We are living in the knowledge society or as Peter Drucker called the ‘Post- Capitalist Society’. Unlike the capitalist society created by the allocation of capital and labour, knowledge society is created by productivity and innovation. Anyone, not just the ones with capital resources, could work towards enhancing productivity and innovate new things, thereby contributing towards the overall development of the self and of the society. The intellectual property system in the country helps them protect their innovations under patents, copyright, trademark, designs and other intellectual property rights. Once protected as IP rights, innovators would seek capital infusion to convert their IP rights into business ventures and integrate such IP rights into the business as an asset.

The balance sheet of any business organization presents, as on any particular date, assets that it owns and liabilities that it owes. Historically, in the capitalist society, the tangible assets comprising of land, building, machinery, vehicles, stock-in-trade, cash, etc., represented the major portion of assets held by the business (around 85% in 1950s). Today, the proportion of such tangible assets in the overall assets has reduced to around 25% (in 2010s), and the rest is accounted by intangible assets including IP assets. In a recent study conducted by Ocean Tomo, the intangible assets represent almost 84% of the total assets of the business. Despite this, managers today are not equipped to manage IP assets effectively. Except for few professionally qualified personnel, business organizations do not even have the skills required to value IP assets to be represented on its balance sheet.

There are universally accepted IP valuation techniques like the cost method, the market method, and the income method. Without understanding the nature of the IP assets involved and the purpose for which IP assets are to be valued, one cannot adopt these techniques to value IP assets. The IP assets are non-rivalrous assets and can be assigned and used by multiple parties simultaneously. They are characterized by large fixed costs and minimal marginal costs; the development of a patented drug costs a lot of initial investment, but requires minimal marginal cost to produce every additional unit of the drug. They demonstrate network effects and benefit from being a part of a network; a greater number of people adopts a particular software program, the more beneficial it would be for every user. Securing the ownership of IP assets is difficult and time consuming. Investing towards the creation of such IP assets could be risky, as the grant of the IP rights could be contingent upon various factors most of which may not be under the control of the innovator. Managing IP assets is also difficult because the infringement of such IP assets could go unnoticed; this leads to unintended outsiders benefiting from the investment made towards such IP assets. And predominantly, the IP assets do not have an established secondary market to trade in them, which poses a lot of challenge for the valuation of IP assets. Each of these features of IP assets plays a crucial role in its valuation, which we shall discuss later.

Valuation of IP assets is not a usual affair in the business and is carried out for a specific purpose based on some triggers. Such triggers could be internal or external. The following table provides a summary of the purpose or triggers for conducting the valuation of IP assets and the audience or users of such IP asset valuation data.