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IP valuation - How to capture uncertainty

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IP valuation - How to capture uncertainty

Submitted by Efua Halm
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Véronique Blum obtained a PhD and a Habilitation to Direct Research in Management Sciences. She currently is an Associate Professor in Corporate Finance and Accounting at Université Grenoble Alpes. 

Her research, published in international journals such as Ecological EconomicsAccounting, Auditing and Accountability Journal or Critical Perspectives on AccountingComptabilité-Contrôle-Audit et la Revue Française de Gestion is focused on risk and intangibles in accounting, and valuation under uncertainty methodologies.

Véronique is also a member of the EFRAG academic panel, the Multidisciplinary Institute in Artificial Intelligence, and a member of the Ecological Accounting Chair. 

At the Association Francophone de Comptabilité, she co-leads a research group dedicated to Intangibles.

Véronique started her career as a consultant in Internal Control in private organizations with a state delegation. She currently acts as a valuation expert in disputes or negotiations and co-chairs the IP Valuation Committee of LES France and is a board member of the IPV committee at LES International. She is also a board member of LES France and of Observatoire de l’Immatériel.

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Reply by Efua Halm

In which cases should one capture the risks in the discount rate or in the cash flows ?


Reply by Véronique BLUM

In reply to by Efua Halm

Good question ! This suggests that the valuation process could be a very mechanical and algorithmic operation, however it is not, and besides judgement, it also calls for lots of precaution/prudence and most of all, for clear and articulated justifications of modelling choices. My answer will be twofold.

First, the method we resort to depends on how much we know about the IP that we are valuing. Indeed, capturing risks in the cash flows is a good approach to build a more objective analysis but it requires some track record of former and similar IPs successes and failures (to be able to assess the transition probabilities for example). Therefore, information availability is key in our modelling process. It is preferable never to invent transition probabilities ! Also, transition probabilities describe the average behaviour and not all IPs are "average" ones....

Second, subjective discount rate premia that lower the cash flow present values can be considered as a default solution. But it is almost universally applicable and easy and convenient to put in practice. However, the illustration on the slides also suggests that there can be overestimation or underestimation of the total risks when using common premium definition grids. In any case, any increase in knowledge calls for a revision of the valuation and it helps moving towards a better alternative or a better estimation.

Reply by Efua Halm

When using the sophisticated methods and especially the Monte Carlo Simulation, does follow-up become more complex?

Reply by Véronique BLUM

In reply to by Efua Halm

This is a technical issue related to modelling tricks.

The base case that one models in a business plan always drives to is a point analysis. This is a good thing because we need to anchor our representation of the IP, however it is not sufficient.

Therefore, when building a business plan, it is important to build it in a flexible manner, where, for example, inputs are only entered once. In such a way, any updates are easy to conduct and variations in a parameter become apparent. As time goes by, one can also proceed to a reevaluation at a later date than the initial valuation. In such way, for any update, one needs only to modify the cumulated flows departing date. 

Altogether, a follow-up based on Monte Carlo Simulation is not more difficult to follow up but much more insightful !

Reply by Efua Halm

Users supposedly prefer point analysis, whereas the methods presented are range analysis. Is that problematic?

Reply by Véronique BLUM

In reply to by Efua Halm

Another good question !

Yes, it is problematic when users prefer to be told certainty because no one knows what tomorrow will be about. As Hannah Arendt said, the future is contingent, it depends on us, but mainly on others. And a valuation exercise is one of human sciences, where we do not know how to make a rocket land at a predefined area on the moon. At best, we can make it taking off....

It may be difficult to admit but the only thing we know about the future is that we don't know it. The WTO example shows that mindset may be changing and if institutions start to recognise that they can not predict, one can expect that users will feel more comfortable with range analysis rather than point analysis. This may be a revolutionary process in our education and practices and building a "culture of risks" may be a key determinant.

Let's start now !