utility model used in the object is determined by the formula:
where i is the invention (utility model) for which profit is calculated (1 n is the number of inventions (utility models) used. Unlike the cost of an invention or utility model, the cost of an industrial design is determined not so much by the technical result achieved with its help, but by its originality (novelty), the complexity of the solved design problem and the volume of products produced using the industrial design. The cost of an industrial design is determined as the share of profit (income) from the technical object in which the industrial design is used. This share is calculated as the product of three coefficients: the originality coefficient, the complexity coefficient of the design task and the achieved result coefficient. The coefficient values are given in Appendix 2 Intellectual property represents the exclusive rights of an individual or legal entity to the results of intellectual activity and equivalent means of individualization (trademarks, service marks, trade names, etc.). Achievements of science and technology, literary, artistic, musical works and other objects of creative activity are objects of intellectual property; they have an intangible nature, different content and form of presentation. In Russian theory and practice, the term “intellectual property” is used in the vast majority of cases to reflect any intangible objects of a business process, and for the purposes of accounting and reporting at an enterprise, the concept “intangible assets” is used. That is "Intellectual Property" = "Intangible Assets" Intangible assets are defined as “investments in intangible objects that are used in business activities over a long period and generate income.” According to clause 55 of the Regulations on accounting and reporting in the Russian Federation, intangible assets used in economic activities for a period exceeding 12 months and generating income include rights arising: The valuation of rights to intangible assets has much in common with the valuation of tangible property. However, for intangible assets there is no universal exact method for determining value, since each of them is so individual that it is impossible to create a mathematical algorithm for reliable and accurate calculation of the value of an intangible asset. In addition, the value of intangible assets is influenced by a wide variety of factors. However, practicing evaluators need to be aware of the theoretical developments in this area and, where possible, use the results of this research in their practice. For practical assessment of the value of intangible assets, experts recommend cost, income and combined approaches, usually used in the assessment of other types of assets. INCOME APPROACH to valuation of intangible assets Basic methods of the income approach to assessing intangible assets: The use of the income approach when valuing intangible assets is subject to the possibility of generating income from the use of intellectual property. Income from the use of intellectual property is the difference over a certain period of time between cash receipts and cash payments (hereinafter referred to as cash flow) received by the copyright holder for the granted right to use intellectual property. The main forms of cash receipts are payments for the granted right to use intellectual property, for example, royalties, lump sum payments and others. The amount of payments for the granted right to use intellectual property is calculated on the basis of the most likely value that could arise when the parties to the transaction act reasonably, have all the necessary information, and the amount of payments is not affected by any extraordinary circumstances. The main forms of benefits from the use of intellectual property are: The benefits from the use of an intangible asset are determined on the basis of a direct comparison of the amount, risk and time of receipt of cash flow from the use of intellectual property with the amount, risk and time of receipt of cash flow that the copyright holder would receive if the intellectual property was not used. Determining the market value of intellectual property using the income approach is carried out by discounting or capitalizing cash flows from the use of intellectual property. Discounted Cash Flow Method For valuation objects that, over equal periods of time, generate cash flows from the use of intellectual property that are not equal in value, the value is determined by discounting future cash flows from the use of intellectual property. Determining the market value of intellectual property based on discounting includes the following basic procedures: In this case, discounting is understood as the process of bringing all future cash flows from the use of intellectual property to the date of assessment at a discount rate determined by the appraiser. When calculating the discount rate for cash flows generated by the intellectual property being valued, one should take into account: the risk-free rate of return on capital; the amount of the risk premium associated with investing capital in the acquisition of the assessed intellectual property; rates of return on capital of investments similar in risk level. In this case, the risk-free rate of return on capital is defined as the rate of return for the least risky investment of capital (for example, the rate of return on deposits of banks of the highest category of reliability or the rate of return to maturity on government securities). Direct income capitalization method For valuation objects that generate cash flows from the use of intellectual property over equal periods of time, equal in value or changing at the same rate, the value is determined by capitalizing future cash flows from the use of intellectual property. Determining the market value of intellectual property based on capitalization includes the following basic procedures: Capitalization means the determination, as of the date of valuation, of all future values of cash flows that are equal to each other or changing at the same rate from the use of intellectual property for equal periods of time. The calculation is made by dividing the amount of cash flow from the use of intellectual property for the first period after the date of assessment by the appropriate capitalization rate determined by the appraiser. When calculating the capitalization rate for cash flows generated by the assessed intellectual property, one should take into account: the value of the discount rate (return on capital); the most likely rate of change in cash flows from the use of intellectual property and the most likely change in its value (for example, if the value of intellectual property decreases due to a reduction in its remaining useful life, take into account the return of capital invested in the acquisition of intellectual property). The capitalization rate for cash flows generated by intellectual property can be determined by dividing the amount of cash flow generated by similar intellectual property by its price. Royalty waiver method The royalty waiver method is used to estimate the value of patents and licenses. The owner of a patent grants another person the right to use the intellectual property for a certain fee (royalty). Royalty is expressed as a percentage of the total revenue received from the sale of goods produced using the patented product. Under this method, the value of intellectual property is the present value of a stream of future royalty payments over the economic life of the patent or license. The royalty amount is determined based on market analysis. The royalty exemption method exists in three modifications, differing in the calculation base (gross revenue, additional profit, gross profit). Calculation of the cost of intellectual property using the royalty exemption method is carried out in several stages. The formula for calculating an intellectual property item using the royalty exemption method is: Вt - revenue in the t-th year; R - royalty rate for the industry; Zt - costs associated with maintaining the intangible asset in force in the t-th year; T - patent validity period, years. The cost of a license using the royalty method is calculated as: Вt - revenue from sales of products under license in the t-th year; Ri - royalty amount in i-year, %; T - validity period of the license agreement, years. For example, royalty rates are 20-25% of the licensor's additional profit or 0.5-14% of sales volume, cost or product price. In the absence of data on a specific industry or subject of a license, the calculation of royalty rates is carried out taking into account the level of profitability of production and the licensor's share in the profits of licensees: P - profitability of production and sales of products under license; d - the share of the licensor’s profit in the licensee’s total profit from the production and sale of products under the license (from 10 to 50%). The essence of the method is to calculate the industry average profit on assets and then compare it with a similar indicator for the enterprise under study. It is assumed that an enterprise, having intangible assets not reflected on the balance sheet (or reflected at an undervalued value), receives additional profit from its use. This profit, by multiplying it by the capitalization ratio, directly reveals the cost of intangible assets. Stages of estimating the value of intangible assets using the excess profit method: 1. determination of the market value of all assets; 2. normalization of the profit of the assessed enterprise; 3. determination of the industry average return on assets; 4. calculation of expected profit based on multiplying the industry average income by the amount of assets (or equity capital); 5. determination of excess profit (expected profit is subtracted from normalized profit); 6. calculating the value of the investment property by dividing the excess profit by the capitalization ratio. Profit Advantage Method Profit advantage refers to the additional profit generated by the assessed intangible asset. The advantage in profit is formed either in comparison with enterprises that produce similar products, but without using the evaluated IP, or in comparison with the production of products by the same enterprise, but before using the evaluated IP. The essence of this method is to predict and evaluate in monetary form the profit advantage that arises throughout the entire period of use of the intangible asset, bring it to its current value and sum it up - this will be the value of the valued intellectual property item. The general formula for assessing intangible assets using the profit advantage method: ∆P - profit advantage r - discount rate; T is the expected period of obtaining an advantage in profit. By this method, the cost of a license is determined as the licensor’s share of the additional profit received as a result of the use of the intellectual property rights to use, which is transferred upon concluding a license agreement. Licenses = Dl-ra*∑Vt * (Tsed – Sed) * Kdisk, where: Dl-ra – licensor’s share; Vt – production volume for 1 year; T – number of periods; Цt – unit price; Ct – unit cost of production; Kdisk – discount factor. To determine the licensor's share, 5 factors are taken into account: 1. Territory under the license, that is, a list of countries in which the licensee is granted rights in accordance with the terms of the license agreement to use industrial property to organize the production and sale of products under the license. It is calculated using the indicator of the territory specified in the agreement: Pt = Nt/Nв, where: Nt – number of countries, territories specified by the agreement; Nв – the number of countries occupying a leading position in the production of products of this type (determined on the basis of patent research). 2. The scope of rights under the license, that is, what rights the licensee received under the terms of the license agreement. Po = 1 – exclusive license; Po = 0.5 – non-exclusive license. 3. The degree of legal protection of an industrial property object within the specified territory: Ppo = Npo/Nt, where: Npo – the number of countries within the specified territory Nt in which legal protection of intellectual property is provided for the subject of the license. 4. Possibility of unhindered sales of products under a license without violating the rights of 3 parties within the agreed territory (patent purity of products under a license): Рпч = Nпч / Nt, where: Npch – the number of countries within the specified territory Nt in which an examination for patent purity was carried out. 5. Volume of transferred documentation (design – 30%); Op – a complete package of documentation. All these 5 factors are combined into a single formula: Licensor's share = 0.3*(Pt+Po+Ppo+Ppch+Pod)/5 Thus, we have examined the main methods for assessing intangible assets of the income approach. COST APPROACH to assessing intangible assets The cost approach is used for inventory purposes, balance sheet accounting, and determining the minimum price of intellectual property, below which a transaction becomes unprofitable for the owner of an intangible asset. As part of the cost approach, the following methods are used when assessing the value of intangible assets and intellectual property: Method for summing the actual costs of assessing intangible assets The method of summing up actual costs is applicable to those intellectual property objects that are created by the copyright holders themselves. The cost of an intellectual property item within the framework of this method is determined by the formula: SZ(actual) = C1 + C2+ C3+ C4, where: SZ (actual) - the estimated value of the value of the assessed intangible asset; C1 - the costs of creating an intangible asset are the sum of the actual costs incurred to carry out research in full and develop all stages of technical documentation, calculated taking into account profitability. C2 - costs of legal protection of an intangible asset; C3 - costs of marketing research; C4 - costs of bringing an intangible asset to readiness for industrial use and commercial sale. Replacement cost method for assessing intangible assets This method is based on identifying the value of rights to intangible assets with the costs of its reconstruction, taking into account a reasonable amount of profit. Such reconstruction involves a complete copying of the calculation of the valued intellectual property object and taking into account the costs of its legal protection. Calculation formula: Сз = Кс S∑Зi x Ki x Kii, Сз - cost of restoration of the IP; Kc is the coefficient of obsolescence (depreciation) of intangible assets by the final year of the billing period; Зi - costs of creating intangible assets incurred in the i-th year; Ki is the numerical value of the coefficient for bringing different-time value estimates to the accounting year (the coefficient for increasing bank interest rates) for the i-th accounting year; Kii is an indexation coefficient that takes into account changes in price indices for the i-th accounting year. Ks - is determined by the formula: Ks = 1 – Tf/Tn, where: Tn - nominal validity period of the security document, license; Tf - the actual validity period of the security document, license and the final year of the billing period; t is the initial year of the billing period; T is the final year of the billing period. Determining the market value of intangible assets using the replacement cost method includes the following main steps: Replacement cost method for valuing intangible assets The replacement cost method assumes that an analogue of the valued intellectual property object with similar consumer properties is used for valuation. The calculated cost takes into account the costs of bringing an intellectual property object - an analogue that replaces the assessed intellectual property object - into a state ready for further use for the planned purposes. Such costs may be the costs listed in the cost of creation method, which take into account the amount of remuneration only to persons who contributed to the acquisition of a replacement intellectual property item and brought it into a state suitable for further use for the planned purposes. The present cost method when calculating the current market value of an appraised object involves recalculating actual past costs for the creation and preparation for use of an appraised object into the current value, taking into account changes in money over time. Formula: Сз(pr.) = Сз(actual) S∑Ki Di /100, Sz(pr.) - reduced costs; Сз(actual) - actual costs; Di is the share of actual costs in the i-th year, %; Ki - the numerical value of the coefficient for bringing value estimates at different times to the accounting year (the coefficient for increasing bank interest rates) is determined by the formula: 1) for the period of time preceding the accounting year: Ki = (1 + E)T-tp 2) for the period following the billing year: Ki = 1/(1 + E)T-tp, where: E - standard for bringing value estimates at different times, calculated using the formula: E = a/100, where: a- bank interest (refinancing rate); tp - the year in which the valuation is reduced to the accounting year (the initial year of development of the object of legal protection, the initial year of validity of the exclusive rights to the object, the year of validity of the license agreement, etc.). Thus, we have reviewed the main approaches and methods for assessing intellectual property and intangible assets. 6. Calculate the value of goodwill by dividing excess earnings by the capitalization ratio. Example. Let's assume that the market value of the company's assets is estimated at $40,000, normalized net profit is $16,000. The average return on assets is 15%. Capitalization rate - 20%. It is necessary to estimate the value of goodwill. The calculation algorithm is as follows: It should be noted that the appraiser must remove non-operating income from the actual net income of the enterprise. Some appraisers use average assets and average earnings over a specified period, usually five years, to calculate excess earnings. But this approach is justified if the data for the selected period reflect reasonable future expectations; moreover, “abnormal years” with profit levels significantly above or below the average should be excluded from consideration. Using a simple average or weighted average of profits over the past few years without taking into account how retrospective information reflects possible future profits will lead to undervaluation or overvaluation of the enterprise. The most important problem when using the excess earnings method is the correct choice of the capitalization rate for calculating the value of goodwill. Typically, investors pay for the expected future profit derived from goodwill over a period not exceeding five years. Under these assumptions, the capitalization rate is calculated as the reciprocal of the number of years of excess return for which the investor is willing to pay. For example, if an investor is willing to pay the equivalent of five years' excess earnings, then the capitalization rate is 20%. Discounted cash flow method. When discounting cash flows, the following work is carried out: 1. The expected remaining useful life is determined, i.e. the period over which projected earnings must be discounted. 2.
Cash flow (CF) and profit generated by an intangible asset are forecast. 3.
The discount rate is determined. 4.
The total present value of future income is calculated. 5.
The current value of income from an intangible asset is determined V post-forecast period (if necessary). 6.
The sum of all income values in the forecast and post-forecast periods is determined. Royalty waiver method. This method is used to estimate the value of patents and licenses. The owner of a patent grants another person the right to use the intellectual property for a certain fee (royalty). Royalty is expressed as a percentage of the total revenue received from the sale of goods produced using the patented product. Under this method, the value of intellectual property is the present value of a stream of future royalty payments over the economic life of the patent or license. The royalty amount is determined based on market analysis. This method bears features of both the income and comparative approaches. Main stages of the method: 1. A forecast is made of sales volumes for which royalty payments are expected. The volume of products produced under a license should be determined for each year, taking into account the fact that in the first years of its development there may not be any output, then there is an increase in volumes, then a decline due to the obsolescence of the innovation. 2.
The royalty rate is determined. The data is taken from the table of standard royalty amounts (see Table 6.14). 3.
The economic life of the patent or license is determined. The legal and economic service life may not be the same, so a realistic forecast regarding the duration of the payment should be made. 4.
Expected royalty payments are calculated by calculating a percentage of projected sales. 5.
All costs associated with securing a patent or license (legal, organizational, administrative costs) are deducted from the expected royalty payments. 6.
Discounted profit flows from royalty payments are calculated. 7.
The sum of the current values of the profit streams from royalty payments is determined. Table 6.13. License cost using royalty exemption method Table 6.14. Standard royalty amounts based on the gross sales volume of licensed products Table 6.15. Standard royalty rates by industry sector based on gross sales of licensed products Thus, the license price formula based on royalties is as follows: Profit advantage method. This method is often used to estimate the value of inventions. It is determined by the profit advantage that is expected to be obtained from their use. Profit advantage refers to the additional profit due to the valued intangible asset. It is equal to the difference between the profit received from using inventions and the profit that the manufacturer receives from selling products without using the invention. This annual profit advantage is discounted by the expected period of its receipt. Application of the cost approach in the valuation of intangible assets When using the cost approach when valuing intangible assets, the following are used: creation cost method; cost benefit method. Creation cost method. Its main stages are the following: 1. The full replacement cost or total cost is determined recovery of an intangible asset. All actual costs associated with its creation, acquisition and implementation are identified. When acquiring and using an intangible asset, the following types of costs must be taken into account: to acquire property rights; for development in the production of goods using an intangible asset; for marketing: research, analysis and selection of information to determine analogues of proposed industrial property objects. When creating an intangible asset at the enterprise itself, the following costs must be taken into account: for search work and topic development; to create experimental samples; for the services of third-party organizations (for example, for identifying intellectual property, issuing documents of protection); to pay patent fees (maintaining the patent in force); for the creation of design, technical, technological, design documentation; for the preparation and approval of the report. 2. The value of the coefficient taking into account the degree of obsolescence of an intangible asset. 3. The residual value of the intangible asset is calculated taking into account the coefficient of technical and economic significance and the coefficient of obsolescence. The coefficient of technical and economic significance K is established on the following scale1: 1.0 - inventions related to one simple part, a change in one parameter of a simple process, one process operation, one recipe ingredient; 1.5 - inventions related to the design of a complex part of a non-main unit, changing several parameters of simple operations, changing several minor ingredients in a recipe; 2.0 - inventions related to one main or several non-main units, part of non-main processes, part of a non-main recipe; 2.5 - inventions related to the designs of machines, devices, machines, apparatus, technological processes, recipes; 3.0 - inventions related to structures with a complex system control, complex integrated technological processes, recipes of particular complexity; "The scale was proposed by specialists from the Engineering Academy of the Russian Federation. 4.0 - inventions related to designs, technological processes, recipes of particular complexity and mainly to new areas of science and technology; 5.0 - inventions that do not have a prototype - pioneer inventions. When estimating the value of an intangible asset, such a cost approach method as the cost gain method is sometimes used. It contains elements of both the cost and comparative approaches. The value of an intangible asset is measured by determining the cost savings resulting from its use, for example, when applying know-how. Example. The company owns the know-how of product production. The cost of producing products without the use of know-how is $6.5 per unit. At the same time, 45% of the cost is labor costs. The company in question sells 300,000 products per year. Know-how gives the company the opportunity to save $1.25 on each product produced due to the materials used and 40% of labor costs. According to forecasts, this advantage will continue for 6 years. It is necessary to estimate the cost of know-how at a discount rate of 15%. 1.
Material savings - $375,000 (300,000 pcs. 1.25). 2.
Labor cost savings: the cost of production without the use of know-how is $1,950,000 (300,000 pcs. 6.5); labor costs (45%) equal to $877,500; Labor savings are $351,000 (40% of 877,500). 3.
Gain in cost of $726,000 (375,000 + 351,000). 4.
The duration of the cost advantage is 6 years. 5.
Cost calculation: factor of the current value of the annuity (6 years at a rate of 15%) - 3.784; the cost is $2,747,184 (726,000 3.784). The comparative approach is based on the principle of an efficiently functioning market in which investors buy and sell assets of similar types, making independent individual decisions. Data on similar transactions are compared with those being assessed. The advantages and disadvantages of the assets being valued in comparison with selected analogues are taken into account by introducing appropriate amendments. It is necessary to take into account that, due to the specifics of the object being valued, there are significant restrictions on the use of the comparative approach when valuing intangible assets.
The royalty amount depends on the following factors:
Excess Profit Method
Profit splitting method
In world practice, when concluding licensing agreements, the licensor’s share is set in the range from 10 to 30%. 
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