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The notion that Intangible Assets (IA) and Intellectual Property (IP) in particular are an increasing proportion of total corporate assets is relatively undisputed by now. Industries such as pharmaceuticals, communications, and media are the clearest examples of this phenomenon. Pharmaceutical products depend on patent protection to establish a degree of niche monopoly to raise prices and recoup extraordinary investment costs, and patent offices across many jurisdictions routinely restore to patent owners the term lost to slow approval processes. Compatibility across diverse communication devices produced by otherwise competing manufacturers relies on standards and the pooling of patents embodying them. Media companies increasingly depend on controlling content, that is, copyrights, rather than specific communication media, such as newspapers, television stations, and so forth.
At appropriate stages in the economic cycle, stock analysts justify apparently excessive price-to-earnings ratios by attributing the incremental valuation to the un-reported value of internally generated trademarks, patents, and intangible assets in general. This is a widely shared notion, but it is not the best way to measure the value of a corporation’s IP, as evident by the consequence that it leads to an apparent evaporation of IP values in the subsequent and unavoidable bear markets as the book value of tangible assets is assumed to remain constant.
Despite these difficulties, it is clear that most businesses find value in the characteristic adaptability and flexibility of trademarks – which can be extended or licensed, patents – which can also be licensed and traded, and intangibles in general. By contrast, tangible business assets can be quickly be in the wrong location, the wrong scale, using obsolete or uncompetitive production processes, and specialized in making outmoded products with few or very expensive ways to re-locate, re-tool, or sell.
Correspondingly, in corporate bankruptcy processes (restructuring and liquidation), intellectual property assets have been gaining in recognition as some of the most flexible, salvageable, and consequently most value assets the debtor possesses.
From an economic perspective, the bankruptcy process can be thought of as a set of laws providing for the regulated transfer of debtor’s assets to creditors in order to settle claims. Consequently, the debtor’s assets and liabilities must be valued, in a mutually and legally satisfactory way, to arrive at the appropriate transfer ratio between the parties. This is an eminently administrative process, not a freely negotiated transaction in a competitive market. Intangibles, furthermore, are typically unique and have few, if any organized secondary markets which can provide arm’s length prices to establish values as they do for financial assets.
Therefore, the bankruptcy valuation process must be carried out in a context of competing interests, under a necessity or compulsion to sell or buy, while ensuring all available, relevant, and valuable assets are taken into consideration. In the 21st Century, intellectual property has thus emerged as a significant, relevant, viable, and valuable asset class which can settle an increasing proportion of the claims and supporting, in some cases, the possibility of restructuring the original business retaining a substantial proportion of its value.
In the general area of IP and intangible assets, in the face of the increasing need noted above, the fact that generally accepted accounting principles (GAAP) do not reflect internally-generated assets such as trademarks, patents, and other intellectual property is an obstacle. At the outset, therefore, it is difficult to determine with certainty what IP and intangible assets the debtor actually owns and, moreover, what their book values were on the eve of filing. Nevertheless, Acquired IP and certain types of intangibles have been recognized in GAAP financials as a result of the implementation over the last few years of The Financial Accounting Standards Board’s (FASB) statements 141 and 142, as well as the corresponding International Financial Reporting Standards (IFRS-3).

In practice, simple ratios and arbitrary “rules of thumb” have been used to fill this information gap, and closure, liquidation, financing, and restructuring decisions have been made on this incomplete basis. In the current environment, these practices are no longer acceptable, and the prevailing standard tends to include a specific audit of the IP and intangible assets, with appropriately wide variations among industries and the size and length of corporate history of the debtor.