Last updated: 
30 March 2016

Intellectual property (IP) can add up to a substantial percentage of your business’ total value and it is essential that you account for it. In an innovative and dynamic business, the value of IP can be much greater than the value of physical assets.

There are two main steps to auditing your IP. Both play an important part in the overall protection of your IP.

  1. Identifying your IP assets.
  2. Valuing your IP as an intangible asset.

Ultimately your commitment to your IP depends on how important it is to the success of your business. However, when planning for your business' growth, don’t forget that what may seem unimportant today might be worth millions of dollars to you in the future.

Identifying your IP assets

You should value your IP assets just as you would value physical assets. Valuing your IP makes your business more attractive to potential investors and buyers, especially if that value can be formally recognised for accounting purposes. Other benefits include:

  • determining the overall value of your business
  • providing a tool to measure and manage your assets
  • providing security and backing for lenders
  • providing taxation benefits (tax deductions)
  • reducing the proportion of your business’ net worth attributed to goodwill - important when selling a business.

When identifying your IP assets, think about:

  • the products or services that are key to your business
  • your legal rights in relation to your products or services
  • the market advantages your rights give you.

Valuing your IP as an intangible asset

Many businesses recognise their tangible assets (for example, computers or machinery), but fail to recognise their IP as identifiable intangible assets. Examples of identifiable intangible assets include:

  • patents, trade marks and brand names
  • copyright and industrial designs
  • franchises and licences
  • distribution agreements
  • newspaper mastheads/publishing rights
  • government quotas
  • covenants not to compete
  • secret processes and formulae
  • information databases
  • computer systems software
  • core technology.

Australian accounting standards have strict criteria for identifying and valuing IP for accounting purposes. To undertake a valuation of your IP, it is recommended that you contact a professional in this area.

IP and taxation

Australia has adopted the International Financial Reporting Standards. These standards have particular implications for reporting intangible assets, including IP.

IP can affect tax-related issues such as:

  • income tax
  • capital gains tax
  • tax deductions
  • depreciation
  • trade mark taxation
  • special tax write-offs
  • withholding taxes (both local and international)
  • GST
  • stamp duty.

Many of the tax-related issues may not apply to your business. However, it is recommended that you get professional advice early, so you are clear of your tax responsibilities regarding IP.

Australian Accounting Standards

There is currently no Australian Accounting Standard that comprehensively addresses the accounting treatment of IP in Australia. The most relevant accounting standards are:

  • AASB138: Intangible Assets
  • AASB136: Impairment of Assets
  • Accounting Interpretation 132: Intangible Assets website costs.

International Accounting Standards and Australian Accounting Standards are now aligned, and have very similar requirements.

Choosing a valuation method

Being a non-current asset, IP may be measured, subsequent to initial recognition, on either the:

  • cost basis
  • fair value basis.

Once a revaluation method is chosen for IP, the entity can only revert to cost in extremely limited circumstances. The revaluations must be undertaken with sufficient regularity to ensure the carrying amount does not differ materially from the fair value at each reporting period.

Assets must still be amortised even where they have been revalued. In cases where asset values are increased, this will result in a higher depreciation expense. Assets with an indefinite useful life are not amortised.

AASB136 requires assets to be assessed at the end of each reporting period to see whether there is any indication that an asset may be impaired.

Common IP valuation methods include:

  • relief from royalties
  • excess profits or notional maximum royalties payable
  • capitalisation of earnings
  • net present value of incremental cash flows
  • gross profit differential
  • premium sales price
  • comparable market transactions
  • cost-based
  • brand strength
  • real options.