What Is An Intellectual Property Accounting Essay

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A specific definition of intellectual property is useful before the analysis of IP issues that could occur in a Living Lab project. This definition will help to take useful assets into account in the IP negotiation of a Living Lab project. Moreover, it could be useful to know methods to evaluate Intellectual property that parties will define in their project.

So, this chapter will provide a (a) definition of intellectual property which will enable to know which kind of assets will enter in the project as intellectual property. Then, we will provide and explain the (b) several sources of IPR which could exist to know precisely protection that partners could use. And finally, we will provide (c) some ways to evaluate IP that companies own.

Definition of intellectual property

Intellectual property designates all exclusive rights that are given on intellectual creation. It is divided in two parts: patents, trademarks, industrial design and models and geographical indications; and copyrights. An IPR confers to its holder an exclusive right of exploitation for a given territory. For example, the copyright's holder of a book will be the only one whose can reproduce or commercialize it. It is the same for a patent's holder. He will be the only one whose can commercialize the patented invention. In the same direction, the holder of a trademark will be the only one whose can commercialize products of the trademark (Naglic, V., 2011).

Thus, Intellectual property applies to intangible assets. It is useful to determine the difference between (a) tangible assets and (b) intangible assets to understand which assets are concerned for the rest of this report.

Tangible Assets

Tangible assets have a physical and financial value. They can be divided into two categories: financial capital or assets that are valued on the basis of their physical valuation, such as infrastructures and buildings. The evaluation of tangible assets is an important phase for tax and financial reporting. Indeed, precise valuations of tangible assets can be used as collateral for financing (Nuri, n.d).

Intangible Assets

Intangible assets aren't physical elements but they are valuable resources. A distinction exists between identifiable intangible and unidentifiable intangible. Identifiable intangible assets are typically elements as patents, trademarks, copyrights, etc. they are usually considered as intellectual property (PricewaterhouseCoopers, 1999). Unidentifiable intangible assets are elements as goodwill and organization costs. It is elements which can't exist independent of the business as a whole (Day, 2008). Intangible assets are considered as an important value for the company. There are more and more intellectual asset managers whose are specialized in the valuation of intangible assets and can help companies and clients to use intellectual assets for commercial improvement (Nuri, n.d.).

These definitions can help to note that there are two sorts of assets which bring value to the company. Even if tangible and intangible assets can be valued, ownership rights vary between them and assets strategy can be differentiated. Annex 6 makes the difference between tangible property and intellectual property.

Sources of IPR

The term intellectual property (IP) is sometimes distinguished from intellectual property rights (IPR). In fact, the term IP means the intangible asset and the term IPR means a legal right which covers IP. For example, an invention is intellectual property and it can be protected by an intellectual property right called "patent".

IPR are divided into 2 parts: (a) copyrights and related rights to these copyrights and (b) industrial property. We are also going to add another part which calls (c) soft IP (The European IPR Helpdesk, 2011). The main distinction between the first two is the creation time. Most industrial property is created after an official procedure which is generally a recording. Copyrights and rights relative to copyrights are automatically created at the time of the creation (SPF economie, n.d.). Soft IP are intangible assets which aren't protected by the law.

Copyrights and rights related to copyrights

The copyrights are the rights of literary or artistic authors as books, painting, or software and they are protected during a certain period after the death of the author. The number of years depends of the country.

The protection extends to artists, producers, and broadcasters. The main objective of copyrights is to boost and reward creation (World trade organization, n.d.).

Rights related to copyrights are also called neighboring rights. These rights are related to author's rights but aren't associated with the work's actual author. In other words, rights related to copyrights are rights which protect the interests of certain groups of right holders, whose actions in most cases concern the reproduction and dissemination of works (UNESCO, n.d.). Protection is often more limited and has a shorter duration than copyrights.

The industrial property

The industrial property can be also divided between (i) trademark, (ii) patent and (iii) industrial designs and models.

Trademark

The protection of significant characteristic as trademark must be a significant characteristic, available (not to violate an anterior property right, such another trademark, a copyright, and so on), licit and must not cheat on its nature. The trademark can be nominal, figurative, semi-figurative, complex or even a sound (World intellectual property organization, n.d. b).

A trademark is protected during 10 years and is renewable indefinitely. The trademark can fall into public domain. It is protected against counterfeit, which can have penal sanctions.

The owner of a trademark can be against the commercialization of his products in different forms. Even if he isn't owner anymore, he can oppose a commercialization if it incriminates the image of the trademark.

Patent

The patent gives the right to the exclusive exploitation of an invention in a specific territory. This invention must be patentable, new, imply an inventive activity, and be suitable for an industrial application. The invention must be the object of a deposit. The exploitation monopoly of a patent's recording is valid for 20 years before it falls in the public domain (WIPO, n.d. b).

There are usually some distinctions about product or process invention. For example, the creation of a new composite is an example of product invention. However, the invention of a new method of composite fabrication is an industrial process invention. They are respectively called product patents and process patents (WIPO, n.d. b). The holder of a product patent can prevent third parties to manufacture, use, offer to the sale, to sell or import the product if the third parties don't have the consent of the holder. The holder of a process can prevent third parties to apply the process, offer to the sale, to sell or import the product obtained directly by the patented process if the third parties don't have the consent of the holder.

Since February 19th, 2013, the European Union has officially signed a single patent for 24 Member states (EurActiv, 2013). Today, a patent has to be obtained for each of the 27 Member states. For instance, only one deposit is enough in United Stated and in China. This difference has an impact on the cost of European patents which are eighteen times more expensive than in the United States (more or less 36 000 euros against 2 000 euros). In China, the cost of a patent is only 600 euros (Fenasse, 2013). This European Union single patent will divide the cost of the patent deposit thanks to administrative simplifications. Indeed, patents will be only express in English, French and German, but requests could be able for each language of the European Union. However, companies will have compensation for costs of translation for other languages than officials' languages.

Industrial designs and models

Industrial designs and models consist generally to the esthetic of a useful object. The industrial design and model has to be attractive and achieve its function in an effective way. At the legal level, an industrial design and model has to be recorded to protect original, decorative and non-functional characteristics of a product resulting of industrial conception's activity (WIPO, n.d.). This protection doesn't take into account technical aspects of the invention.

Soft IP

Soft IP is the third sort of IPR. It is a category of rights which aren't protected by law. However, this category is considered as intangible asset and they are usually associated with other intellectual property rights. It includes (i) trade secret, (ii) confidential information and (iii) know-how (Cameron, 2007).

Trade secrets

Trade secrets are protected without any registration, contrary to patents. Trade secrets are formula, process, pattern which is known by a restricted number of individuals (e.g. Coca Cola). It can be protected for an unlimited period of time. Nevertheless the information should follow some conditions to be considered as a trade secret. These conditions vary according to the country but there are some standard which exist in Article 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement):

"The information must be secret (i.e. it is not generally known among, or readily accessible to, circles that normally deal with the kind of information in question).

It must have commercial value because it is a secret.

It must have been subject to reasonable steps by the rightful holder of the information to keep it secret." (WIPO, n.d. a)

Confidential information

Confidential information is information which are identified as confidential at the moment of its disclosure between the participants of the project, except for information which is

in the public domain at the beginning of communication,

become part of the public domain by publication or otherwise after the communication, except if the receiving party break rules of the agreement,

acquired from a third party who don't break obligation of confidentiality,

Familiar for the receiving party before the date of the communication (IMI IP Policy, 2007).

Such confidential information isn't necessarily secret but it could have a value because of time and resources that companies used. For example, confidential information could be customer lists or databases (WIPO, n.d. a).

Know-how

Know-how can be considered as a subcategory of trade secrets or confidential information. This soft IP contains additional technical information that could have a value to an invention's licensee which are not including in a patent, such as "information relating to the optimum commercial exploitation of a technology" (WIPO, n.d. a).

We can note that IP plays a crucial role in several domains. Companies whose want to study their IPR have to keep in mind that there is not only one type of intellectual property rights. They have to study protections that they could have according to their own goals.

IP valuation

The collection of different IP that companies (public or private) or Public research organizations can own is an important step of IP valuation. It is possible to do a bundle of different intellectual property which can bring value to the organization in order to facilitate this collection. With this aim in mind, the figure in annex 7 can help companies to make a package of IP that they own. This list is non-exhaustive.

Intellectual property has become more and more essential to trade with other companies thanks to this intellectual creation diversity. Use of IP can take many forms and IP valuation will help companies to choose the most effective way in which the IP assets could be utilized or exploited. 

A difference exists between the legal and economic perspective of an IP asset. On a legal perspective approach, IP asset owns value thanks to characteristics or standards as novelty or originality. On an Economic perspective approach, IP asset owns value in terms of the economic benefit linked to the IP asset (WIPO, n.d b). Thus, IPR don't always own a real value even if on a legal approach, they have value. For example, a trade mark could have no value if partners aren't interested to use and pay for the trademark. It is also possible that an IPR has no economic value at the moment. For example, patent which doesn't have a commercial value for now doesn't mean that the patent has no value at all. Its value will be influenced by its possibility to create revenue in future, or its capacity to increase or maintain market share in using patents as a barrier to competition.

Furthermore the economic situation affects the value of IPR, but also other factors. For example, an invention which can be protected by a patent in the early stages of development will have less value than an invention which is already launched on the market and generating revenue. And a patent which is creating strong revenues now will have less value if it is close to expire.

Normally, there are three approaches to assess the value of IP: (a) cost approach, (b) income approach and (c) market approach (Intellectual property management, n.d.).

Cost approach

The cost approach doesn't mean that the value of an IP asset is the total of actual costs of creating assets. Companies which use this method will follow two important steps which are (i) the estimation of a cost indication of IP asset, and (ii) the modification of the cost indication by obsolescence factors (Intellectual property office, 2011). 

Estimation of a cost indication of IP asset

There are two types of cost which are called respectively reproduction cost and replacement cost (Intellectual property management, n.d.).  Reproduction cost represents the cost to recreate the IPR or to improve a similar product or service. Replacement cost expresses the cost incurred in developing or producing the IPR (Intellectual property management, n.d.). These definitions show that an investor should not pay more than it will cost him to generate an identical or similar IP asset.

Thus, a cost valuation analysis can be built from reproduction cost and replacement cost. These costs are usually material cost, labor cost, R&D cost, creation of the prototype, test, and registration of the IPR (Intellectual property office, 2011). These cost elements are based on the present historical cost of creating the subject IP asset. Cost valuation should also take adjustments for inflation and other relevant economic factors into account. 

Modification of the cost indication by obsolescence factors

Significant obsolescence factors will adjust results of the first step.  It is a useful step to give a value indication of the IP asset. Obsolescence factors include physical deterioration, functional obsolescence, technological obsolescence and economic obsolescence. The cost indication deducts significant measures of obsolescence in order to give value of the subject IP asset (Intellectual property management, n.d.).   

Cost approach represents advantages and disadvantages for an IP valuation. This method is useful in particular situations. In annex 8, we can find the different advantages and disadvantages of this method.

Income approach

The income approach method bases its calculation on the value that IPRs will generate in the future.

It involves several measures of income as gross or net revenues, gross income, net operating income, net income before tax, net income after tax to operating or net cash flow. Moreover, it is necessary to estimate correctly the time period for the creation of economic income and its periodicity. And the choice of the risk-adjusted capitalization rate has to be also taken into account.

This method is complicated to use because of the estimation of the economic life of IPRs, the estimation of income over several years and factors of the economic climate which need to be taken into account (Intellectual property office, 2011).

Market approach

This approach looks the price of other IPRs in the same area during the last months. Companies which use this method analyze and compare IP assets on the market to make a good valuation of the company's IP assets (Intellectual property office, 2011).

The market method could follow a methodology to find the most useful information about this valuation. A WIPO figure that we can find in annex 9 sums up these steps and shows basic steps of the market method.

In reality, these collect of data presents considerable difficulties. Indeed, it is often difficult to find IP assets which have considerable similarity to another IP asset because two agreements aren't definitely the same. Additionally it is difficult to price information that companies find because they are often kept confidential. 

Nevertheless, this method is objective and fair for parties because it reproduces its valuation on existing market data. Indeed, it could be useful if exact comparable information is available. But it is not appropriate for every sort of IPRs. For example, it is difficult to value patents with this method. As patents value depends on its innovation, it is difficult to find comparable information. Moreover, in niche market, it could be difficult to find comparative information (Intellectual property office, 2011).

In conclusion, companies have to choose their appropriate method according to the most IPR that they own. In annex 10 we can find different questions that organizations have to keep in mind to do a good valuation of their IP.

Chapter 4: What is FP7? Why is it important for Living Labs?

This chapter will provide an analysis basis which is obtained by a framework program created by the European Union. Indeed, there is a framework program which consists to provide funds for collaborative research projects at the European level. Living Labs can take part to this program. These funds are provided after an evaluation which is envisaged by the European Commission. This program is called FP7 and companies whose want to participate have to follow certain specific rules, in particular in terms of IP. Intellectual Property Rights is an essential point that participants have to study and understand in order to reach a successful FP7 project. Effective implementation of the project relies on a good application of IPR (EuropaMedia Non-Profit Ltd, n.d.).

According to FP7 website [i] , this seventh framework program is a program which gathers all initiatives of EU concerning research. The program plays an essential role to reach goals about growth, competitiveness and employment. Principal goals of FP7 are collected in four categories: Cooperation, ideas, people and capacities (European Commission, n.d.).

For the report, we will focus on the « Cooperation » category which supports all types of research activities performed by different research organizations in global cooperation. We can find different FP7 activities and themes in annex 11.

Most of UE research's funds in FP7 will be granted to collaborative research in order to establish excellent research projects and networks which could attract researchers and investments from Europe and whole world (European Commission, n.d). This collaborative initiative is in harmony with the setting up of Living Labs at the European level. Indeed, Living Labs are platforms where many private and public actors collaborate to develop new innovating products or services. Moreover, different challenges in ICT FP7 are horizontally cross over by user-driven open innovation approaches (Luotonen, 2008). Besides, FP7 is also important for financial reasons. According to a survey, Mulvenna, M. and Martin, S. (2012) show that 83% of respondents of a Living Lab project said that access to funding was a problem. So, if the project were accepted, these platforms obtain a funding and guidelines about IP management.

Additionally, participants have to provide certain documents which are required by European Commission. These documents are essentials for a FP7 project. In these papers, a part is devoted to IPR. In fact, two official papers have to be studied and filled by consortium:

The first official paper is the grant agreement. The standard EU Grant Agreement gives the common rules about IPR, their use and dissemination. In reality, Grant Agreement is the contract between the European Commission and the participants of the project. So, the Commission includes in annex intellectual property clauses that consortium cannot change. But they are so flexible and abstract that it is possible to imagine a lot of IP strategies (Bracquené, 2012).We can read an example of intellectual property rules in a Grant agreement in annex 12 and an overview of IPR rules in the GA in annex 13.

For instance, the Grant Agreement distinguishes access rights to IPR which are generated before the project and access rights to IPR which are generated during the accomplishment of the project. Furthermore, grant agreement distinguishes access rights which are essential for the project and access rights which are needed for later exploitation of the Foreground generated by the project. All these approaches will be developed in the next part of the report.

The second official paper is the consortium agreement. It is the agreement between participants of the project (Hjertman, n.d.). Commission doesn't take part in this agreement (IPR Helpdesk, 2011). One of the main goals of this Consortium Agreement is to resolve all IPR issues. Even for projects for which the Consortium Agreement isn't vital, it is better to negotiate this agreement in the case where any problems or issues arise during the implementation of the project.

Concerning IP management, the consortium agreement checklist can be summarized as follows: Confidentiality, pre-existing IP (Background), use of IP generated parallel to the project (Sideground), ownership/Joint ownership of results (Foreground), legal protection of results and commercial exploitation of results and any necessary access rights (IPR Helpdesk, 2011).

All things considered, the elementary principle in this official paper is to provide a flexible and effective mechanism to support the co-operation between members, to encourage protection and maximum use of Foreground as well as to ensure rapid dissemination. So, the consortium agreement is the instrument which develops aspects that are explicit to the project and aren't covered in the Grant agreement.

Finally, we can find in Annex 14 a sum up of the two essential official papers in order to receive funds by EU. Points which are developed in the grant agreement and the consortium agreement give a basis for a good IP management. Indeed, most of these points are a good basis to the analysis that we have prepared about IP issues in the Living Labs certified by ENoLL.

Even if some Living Labs don't obtain FP7 funds, we could take these IP rules into account in the next part of this report. These points could help any participants of a collaborative and open innovation.

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