The Multitopic Blog

In any acquisition, intellectual property is likely to be reflected in the value of goodwill on the acquirer’s books as well as in specifically identified items. If the value of important intellectual property becomes impaired, this impairment may have to be considered in determining whether there is an impairment of the acquirer’s goodwill that requires a write-down on the company’s financial statements.

In this regard legislations like the Sarbanes-Oxley Act, 2002 of the United States  and certain international accounting standards  require companies to provide certified copies of their valuation sheets. In fact, the Sarbanes-Oxley Act requires this certification to be attested by the CFO and the CEO of the company.  The acquisition documents of a company which is going to be acquired by another, as well as the transfer of assets documents, in a merger and acquisition procedure as a norm contain the valuation details of the intellectual property assets.  

The internal control provisions and the certifications required under the Sarbanes Oxley Act, 2002  contemplate that managers (CEOs, CFOs) understand and assure the quality of the company’s systems for managing and valuing its intellectual property and provide a means of regularly assessing developments in the portfolio. This includes evaluating the valuation methods for intellectual property and the company’s internal intellectual property licensing, maintenance and enforcement strategy and mechanisms in place to protect and enforce the company’s intellectual property rights.

For companies that have a significant amount of intellectual property recorded as a valuable asset, it will be necessary for management to analyze in the MD&A(Management Discussion and Analysis) section of the Report of the Annual General Meeting the intellectual property assets and evaluate how their assets are carried on the company’s books and the risks of impairment in order to provide investors with more transparent disclosure surrounding the contributions of a company’s intellectual property to the company’s operations and earnings.

A pitfall is the ownership of an intellectual property asset in case of termination. This is where valuation is of the most assistance. When a corporate partnership terminates or in the case of a demerger, the intellectual property assets which have acquired value in the merged company but originated in the transferor company have to be reassessed and valued.  While the ownership and control of an intellectual property asset may rest with any entity formed from the demerger, the valuation has to decide the compensation to be paid to the pre-demerger entity. In such case the income method and the disaggregation method are most suitable methods to determine the value.

One of the pitfalls in intellectual property asset valuation in mergers and acquisitions is that reciprocal licenses may risk treatment as sales or exchanges of intellectual property or as involving advance royalties, and license arrangements tied to services, such as R&D services, may be construed as transfers of property for services giving rise to gain recognition and compensation income.  Such a case may invite regulatory action which may lead to the questioning of the validity of the merger procedure; the Honeywell merger is an example for this point.