Intellectual property, more broadly, intangible assets have become a growing part of many companies’ performance. Most companies have significant intangible assets, though not all intangible assets are reflected on a company’s financial statements. The most common reason for a company to have considerable balances for intangible assets (IP) on its financial statements is a recent merger or acquisition. When business merge or one acquires another, intangible assets are assessed at a fair value of the acquisition date. Fair value is the price that would be received to sell an asset or paid to transfer liability in an orderly transaction between market participants at the measurement date. The fair value is typically determined by an expert at the time of acquisition, specifically accountants.

Are intangible assets (IP) reported on a merger or acquisition?

Business financial statements are used by managers and business owners/investors to evaluate the financial condition of their company. Business assets and the comparison of assets to liabilities is detailed on the balance sheet. Business financial documents should also disclose the value of intangible assets, specifically intellectual property.

Trademarks and band names as well as patents that allow exclusive rights to manufacture a particular item are some but a few of these intangible assets.

What are the problems of intangible assets in accounting and how does this affect the M&A valuation?

M&A accountants’ record and report assets on the company’s balance sheet, but problems are inherent with intangible assets such as intellectual property. In most cases intangible assets may not be part of the financial statements reporting. These occurs because the assets have no real physical value since they can be difficult to properly value. A trademark is among the hardest intangible assets to value, making it difficult to truly value a company in an M&A transaction.

How do intangible assets (IP) affect the business value of an M&A transaction?

A strong brand and a loyal customer base can be distinct assets owned by a business. Examples of distinct intangible assets include patents or trademarks that let a business sell its product for a higher price or in greater quantity than its competition. When pricing a business for sale, intangible assets especially IPR’s can be even more important than tangible assets. The value placed on intangible assets, such as intellectual property, is now a greater portion of the total value of most businesses than is the value of tangible assets, such as machinery and equipment. And the creation and management of intellectual property is often essential to long-term success.

Establishing the value of intellectual property in a M&A transaction

Intangible assets can be difficult to value if they were not purchased by the business. Often, goodwill is an amount that is agreed on between the acquiring company and the seller of the business at the time of sale. For other items, such as trademarks or production process, the value of such intangible item will depend on how much revenue will be derived from the use or depletion of the asset over time therefore establishing the fair market value of an IP prior a business sale is key.

Conclusion and recommendation

Professional fees are directly related to the transaction value of a merger or acquisition. Intangible assets, in particular intellectual property such as patents, production process, trademarks and brand names can understate the total value of the company if not well accounted for thereby diminishing the remuneration for the lawyers and accountants involved in the transaction. Merger and acquisition lawyers and accountants must overcome these issues in order to present an accurate financial picture by consulting with an intellectual property (IP) financial expert such as Random Forks Intellectual Property (RFIP) Group Ltd.

RFIP has the capacity to unearth the intellectual property assets of a company by conducting both preliminary and in-depth IP audit. After determining the intellectual property portfolio of a company, RFIP will assist the lawyers and accountants in valuing and incorporating them in the financial statements thereby representing the fair value of a company.