The Cost Approach case develops the example of a trended historical cost approach to valuation for a pool of patents. It is based on tangible experience incoming from TUDOR technology transfer activities. Although historical cost approaches to valuation are often presented as the simplest of all quantitative valuation methods, the reader will understand some drawbacks and key elements in order to ensure a valid valuation in such a framework. www.FITT-for-Innovation.eu

1. Cost Approach
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2. Case - In brief
This case is based on a valuation example
• Valuation method is a trended historical cost-based approach
• Case exposes the various steps needed to be followed in order to
succeed such a valuation
• Case is based on a real-world example
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3. Valuation - A question of Time
Cost Approach
Image source : Microsoft Office 2007 Cliparts
Past Present Future Time
Market Approach Income Approach
 Valuation case hereby developped is based on the cost approach
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4. Case exposed
Introduction to cost approaches
 TRENDED HISTORICAL COSTS
METHOD
IDEA : Measure the actual (trended) costs
incurred during the creation and Image source : Microsoft Office 2007 Cliparts
development of the IP.
 REPLACEMENT COSTS METHOD
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.
 REPRODUCTION COSTS METHOD
IDEA : Based on the costs to purchase or
create an exact replica of the IP asset
subject to valuation.
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5. Case exposed (introduction)
 In this Case, we used the trended historical cost method
 Advantages
 Simple method
 Accounting information was available
 Information was available
 Valuated IP asset was clearly identified
 Team was available Image source : Microsoft Office 2007 Cliparts
 Answer a simple question : « how much did this invention cost us? »
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6. Case exposed
 6 steps procedure
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7. Step 1 ~ IP asset description
Description of IP asset under valuation
• Patent familly composed of a set of patents in the healthcare sector
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8. Step 2 ~ Identification of information sources
Information sources
Image source : Microsoft Office 2007 Cliparts
• Accounting balance sheets
• Research reports
• Project follow-up reports Usually the best
• Direct interviews with all stakeholders source of
information
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9. Step 3 ~ Selection of data
Used Data includes
• Cost of human resources (scientists, engineers, ...)
• Cost of IP asset protection
• Overhead costs for utilities and research space, for administrative and technical
support
• Raw materials used
• Prototype construction and testing expenses
• Outside services for independent evaluation, certifications, patenting procedures
• Pilot plant expenses
• Sector specific administrative costs (i.e. approval procedure phase to commercialize a
medical product, official recognition)
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10. Step 4 ~ Costs Compilation
Domains of expenditures
are regrouped
• Human resources
expenditures: e.g. salaries,
• R&D expenditures: e.g. plant
expenses, raw materials (used
for the prototype)
expenditures, overhead costs,
• Juridical and administrative
expenditures: expenditures All expenditures are validated by team
from outside services mainly
for patenting procedures. (goal is to exclude non valid ones)
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11. Step 5 ~ Cost trend factors application
Yesterday’s value ≠ Today’s value
Impact of inflation  Use of Consumption price index
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
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12. Step 6 ~ Depreciation
 Depreciation which should be taken care of
• 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.
• Functional obsolescence: Over time, the IP asset may be less able to realise the
specific function for which it was originally developed.
• 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.
• Economic obsolescence: Economic conditions that reduce consumer demand and
yield excess industry capacity.
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13. Conclusion
• Trended historical cost approach is a fairly easy valuation method,
mostly based on available data
• Calculation of trend factors and depreciation can be difficult,
dependng on the IP under valuation
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
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