Diagram 2.7 In a nutshell, the most common valuation methods are based on one of the three methods below:-

A. Cost – Based on cost to replicate, (less functional or economic obsolescence) that is the cost to create or recreate the asset; we look at what we spent on developing the IP and what another company might spend if they were to invent it from scratch.

B. Market – Based on market transactions involving comparable assets (with adjustment for differences) that is the sales of comparable IP, where a “somewhat” similar deal could be used for the purposes of comparison.

C. Income – Discounted Net Cash Flow (royalties/profits/savings)

which is based on the future economic benefits produced by the intellectual property; where we look at the projected incremental profits or cost savings from using the IP.

For the purpose of discussion, we shall look at the Discounted Net Cash Flow Method. The Discounted Cash Flow Method involves a summation of the net cash flow derivable from an IP assets over its useful life and discount the value to the present day value using an effective discount rate. To do that, we need to(a) Determine the overall cash flow of a company from P&L account(b) Disaggregate the business segment and product line ( Diagram 2.7.1)(c) Disaggregate the earnings of the relevent product line to derive the earning attributable to the intangible assets ( Diagram 2.7.2)(d) Disaggregate the intangible assets earnings to arrive at the earning attributable to a particular IP asset. ( Diagram 2.7.3)(e) The value of an IP Asset can be deduced using the formula:-