The change in the economy in the 20th century is more towards an economy based on ideas, away from the matter based economy of earlier times. The emphasis has shifted from natural resources to thought, ideas, design and organization11 Services replaced the importance of manufacturing. Contractor 2001,
names this overall change as a de-materialization of the economy and quantifies the significance of the change by pointing out that by the end of the twentieth century 79 percent of jobs and 76 percent of the GNP in the United States were in the service sector. This change wasn't visible only in the US.
European and Emerging nations did also portray similar trends.
In 1969 Tobin introduced a new ratio called Tobin's q Ratio12, which have been a great influence on the valuation/measure of intangible components of enterprises. Having a look at the example of Microsoft's
ratio between its market value and its book value, which in 1999 25 to 1 was, reveals the fact that most of the value is in the form of knowledge capital, in its employees, organization, patents, copyrights, brand value, etc. This ratio is bound to increase as the importance of intangible assets rises over the
course of years. Though this increase is certain and expected, the valuation of these assets is still not clarified nor agreed upon. The value of the intangible assets is of importance to different audiences such as academicians, scholars, accountants, consultants, etc. and they haven't been able to come up
with one single approach to solving the problem. This thesis will focus on a particular subset of intangible assets, namely patents, and demonstrate how to value them.
Table of Contents
1 Intangible Assets
1.1 Definition
1.2 Goodwill
1.3 Classification of Intangible Assets
1.4 Valuation of Intangible Assets
1.5 When to Value Intangible Assets
1.6 Valuation Methods
1.7 Value of an Intangible Asset
2 Options
2.1 Stock Options
2.1.1 Call Options
2.1.2 Put Options
2.1.3 Positions in Options
2.2 Real Options
2.2.1 Variables in Option Valuation
2.2.2 An Anecdote: The first ever Real Option in History
2.3 Classification of Real Options
2.4 Figures in Real Options
2.5 Comparison of Valuation Methods
2.5.1 NPV method
2.5.2 Decision Tree Analysis
2.5.3 Real Options Analysis
2.5.4 The Marketed Asset Disclaimer(MAD)
2.5.5 Risk-Neutral Probability Approach
2.5.6 Black Scholes Approach
3 Patents & Real Options in Valuation of Patents
3.1 What's a patent?
3.2 Why value patents?
3.3 When value patents?
3.4 The Value of a Patent
3.5 Patent Valuation Methods
3.5.1 Cost Based Approaches
3.5.2 Market Based Approaches
3.5.3 Income based methods
3.5.4 Time and Uncertainty – DCF based approaches
3.5.5 DTA based methods
3.5.6 OPT based methods
4 Case Study
4.1 The Background
4.2 Calculation
4.2.1 Value without Flexibility
4.2.2 Implementing the Options
4.2.3 ROA Calculations
4.2.4 Optimal Decisions
5 Conclusion
Research Objective and Core Topics
The primary objective of this thesis is to explore and demonstrate the application of the Real Options Approach (ROA) as a superior method for valuing intangible assets, specifically patents, compared to traditional static valuation techniques. By incorporating managerial flexibility into the valuation process, the study aims to provide a more accurate framework for investment decision-making in uncertain business environments.
- Theoretical foundation of intangible assets and their classification.
- Comprehensive analysis of financial and real options theory.
- Comparison of traditional NPV methods versus Real Options Analysis.
- Specific challenges and methodologies for patent valuation.
- Practical application of ROA through a detailed case study on R&D projects.
Excerpt from the Book
1.1 Definition
Before starting off with the meaning of intangible assets it is necessary to define assets due to the fact that The International Accounting Standards Board (IASB) defines intangible assets as a particular type of asset. According to the IASB Framework the corresponding definition is as follows:
“An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.”
Expanding on this definition The International Accounting Standards Board accepts the following definition in IAS 38 for the intangible assets.
“An intangible asset is an identifiable non-monetary asset without physical substance.”
For an item to be recognized as an intangible asset there are two criteria that are needed to be fulfilled by it. These are (a) the definition of an intangible asset and (b) recognition criteria.
(a)As the definition points out, an intangible asset needs to be identifiable. For an asset to be identifiable it has to be (i) separable, capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or (ii) it has to arise from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
Chapter Summaries
1 Intangible Assets: This chapter establishes the accounting and management definitions of intangible assets and discusses the necessity of their valuation in a modern, knowledge-based economy.
2 Options: This section provides a fundamental overview of financial options, extending these concepts into the Real Options Approach, and compares various valuation models including NPV and Black-Scholes.
3 Patents & Real Options in Valuation of Patents: This chapter focuses on the specific context of patents, addressing why they require unique valuation methods and how real options can be applied to patent-related management decisions.
4 Case Study: A practical implementation of the theoretical framework is presented, demonstrating the calculation of project value with and without flexibility using a real-world scenario.
5 Conclusion: The concluding chapter synthesizes the findings, confirming that the integration of flexibility through real options significantly enhances the accuracy and profitability of investment decisions.
Keywords
Intangible Assets, Real Options Analysis, Patent Valuation, Goodwill, Net Present Value, Managerial Flexibility, Option Pricing Theory, Decision Tree Analysis, Black-Scholes, Intellectual Capital, R&D Projects, Risk-Neutral Valuation, Investment Strategy, Corporate Finance, Discounted Cash Flow
Frequently Asked Questions
What is the core focus of this thesis?
The work focuses on the valuation of intangible assets, specifically patents, by applying the Real Options Approach to address the limitations of traditional, static valuation methods.
Which key topics are covered in this research?
The research covers the definition and classification of intangibles, the theory behind stock and real options, various valuation techniques, and the strategic decision-making process for patents.
What is the primary goal of the author?
The primary goal is to demonstrate that real options provide a more accurate valuation for complex, uncertain investments like patents by quantifying the value of managerial flexibility.
Which scientific methods are employed?
The author uses a comparative analytical approach, evaluating and contrasting techniques such as NPV, Decision Tree Analysis (DTA), and the Black-Scholes model, supported by a practical case study.
What constitutes the main body of the work?
The main body comprises a theoretical framework for intangible assets, a detailed technical discussion on option pricing, and an applied case study involving pharmaceutical R&D.
Which keywords best describe the research?
Key terms include Intangible Assets, Real Options Analysis, Patent Valuation, Managerial Flexibility, and Option Pricing Theory.
How does the author define the value of a patent?
The author emphasizes that a patent's value is derived from the future incremental profits generated by the protected invention, which can be captured more effectively by evaluating the strategic decision points involved.
What is the practical outcome of the case study?
The case study illustrates that incorporating flexibility options (like expansion or abandonment) increases the perceived project value compared to a rigid "do-nothing" NPV approach, turning a potentially unfeasible project into a viable one.
- Quote paper
- Selcuk Kocak (Author), 2005, Intangible assets in business valuation, with emphasis on real options approach, Munich, GRIN Verlag, https://www.grin.com/document/112308
