New industries, based on technologies like genetic engineering, are emerging which are totally based on the intellectual properties of the new companies. Business managers with basic intellectual property knowledge and intellectual property professionals are becoming increasingly influential leaders in the information age. This series of articles will provide management with an overview of the key concepts that must carefully be considered when valuing or computing infringement damages for any intellectual property.

What are Intellectual Capital and Intellectual Property?
Knowledge underlies the creation of value. Successful use of that knowledge contributes to the progress of society. Knowledge in business is manifested as intellectual capital, which includes:

• Human capital
• Structural capital
• Intellectual assets
• Intellectual property

Human capital is the collection of experience, skill and education of a company's employees. Structural capital, which includes intangible assets such as process documentation and the organizational structure itself, is the supportive infrastructure provided to human capital, which encourages human capital to create and leverage its knowledge.

Intellectual assets are the codified physical descriptions of specific knowledge that can be owned and readily traded. Intellectual assets that receive legal protection become intellectual property. There are five forms of intellectual property:

• Patents
• Copyrights
• Trademarks
• Trade secrets
• Know-how

Companies often fail to capitalize on the opportunities offered by their intellectual properties, simply because they have never identified all the intellectual properties they own. We have identified more than 90 types of intellectual properties and intangible assets that a company may own, including brand names, literary works, technical documentation and use rights, just to name a few.

Challenges in Valuing Intellectual Property
One of the major difficulties in valuing intellectual property or negotiating licensing agreements is to determine the market royalty rates that should be used. Most consultants traditionally develop royalty rates based on three traditional sources:

• from the client, if the client has its own negotiated licensing agreements;
• from surveys performed by various professionals, generally in cooperation with trade associations; or
• from judicial opinions (court cases) which vary greatly depending on individual fact patterns.

The valuer should augment these traditional tools through a search of public documents for licensing agreements. The authors have identified more than 1,800 transactions listed in public documents that will allow you to document royalty rates and terms actually used by companies. This direct market evidence is the most compelling evidence available.

Managing the Millennium
Intellectual capital is the value generator of the future. To sustain growth, companies in the future will have to:

• Identify the intellectual capital available to them
• Measure the value of the intellectual capital components
• Structure the means of delivery and potential leverage with other potential intellectual capital within the company
• Manage the cash flow and the distribution channels of the intellectual capital
• Protect the intellectual capital by converting it to intellectual property
• Manage the intellectual property registrations on a world-wide basis
• License intellectual property to and from third parties
• Assure compliance with all agreements.

Distinction Between Intellectual Property and Intangible Assets
Intellectual property is a subset of intangible assets. Intellectual properties, specifically patents, copyrights, trademarks and identifiable know-how, satisfy the definitional requirements of intangible assets. As will be seen later, valuation methodologies applicable to intangible assets also apply to intellectual property.

Intangible assets are long-lived assets used in the production of goods and services that, unlike fixed or tangible assets, lack physical properties. Intangible assets represent certain long-lived legal rights or competitive advantages developed or acquired by a business enterprise. Intangible assets differ considerably in their characteristics and useful lives and are classified in the Financial Accounting Standards Board Statement #72 (Accounting for Acquisitions) as follows:

• Identifiability: Patents, copyrights, franchises, trademarks, and other similar intangible assets that can be specifically identified with reasonably descriptive names.
  
• Manner of Acquisition: Intangible assets that may be purchased or developed internally.
  
  Determinate or Indeterminate Life: Many intangible assets that have a determinate life established by law or by contract or economic behavior.
  
• Transferability: The right to a patent, copyright or franchise that can be identified separately and bought or sold.
  

For valuation purposes, the intangible assets must be readily identifiable and capable of being separated from the other assets employed in the business. An intangible asset can be defined by referring to practical considerations such as whether it is supported by a contract, or whether it can be economically measured objectively with a determinate life. Intangible assets that exist but cannot be specifically identified are included in goodwill.

Attributes of Identifiable Intangible Assets
For an identifiable intangible asset to exist from a valuation or economic perspective, it should possess certain attributes. Some of the more common attributes include the following:

• It should be subject to specific identification and a recognizable description.
  
• It should be subject to the right of private ownership, and this private ownership must be legally transferable.
  
• There should be some tangible evidence or manifestation of the existence of the intangible asset (e.g., a contract, a license, a registration document, a computer diskette, a set of procedural documentation, a listing of customers, recorded on a set of financial statements, etc.).
  
• It should have been created or have come into existence at an identifiable time (or time period) or as the result of an identifiable event.
  
• It should be subject to being destroyed or to a termination of existence at an identifiable time (or time period) or as the result of an identifiable event.
  
• In other words, there should be a specific bundle of rights (legal and otherwise) associated with the existence of any intangible asset.

For an identifiable intangible asset to have a quantifiable value from an economic analysis or appraisal perspective, it should possess certain additional attributes. Some of the more common additional attributes include the following:

• The intangible asset should generate some measurable amount of economic benefit to its owner. This economic benefit could be in the form of income increment or cost savings. The benefit is sometimes measured by comparison to the amount of income otherwise available to the intangible asset owner (e.g., the business) if the subject intangible asset did not exist.
  
• This economic benefit may be measured in a number of ways, such as net income, net operating income or net cash flow.
  
• The intangible asset should be able to enhance the value of the other assets with which it is associated. The other assets may encompass all other assets of the business, including tangible personal property, tangible real estate, or other intangible assets.

Some of the more common categories of intangible assets most commonly valued are as follows:

• Patents - product or process
• Brands - consumer goods' brands, trademarks, corporate names
• Publishing Rights - magazines, books, mastheads, film and music rights
• Intellectual Property - patents, copyrights, technology, know-how
• Licenses - television and radio, franchises, distribution rights
• Computer Software - developed in-house

Unidentifiable Intangible Assets
Economic phenomena that do not meet these specific attribute tests typically do not qualify as identifiable intangible assets. Some economic phenomena are merely descriptive in nature. They may describe conditions that contribute to the existence of - and value of - identifiable intangible assets. But these phenomena do not possess the requisite elements to distinguish themselves as intangible assets.

For a typical business, descriptive economic phenomena that do not qualify as identifiable intangible assets may include:

• High market share;
• High profitability;
• General positive reputation;
• Monopoly position;
• Market potential; and
• Other economic phenomena.

However, while these descriptive conditions do not qualify as identifiable intangible assets themselves, they may indicate the existence of identifiable intangible assets that do have substantial economic value. They are most often referred to collectively as "goodwill".