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Cost Approach


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Cost Approach

  1. 1. FITT (Fostering Interregional Exchange in ICT Technology Transfer)
  2. 2. <ul><li>This case is based on a valuation example </li></ul><ul><li>Valuation method is a trended historical cost-based approach </li></ul><ul><li>Case exposes the various steps needed to be followed in order to succeed such a valuation </li></ul><ul><li>Case is based on a real-world example </li></ul>Case - In brief
  3. 3. Valuation - A question of Time Present Past Future Time Cost Approach Market Approach Income Approach <ul><li>Valuation case hereby developped is based on the cost approach </li></ul>Image source : Microsoft Office 2007 Cliparts
  4. 4. Case exposed Introduction to cost approaches <ul><li>TRENDED HISTORICAL COSTS METHOD </li></ul><ul><ul><li>IDEA : Measure the actual (trended) costs incurred during the creation and development of the IP. </li></ul></ul><ul><li>REPLACEMENT COSTS METHOD </li></ul><ul><ul><li>IDEA : Use an estimation of the costs to obtain an equivalent IP asset with similar use or function (economic utility) as the original IP asset under valuation. </li></ul></ul><ul><li>REPRODUCTION COSTS METHOD </li></ul><ul><ul><li>IDEA : Based on the costs to purchase or create an exact replica of the IP asset subject to valuation. </li></ul></ul>Image source : Microsoft Office 2007 Cliparts
  5. 5. Case exposed (introduction) <ul><li>In this Case, we used the trended historical cost method </li></ul><ul><li>Advantages </li></ul><ul><ul><li>Simple method </li></ul></ul><ul><ul><ul><li>Accounting information was available </li></ul></ul></ul><ul><ul><li>Information was available </li></ul></ul><ul><ul><ul><li>Valuated IP asset was clearly identified </li></ul></ul></ul><ul><ul><ul><li>Team was available </li></ul></ul></ul><ul><ul><li>Answer a simple question : « how much did this invention cost us? » </li></ul></ul>Image source : Microsoft Office 2007 Cliparts
  6. 6. Case exposed <ul><li>6 steps procedure </li></ul>
  7. 7. <ul><li>Description of IP asset under valuation </li></ul><ul><li>Patent familly composed of a set of patents in the healthcare sector </li></ul>Step 1 ~ IP asset description
  8. 8. <ul><li>Information sources </li></ul><ul><li>Accounting balance sheets </li></ul><ul><li>Research reports </li></ul><ul><li>Project follow-up reports </li></ul><ul><li>Direct interviews with all stakeholders </li></ul>Step 2 ~ Identification of information sources Usually the best source of information Image source : Microsoft Office 2007 Cliparts
  9. 9. <ul><li>Used Data includes </li></ul><ul><li>Cost of human resources (scientists, engineers, ...) </li></ul><ul><li>Cost of IP asset protection </li></ul><ul><li>Overhead costs for utilities and research space, for administrative and technical support </li></ul><ul><li>Raw materials used </li></ul><ul><li>Prototype construction and testing expenses </li></ul><ul><li>Outside services for independent evaluation, certifications, patenting procedures </li></ul><ul><li>Pilot plant expenses </li></ul><ul><li>Sector specific administrative costs (i.e. approval procedure phase to commercialize a medical product, official recognition) </li></ul>Step 3 ~ Selection of data
  10. 10. <ul><li>Domains of expenditures are regrouped </li></ul><ul><li>Human resources expenditures: e.g. salaries, </li></ul><ul><li>R&D expenditures: e.g. plant expenses, raw materials (used for the prototype) expenditures, overhead costs, </li></ul><ul><li>Juridical and administrative expenditures: expenditures from outside services mainly for patenting procedures. </li></ul>Step 4 ~ Costs Compilation All expenditures are validated by team (goal is to exclude non valid ones)
  11. 11. <ul><li>Yesterday’s value ≠ Today’s value </li></ul><ul><li>Impact of inflation  Use of Consumption price index </li></ul>Step 5 ~ Cost trend factors application To give an example of calculation, the cost trend factor for 2006 (in 2008 value) is equal to 1.09 = (1+2.7%)x(1+2.3%)x(1+3.4%) Source of data : national statistic offices
  12. 12. <ul><li>Depreciation which should be taken care of </li></ul><ul><li>Physical depreciation: Physical wear and tear of the asset that makes it increasingly unable to perform with the speed, dependability and accuracy of a new counterpart. This type of obsolescence is rarely observed to the IP assets. </li></ul><ul><li>Functional obsolescence: Over time, the IP asset may be less able to realise the specific function for which it was originally developed. </li></ul><ul><li>Technological obsolescence: Often considered as a subset of the functional obsolescence it is linked to a change of the state of art, the development of new technologies that make the technology of the IP asset not useful anymore. </li></ul><ul><li>Economic obsolescence: Economic conditions that reduce consumer demand and yield excess industry capacity. </li></ul>Step 6 ~ Depreciation
  13. 13. <ul><li>Trended historical cost approach is a fairly easy valuation method, mostly based on available data </li></ul><ul><li>Calculation of trend factors and depreciation can be difficult, dependng on the IP under valuation </li></ul><ul><li>Such an approach constitutes an important initial source of information, but depending on the reason for the valuation action, it most oftenly needs to be completed with market and/or income approaches </li></ul>Conclusion