Transfer Pricing Associates

How to Deal with the New Generation of Intangibles

post Thursday February 23, 2012

new gen


When we hear the term new generation intangibles, our minds instantly imagine the newest prototype car or a new cell phone that knows what you’re thinking.  And in a sense, what we imagine new generation intangibles to be is actually fairly accurate.  Almost all new generation intangibles are triggered by companies with new types of business models, with a new and different configuration than competitors. 

The new generation of intangibles can be identified in a few different categories:

Though this new generation of intangibles is the product of strong innovation, these intangibles usually have short economic lifetimes especially if the competition is smart enough to quickly replicate the novel technology or business model.  This typical one to two year economic lifetime of new generation intangibles also impacts the decision of how much R&D/marketing costs to undertake in order to earn a potentially superior return.

It is important, then, to properly analyze intangibles to determine what role they can play within a company’s overall business to better exploit the intangible before its economic lifetime times out.  When addressing an intangible, the four functional variables should always be part of the analysis:

Labeling intangible assets involves deciding what assets a company owns which are not tangible.  Some overarching labels for intangibles are product-related intangibles, process-related intangibles, market-related intangibles, and hybrids.

Identifying or recognizing different types of intangible property is a critical step as it enables the subsequent step of attributing ownership of the intangibles.  Some of the go-to places companies can look when attempting to identify their intangibles are their balance sheet (i.e. trade name bought from a third party); IP registrations (i.e. if a patent is protected); and assets that are remunerated (i.e. assets that are accompanied by royalty fee payments). 

Attributing ownership of an intangible enables the appropriate amount of income to be attributable in an accounting, legal, or tax/transfer pricing context.  Two different types of ownership of intangibles exist.  The first is legal ownership whereby the party that registers the IP is considered the ultimate owner.  The other is economic ownership whereby the right to ownership goes to the party with the ability to benefit from the IP’s income stream and the party that bears the costs and risks of developing an intangible.

Since intellectual property is becoming more and more important for companies, it has become increasingly important for companies to understand the economics that affect the value of these properties.  The three most used methods to value an intangible are the cost, market, and income approaches, but additional factors will apply specifically to “start-ups” with a unique set of intangibles.  Some of these factors include determining whether the discount rate reflects the high risk profile of an intangible and whether resource allocation within the start-up is managed properly.

New generation intangibles are difficult to create and properly manage, but when the four factors (labeling, identification, ownership determination, and value) are properly understood, a company can better ensure significant returns on their innovations.


(image courtesy of David Castillo Dominici)

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