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29th Congress of Real Estate Appraisers, Valuers and Counselors

“A study on Patent Appraisal Method”

Author: Mr. Kim, Byeong-chyol

Association: Korea Association of Property Appraisers (KAPA)

Date: July 6th, 2018

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CV FOR 29th PPC 2018

Mr. KIM, BYEONG-CHYOL

Jeong-do Appraisal Co. Ltd., Seoul, Republic of Korea

Member of KAPA (Korea Association of Property Appraisers)

wowkim70@hanmail.net, +82-2-565-9302

Education

2002. 02. Graduated from Hanyang University in Seoul, Republic of Korea

Graduate school completion of Urban-Engineering

1997. 02 Graduated from Hanyang University in Seoul, Republic of Korea

Degree: Bachelor of Urban-Engineering

Certification

2013. 03. Certificate of Property Appraiser in Korea

2011. 12. Passed Property Appraiser Exam in Korea

2006. 11. Certificate of Public Real Estate Agent in Seoul, Korea

Experience

2018. 07 ~ current: Have been working for Jeong-Do Appraisal Co. Ltd. as Representative

2018. 07: Establishment Jeong-Do Appraisal Co. Ltd.

2018. 04 ~ current: Member of Young Appraiser Support Groupl of KAPA

2016. 01 ~ current: Member of Co-ownership Land Division Committee of Yonsu-gu Office, Inchon

2012. 03 ~ 2014. 02 Member of Planning Committee of KAPA

2016. 12 ~ 2018. 06 WOORI Appraisal Co. Ltd. as Director of Planning & Management

2013. 09 ~ 2016. 12 SERVE Appraisal Co. Ltd. as Director of 1st Business Department

2013. 05 ~ 2013. 09 GAWHA Appraisal Co. Ltd. as Probation Appraiser

2012. 08 ~ 2013. 04 SAMIL Appraisal Co. Ltd. as Probation Appraiser

1997. 01 ~ 2003. 02: Manager of Industrial Automation Department, LSIS Co., Ltd

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"A Study on Patent Appraisal Method"

(※ Applicable part: Criteria for Intangible Asset Valuation)

Ⅰ. Introduction

In South Korea, appraisal is defined as "valuation of land, etc. and expressing the

result with numbers ", and a) with a focus on real properties "land, etc." and b)

with a view to "valuation", has expanded its scope of operations into feasibility

study, cash flow analysis, cost-benefit analysis, consulting etc. in real estate market,

by applying the Appraisal 3Methods based on the three aspects of the value

(marketability, profitability, and cost).

Lately, however, as the appraisers feel insecure about their status due to "the big

change of the 4th Industrial Revolution", the value of technology or the

importance of knowledge-based assets grows, the local appraisal industry is

increasingly interested in the assessment of intellectual property rights. As far as the

actual operations in appraisal are concerned, the general regulations on the

appraisal of patent rights (intellectual property rights) are presented in Appraisal

Rules or Standards for Appraisal in Practice, but in fact, specifics remain

controversial. It is also urgently required for the local industry to create and

revise the standards on patent rights (intellectual property rights) based on the

Appraisal 3 Methods.

For the last ten years, the technology valuation (appraisal) including patent rights

has transformed based on Technology Transfer and Commercialization

Promotion Act ("Technology Transfer Act" for short) under the leadership of the

South Korean government. The technology valuation (appraisal) has developed

under the leadership of the local government because 'the technology valuation

(appraisal)', which can fairly appraise the economic utility or value of technology, has

gained in importance, when the application of technology to business involves the

implementation of technology transfer and/or trade, investment and/or loan in kind

etc. Especially as the government's policy for using technology appraisal to provide

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technology financing for SMEs selected for Inno-Biz spreads, the technology

appraisal methodology came to develop mainly among the related government

agencies.

Especially, Ministry of Industry, Trade & Energy created A Practical Guide to the

Technology Appraisal (A Practical Guide for short) and has developed it through

three revisions over the last several years. Remembering that the current South

Korean appraisal industry applies it with necessary modifications in appraising the

patent rights, I will examine 'Income Approach That Applies Technology Factor

Method1', a representative appraisal method from A Practical Guide and then,

present several issues and responses.

The results of this study can be used as basic data for establishing the standards

for appraising 'patent rights' among other intellectual property rights, and I think

that they will exercise positive influence in continuously developing the appraisal

methods and thereby expand the role of the appraiser into not only the real estate

market but also the appraisal market about intellectual property rights.

Ⅱ. The Concept and Classification of Intellectual Property Rights in

the Related Laws

1. Reviewing the Relationships between Intangible Assets and Intellectual

Property Rights in the Local Appraisal Industry Practice

Standards for Appraisal in Practice 650 (Right Appraisal) specifies the method

for appraising mining right, fishing right, sales right, and intellectual property

rights, stating that "intellectual property rights" refers to those rights pursuant to

the property rights granted to intellectual creations including the industrial property

1 Technology Factor Method was developed by ADL, a consulting company, as a method for R&D and business

communication, and afterwards was recognized for its practical use by Dow Chemical which applied it to sale and

management of patents. The method measures the value of technology by multiplying NPV, the future cash flow, by the

adjustment factor of technology factor. A Practical Guide (December 2017) presents an income approach based on

Technology Factor Method.

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Patent right Utility right

Design right Trademark right

Copyright

Mining right Fishing right Sales right

Other intangible rights

Other intangible assets

Copyright Industrial property rights

Intangible Assets

rights such as patent right, utility right, design right, and trademark right and

copyright. Furthermore, as Article 23 (Appraisal of Intangible Assets) of

Appraisal Rules specifies the appraisal methods for mining right, fishing right, sales

right, patent right, utility right, design right, trademark right, copyright, right to use

railroad facilities, and other intangible assets. And the intangible assets as classified

thereby are presented as below, while patent rights are recognized as industrial

property rights in the classification of intangible assets.

Fig. 1 ― the relationships between intangible assets and intellectual property rights

2. Reviewing the Relationships between 'Technology' and Intellectual Property

Rights as in Article 2 of Technology Transfer Act

『 Article 2 of Technology Transfer Act defines "technology appraisal" as

indicating in value, grade, or score the economic value of technology which

may arise from its conversion to business, and Technology Appraisal

Standards Operating Guidelines of Ministry of Industry, Trade & Energy

classifies "technology appraisal" into the two types of ① appraisal of

technological power and ② appraisal of technological value. ① "Appraisal of

technological power" is a type of technology appraisal and refers to total evaluation

of the workforce, organization, and support services of the agent that uses

technology which leads to the appraisal of its ability to develop, assimilate, and

innovate technology (indication may take diverse types such as grade or score), and

② "appraisal of technological power" refers to the appraisal is the other type of

technology appraisal and refers to the appraisal of the economic value that is

created by the technology to be converted or already converted to business

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Technological know-how

Patent Utility Design

Trademark Copyright

① Technology appraisal

Intellectual assets Technology (①+②)

Intangible assets

according to the principles and methodology of valuation which are generally

recognized in the technology market. A Practical Guide understands the

relationships between intangible assets, technology, and intellectual property

rights2 as follows.

Fig. 2 ― the relationship between technology and intellectual properties

3. Reviewing the Concept of the Intellectual Property Rights as in Article 3 of

the Framework Act on Intellectual Property

Article 3 of the Framework Act on Intellectual Property defines ① "intellectual

property" as the knowledge, information, and technology, the expression of

thoughts and feelings, the indication of sales and objects, biological varieties or

genetic resources, or other intangible things whose value as property may be

realized, ② "new intellectual property" as the intellectual properties that emerge

in new areas according to the economic, social, or cultural changes or the

development of science and technology, and ③ "intellectual property rights" as

the rights to the intellectual properties that are recognized or protected by

laws, treaties etc. In a nutshell, "intellectual property rights" are divided into

'intellectual properties' and 'new intellectual properties', while "intellectual

properties" are divided into 'industrial property rights' and 'copyright'.3

2 Excerpt from p. 4 in Chapter I of A Practical Guide to the Technological Value Appraisal (December 2017)

by Ministry of Industry, Trade & Energy.

3 Gyeong Eung-soo,"Practice in Appraising Intellectual Properties and Intangible Assets', August 2016, p.11.

② Appraisal of technological

value

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Patent rights Utility rights

Design rights Trademark rights

Intellectual property rights Moral rights

Neighboring rights

Trade secrets, database, programming, semiconductor design technology, electronic

commerce technology

New intellectual property rights

Copyright Industrial property rights

Intellectual property rights

Fig. 3 ― Classification of intellectual property rights

Ⅲ. Recent Changes in the Number of Cases of Intellectual Property

Right Appraisal according to the Cases Registered with Korea Association of Property Appraisers (KAPA)

1. Overview of the Review of the Cases of Appraisal through the Analysis of

the Registration of the Cases of Intellectual Property Right Appraisal4

It can be seen that the demand for intellectual property rights is increasing based on

the number of appraisals of intellectual property rights (patent rights, trademark

rights) from 2011 through Appraisal Precedents (Cases) Database. However,

caution is needed in interpreting the statistics, it is not mandatory for an appraiser to

submit the appraisal report to KAPA Database, so there may be more to the cases

surveyed here.

2. Analyzing the Trend in the Number of the Cases of Patent Right Appraisal

The cases of patent right appraisal implemented as classified by purpose and by

year show an increase over the last couple of years and indicate a number of cases

designed to check the current price.

Appraisal purpose 2011 2012 2013 2014 2015 2016 2017 2018.5

Other 2 - 9 3 16 4 2 2

Collateral 1 3 1 1 1 2 4 1

4 According to KAPA database (in late May, 2018).

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160

2011 2012 2013 2014 2015 2016 2017 2018

0

Buy & sell

Business value

Redevelopment

Acquisition & disposal

Litigation

Tax

Reappraisal

Checking current price

Collateral

Other

140

120

100

80

60

40

20

Fig. 4 ― Trend in patent right appraisal by year and by purpose

Checking current

price 7 5 14 42 36 95 120 27

Reappraisal - - - - - - 2 1

Tax - - - - 1 1 - 1

Litigation - - 2 4 1 - 1 -

Acquisition &

disposal - - - 1 - 2 - -

Redevelopment - - - - 1 - - -

Business value - - - - - 4 5 -

Buy & sell - - - - - - 1 -

Total 10 8 26 51 56 108 135 32

3. Analyzing the Trend in the Number of the Cases of Trademark Right

Appraisal

The cases of trademark right appraisal implemented as classified by purpose and by

year show an increase over the last couple of years and indicate a number of cases

designed to check the current price.

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2011 2012 2013 2014 2015 2016 2017 2018

0

Buy & sell

Business value

Auction

Acquisition & disposal

Litigation

Checking current price

Collateral

Other

60

50

40

30

20

10

Appraisal purpose 2011 2012 2013 2014 2015 2016 2017 2018.5

Other 1 1 2 7 9 4 3 1

Collateral 3 - - - 2 1 - -

Checking current

price - 8 9 8 9 24 52 10

Litigation 1 1 3 2 - - 1 -

Acquisition &

disposal - -

1 - - - -

Auction - 1 2 1 - - -

Business value - - - - 1 1 - -

Buy & sell - - - - 1 - -

Total 5 11 16 19 22 30 56 11

Fig. 4 ― Trend in trademark right appraisal by year and by purpose

Ⅳ. Reviewing the Regulations on the Patent Right (Intellectual

Property Right) Appraisal Methods

1. Overview of the Regulations on the Patent Right (Intellectual Property Right)

Appraisal Methods

As far as the patent right (intellectual property right) appraisal methods are

concerned, Appraisal Rules, Section 4.3.1 of Standards for Appraisal in

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Practice, Technology Appraisal Standards Operating Guidelines, and A

Practical Guide to the Technological Value Appraisal specify the cost approach,

comparison approach, and income approach based on the three aspects of value.

2. Reviewing Appraisal Rules

Article 11 of Appraisal Rules divides appraisal methods broadly into cost method,

comparison method, and income method, and Article 23, Section 3 stipulates that

yield capitalization method is applied when appraising sales right, patent right,

utility right, design right, trademark right, copyright, and right to use railroad

facilities, and other intangible assets.

3. Reviewing Standards for Appraisal in Practice

In Section 4.3.1 of Standards for Appraisal in Practice, Clause 1 stipulates that

"yield capitalization method should be basically be applied when appraising

intellectual property rights", whereas Clause 2 states that "appraisal may be

performed with transactions comparison method or cost method despite

Clause 1 when it is difficult to inappropriate to perform appraisal with yield

capitalization method'.

Clause 1 of Section 4.3.2 presents two methods for performing appraisal with

"yield capitalization method", one is "calculating by discounting or reducing

the cash flow from the specific intellectual property right to the current value"

and the other is "calculating by multiplying the going concern value by the

technological contribution of the specific intellectual property".

Clause 2 presents as the methods for calculating "the cash flow from the specific

intellectual property" ① calculation based on savable charges, ② calculation

based on increased cash flow, and ③ calculating the cash flow by allocating a

specified portion of the company's total income.

Clause 3 defines "technological contribution" in Clause 1, Paragraph 2 as the

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relative ratio that the specific intellectual property right takes up of the

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tangible or intangible company assets which have contributed to creating the

financial profits of the company and present as its calculation methods ① the

method that applies to the specific intellectual property right the technological

contribution of similar intellectual property rights and ② the Technology Factor

Method that takes into consideration industrial technology factor, the strength

of specific technology, the specific weight of technology etc.

4. Reviewing "Technology Appraisal Standards Operating Guidelines"

(Ministry of Industry, Trade & Energy Announcement 2014-97)

Article 36 of Technology Appraisal Standards Operating Guidelines states the

technological value appraisal methods, specifying them in Article 37 (Market

Approach), Article 38 (Income Approach), Article 39 (Cost Approach), and

Article 40 (Royalty Deduction), and recommends the most appropriate appraisal

approach that reflects the characteristics of the target, multiple appraisal approaches

or methods etc.

5. Reviewing "A Practical Guide to the Technological Value Appraisal"

(Ministry of Industry, Trade & Energy)

Technology Appraisal Standards Operating Guidelines distinguishes the

appraisal methods broadly into four types (market approach, income approach,

cost approach, and royalty deduction approach), specifying appraisal procedures,

method application, precautions etc.

Ⅴ. Reviewing Patent Right Appraisal Methods

1. Overview of Patent Right Appraisal Methods

Table 1 ― Description of the patent right appraisal methods

Division Description

Market

Approach

Market Approach includes market transactions comparison, commercial practice etc. that

calculate relative value through comparative analysis based on the value in which the

technologies identical with or similar to the target technology are traded in an active

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market.

Income

Approach

Income Approach is an appraisal method based on the Technology Factor Method and

converts to current value the future economic interest which will be generated due to the

conversion of the technology to business during the economic life of the target technology

by applying an appropriate discount rate.

Cost

Approach

Cost Approach includes historical cost approach, regenerated cost approach, and

replacement cost approach which calculates the value of technology based on the cost

involved in developing the target technology, develops the technology that has the same

economic interest based on the economic principle of substitution, or calculates the value

by estimating cost price of a purchase.

Royal

Deduction

Approach

Royalty Deduction Approach is the method that converts to current value the estimated

royalty which would have to be paid if it is licensed from a third party but has been saved

because the owner of technology does not have to pay it, and its use presupposes the

existence of a comparable technology.

2. Reviewing Income Approach, the Representative Patent Right Appraisal

Method

As far as the appraisal of the value of technology including intellectual properties is

concerned, various theoretical methods have been introduced. However, the method

currently favored for appraising patent rights by the local appraisal industry is

'Income Approach That Applies Technology Factor Method'5 which is based on

A Practical Guide of Ministry of Industry, Trade & Energy. The detailed method is as

following table. Its specifics are as shown in the figure below. The four appraisal

elements which are crucial in 'Income Approach That Applies Technology Factor

Method' are ① the economic life of technology, ② cash flow, ③ discount

rate, and ④ contribution rate to technology

5 Excerpt from A Practical Guide to the Technological Value Appraisal (December 2017) of Ministry of Industry,

Trade & Energy, Chapter III, Section 2 - Income Approach, p.39.

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∑

Technology factor(%) = Industrial technology factor(%) ✕ strength of specific

technology(%)

Industrial Technology Factor = Maximum realized ratio of intangible asset value ✕

Average ratio of technology assets

Strength of specific technology = the ratio of technology/business potential in obtained

scores for 10 evaluation criteria

Fig. 7 ― Procedures of Income Approach according to Technology Factor Approach6

6 "A Practical Guide to the Technological Value Appraisal" (December 2017) of Ministry of Industry, Trade &

Energy, Chapter III, Section 2 - Income Approach, p. 38.

8) Tech value: 6) business value x 7) contribution rate to technology

7) Estimate contribution of technology: the portion of business value as the contribution of the technology

6) Estimate business value: FCFF, net present value (NPV)

5) Estimate discount rate: analyzing business risk (WACC, CAPM, empirical method)

4) Flow of economic interest: estimating cash flow

3) Financial analysis: estimating cost price, sales & administrative expenses, capital spending etc.

2) Estimate sales: estimating sales for different income periods

1) Estimate the economic life of technology: estimating the cash flow period

Purpose: measure business value and technology value with a

view to business feasibility assessment

3. Technology valuation ― quantitative

assessment

1) technology analysis 2) right analysis 3) market analysis 4) business potential analysis

Purpose: in-depth assessment of the feasibility of creating business out of technology

2. Assessment ― qualitative assessment

Purpose: simplified evaluation to check business potential (using evaluation indicators)

1. Screening

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3. Method for Calculating Major Evaluation Factors

A. Method for Calculating the Economic Life

The economic life of technology refers to the period up to the point of time when

technology is feared to lose its comparative advantage due to the factors that

negatively affect the life of technology. It is defined as the period during which

comparative advantage can be maintained with specific technology, through which

one can determine 'the estimated period of cash flow' for estimating the business

value for patent right appraisal. A Practical Guide (December 2017) presents the

statistics on the cited patent life time indicators (such as TCT) based on International

Patent Classification (IPC),7 thus estimating the life on that basis.

Table 2 ― Model for calculating the economic life (ELT) of specific technology

ELT

= Q2 + (Q3 - Q2) × [(acquisition value - reference value)/(maximum value - reference

value)], if acquisition value ≧ reference value

= Q1 + (Q2 - Q1) × [(acquisition value - minimum value)/(reference value - minimum value)],

if acquisition value ≦ reference value

Q1(bottom 25%), Q2(median value, TCT indicator, 50% of distribution), Q3(top 25%),

acquisition value (reflecting the factors that affect technology life), maximum value 100%,

minimum value 20%, reference value 60%

<Addendum 1> Cited patent life time

IPC Description Average Q1

Median

value (Q2) Q3

A01B

Earthworks in agriculture or forestry: agricultural equipment and parts, specific

accessories or accessories as a whole 10.68 5 10 16

A01C Planting; sowing; fertilizing 10.54 5 10 16

A01D Harvesting: reaping 11.00 5 10 16

A01F

Threshing: a bale of straws, hay, or other similar things; fixing equipment or

manual instrument for baling or tying straws, hay, or other similar things;

cutting of straws, hay, or other similar things; storing agricultural or horticultural

harvests

10.21

5

9

15

B. Method for Calculating the Contribution of Technology

The contribution rate to technology, which indicates the degree that the target

7 Excerpt from Addendum 1 of A Practical Guide to the Technological Value Appraisal

(December 2017) of Ministry of Industry, Trade & Energy, p. 109.

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technology contributes to creating profits or reducing costs, refers to the portion of

the contribution to creating profits that has been made by technology assets (or

technology factor), among other tangible or intangible assets which have contributed

to the future cash flow. The method for estimating the contribution of technology may

be calculated by applying 3-part method (33%), 4-part method (25%), Technology

Factor Method etc. Measuring the contribution rate to technology with

Technology Factor Method is composed of ① the industrial technology factor

that reflects the industrial characteristics multiplied by ② the strength of

specific industry, which evaluates the characteristics of specific technology.

※ Industrial Technology Factor is provided for top 5% companies in intangible

asset value for each business category in Addendum 3 of A Practical Guide

(December 2017), through the analysis of the financial data for last 10 years (2007-

2016) for companies listed at KOSDAQ and KOSPI.

※ Strength of specific technology, which is composed of 10 technology

evaluation criteria and 10 business evaluation criteria, evaluates how much it

contributes to creating business value.

∑

Technology factor(%) = Industrial technology factor(%) ✕ Strength of specific

technology(%)

Industrial technology factor = Maximum realized portion of intangible asset value ✕

Average ratio of technology assets

Ratio of intangible asset value = Intangible asset value / Company value

Average ratio of technology value = R&D cost / (R&D cost + Advertising cost + Training

cost)

Strength of specific technology = the ratio of technology/business potential in obtained

scores for 10 evaluation criteria

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Fig. 8 ― Industrial technology factor database8

□ Industrial Technology Factor (manufacturing)

Standard Industry Classification Code Maximum ratio of

intangible asset value

Ratio of technology

asset

Industrial technology

factor

C10 Food manufacturing 45.89% 66.60% 30.56%

C11 Beverage manufacturing 51.40% 90.84% 46.69%

C13 Textile products manufacturing; except clothing 61.61% 70.74% 43.59%

C14 Apparel, accessory and fur 61.61% 70.74% 43.59%

C15 Leather, bag and shoes manufacturing 61.61% 70.74% 43.59%

C16 Wooden products manufacturing; except furniture 30.56%

C17 Pulp, paper and paper products manufacturing 30.56%

C18 Printing & recording media reproduction 30.56%

C19 Cokes, briquette and refined petroleum products 62.59% 80.22% 50.21%

Fig. 9 ― Evaluation criteria for strength of specific technology9

Category Criteria Evaluation score

Very good Good Average Bad Very Bad

Technology

Innovation 5 4 3 2 1

Spread ability 5 4 3 2 1

Usability 5 4 3 2 1

Prospect 5 4 3 2 1

Distinctiveness 5 4 3 2 1

Substitution 5 4 3 2 1

Easy imitation 5 4 3 2 1

Obsolescence 5 4 3 2 1

Scope of right 5 4 3 2 1

Security of right 5 4 3 2 1

Business

Value

Demand 5 4 3 2 1

Market access 5 4 3 2 1

Production 5 4 3 2 1

Market share 5 4 3 2 1

Economical life 5 4 3 2 1

Sales growth 5 4 3 2 1

Derivative sales 5 4 3 2 1

Commercial

period 5 4 3 2 1

Commercial

capital 5 4 3 2 1

Operating profit 5 4 3 2 1

Strength of specific technology Obtained Score / 100

8 Excerpt from A Practical Guide to the Technological Value Appraisal (December 2017) of Ministry of Industry,

Trade & Energy, Addendum 3, p. 135-136.

9 Excerpt from A Practical Guide to the Technological Value Appraisal (December 2017) of Ministry of Industry,

Trade & Energy, p. 86-7.

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8) Tech Value: 6) business value x 7) contribution rate to technology 1 bil. won x 0.1984 = 198,400,000 won, technology value determined at 200

mil. won

7) Estimate the contribution rate to technology: technology factor=industrial

6) Estimate business value: total 1 bil. won for term 6 FCFF

5) Estimate discount rate: analyzing business risk (WACC, CAPM, empirical

4) Flow of economic interest: estimating cash flow

3) Financial analysis: estimating cost price, sales & administrative expenses, capital

2) Estimate sales: estimating sales for different income periods (term 6)

1) Estimate the economic life of technology: to be decided within the TCT

standard, considering the year of patent registration. Refer to the cited patent

life time in 'Addendum 1'

Purpose: measure business value and

technology value with a view to business

3. Technology valuation

4. Presenting the Cases of Technology Appraisal

For "Income Approach That Applies Technology Factor Method" presented in A

Practical Guide, a simple example may be shown as below.

Name Country Publication Date Reg. No. Reg. Date Patent Holder

PCB

manufacturing South Korea Nov. 13, 2016 10-121XXXX Nov. 1, 2016 OOO

7-1) Industrial technology factor: maximum realized ratio of intangible asset value ✕ Average ratio of technology value In 'Addendum 3', industrial technology factor is decided as C10 = 45.89%x 66.60% = 30.56%

7-2) Strength of specific technology: (technology+business value) obtained score / 100 Standard for the evaluation criteria in 'Table 5' = (30+35)/100=0.65

7-3) Contribution rate to technology: 7-1)x7-2) = 0.3056 x 0.65 = 0.1984 (decided as 19.84% )

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Ⅵ. Issues in the Practice of Patent Right Appraisal and Responses

1. Overview of the Issues Involved in Patent Right Appraisal

A Practical Guide, which has underwent three revisions over the last decade, is a

technology appraisal manual under the leadership of a public agency head and has

developed in step with increasing social needs. As the local appraisal industry, which

has yet to form its concrete methodology, commonly applies 'Income Approach

according to Technology Factor Method' as presented in A Practical Guide, I will

take a look at several practice-related issues involved in this appraisal model and

possible responses.

2. The Price-Pluralism Approach according to the Purpose of Appraisal in the

Patent Right Appraisal

As Article 16 (Specification of Purpose and Uses) of Technology Appraisal

Standards Operating Guidelines of Ministry of Industry, Trade & Energy states that

"technology appraisal must specify its purpose and uses because the

considerations in the perspective and factors of the appraisal vary with the purpose

and uses, we may review the standards and pricing of appraisal from the

perspective of price pluralism according to the purposes of technology appraisal

presented below such as transfer, transactions, finance, investment in kind,

liquidation, litigation, tax, and others.

Table 3 ― The purposes of technology appraisal

1. Transfer and transactions: to determine the price for technology sale or licensing

2. Finance: to create a security interest in technology or attract investments in it

3. Investment in kind: for investment in kind in technology or intellectual property rights

4. Strategy: to increase a company's value, turn technology into a commodity, split a company,

create a long-term strategic business plan etc.

5. Liquidation: to create asset evaluation, debt payment plant etc. in the wake of a company's

bankruptcy or restructuring

6. Litigation: for lawsuits over breaches of intellectual property rights, default, or other property

related disputes.

7. Tax: for creating a tax plan, tax payment etc. for donation, disposal, or depreciation of technology

8. Other matters: for exception listing

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3. Activating Collaboration with Related Websites or Specialists in Other Areas

such as Patent Lawyers in Analyzing the 4 Evaluation Factors for the Target

Technology

A. Raising Issues

In technology appraisal, the evaluation factor analysis, which is a process of

qualitative analysis that checks the business feasibility for the target technology, is

an indispensable process that is implemented to come up with reasonable results in

estimating the four evaluation factors of the economic life of technology, cash flow,

discount rate, and the contribution of technology, which are necessary to apply the

income approach as described in A Practical Guide. Evaluation factor analysis is

broadly categorized into the four factors of the target technology: technology,

rights, market, and business potential. As the results of evaluation factor analysis

and the variables put in valuation are highly related, their importance is huge, but the

local appraisal industry alone has shortcomings for analyzing the target technology.

It requires collaboration with outside experts.

A. Responses

The local appraisal industry has two responses to analyze the four evaluation factors.

One method is the analysis based on the patent evaluation report (see the sample

below) and the analytical data on similar patents of “SMART3.1” 10 (System to

Measure, Analyze and Rate patent Technology), the online patent grade

assessment system for " Korea Invention Promotion Association (KIPA) 11.

Another method is a more reliable evaluation factor analysis that can be done

through collaboration with specialists operating in other areas such as 'patent

lawyers' who specialize in the technology and rights of patent.

10 "SMART3.1" is a paid online service in assessing patent grade which objectively evaluates the excellence of patents

in different countries focusing on technology etc. by using patent data extracted from patent statement and

administrative information.

11 Korea Invention Promotion Association (KIPA) is a public agency created for the purpose of protecting and fostering

the South Korean intellectual property industry in accordance with Article 52 of Invention Promotion Act.

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Fig. 10 ― Sample for Patent Evaluation Report

Evaluation Analysis

Evaluation analysis of technological areas of WIPO

Evaluation Indicator

(specific gravity)

Grade

Category (electrical/electronic/IT)

[354,062 cases]

Subcategory (electrical/electronic/IT)

[341,014 cases]

Sub-subcategory (computing technology)

[48,565 cases] Percentile (%) Percentile (%) Percentile (%)

Rights (35) AAA 3.1 3.2 3.6

Technology (35) AAA 3.8 3.9 5.0

Usability (30) AAA 0.1 0.1 0.2

Total evaluation (100) AAA 0.5 0.5 0.7

Comment

Patent No. , "Digital Content Rendering in the Content Protection System with a Chain of Multiple Digital Licenses" has been graded as AAA (top 0.5%) in total evaluation among the patents in the category of "Electrical/Electronics/IT". As for detailed evaluation indicators, it has been graded as AAA (top 3.1%) for Rights, AAA for Technology (top 3.8%), and AAA for Usability (top 0.1%).

4. Reasonably Estimating the Sales of the Target Technology in Estimating the

Sales for Estimating the Business Value of Patent Right

A. Raising Issues

The evaluation factor which is the most important of the four evaluation factors in

Income Approach That Applies Technology Factor Method" but can be most

neglected is Estimation of Sales" for estimating the business value of the target

technology (IP).

Article 2 of "Technology Transfer Act" defines "technology evaluation" as

indicating in value, grade, or score the economic value of technology that can

arise from its conversion to business. Technology Appraisal Standards

Operating Guidelines of Ministry of Industry, Trade & Energy states that

'"Technology appraisal", which is a type of technology evaluation, refers to the act

of evaluating the economic value that technology to be converted to business or

converted to business according to the principles and methodology of appraisal

which are generally recognized in the technology market. Therefore, the sales for

judging the economic value of technology means the estimation of the sales for

technology to be converted to business or converted to business". In addition,

there is controversy too when there are no objective sales for the target patented

technology.

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In the patent right appraisal, the size of the estimated sales for the target patented

technology absolutely decides the value of the target patented technology. Therefore,

its importance is enormous and the procedure takes the most time and energy in the

whole appraisal process.

B. Responses

Methods for estimating the sales for the target patented technology are ①

estimation based on the company's past performance data for the target

technology product, ② estimation based on the business plan for the target

technology product, and ③ estimation based on the demand prediction for the

target technology product.

In reality, as SMEs request the patent evaluation, it is difficult for the local appraisal

industry to distinguish the sales for the patents by target technology product. Still,

the estimation of the sales for the target technology product should get a total

review, using various methods as suggested in A Practical Guide.

And for direct or indirect reasons such as ①if there exist no objective sales for

the target patent technology or ② if it is impossible to acquire data related to

the sales of similar technology or similar companies, it seems unlikely to apply

the income approach according to the theory of appraisal. In this case, I think, we

should fund the method by using historical cost approach, regenerated cost

approach, and replacement cost approach, which calculate the value based on

the cost spent to develop the target technology in terms of cost approach instead

of insisting on income approach or calculate the value by estimating the cost price

for developing or purchasing the technology which has the same economic benefit.

Ⅶ. Conclusion

As the appraiser feels insecure about the 4th Industrial Revolution, the value of

technology or the importance of knowledge-based assets grows. But the local

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appraisal industry remains split over specific methods.

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However, given that the patent appraisal practice usually applies with necessary

modifications "Income Approach according to Technology Factor Method" in

A Practical Guide (2017), a more objective data review is required when

applying the major evaluation factors such as business value estimation or

technology factor method. Moreover, I think related standards need to be

created or revised for the patent (intellectual property right) appraisal based on the

collaboration with Korea Patent Attorneys Association and Method 3.

Implementing the systems as through creating and/or revising the standard

manual and establishing review procedures by KAPA and the local appraisal

industry will serve to upgrade the level of the patent right (intellectual property right)

appraisal of the local appraisal industry. By continuously improving the appraisal

methods, it will contribute to expanding not only the real estate market but also

the intellectual property right appraisal market.

Reference

1. Gyeong Eung-soo, Practice in Appraisal of Intellectual Properties and Intangible

Assets, Namu Media, August 2016.

2. Ministry of Industry, Trade & Energy, A Practical Guide to the Technological Value

Appraisal, December 2017.

3. Ministry of Industry, Trade & Energy, A Practical Guide to the Technological Value

Appraisal, December 2014.

4. Ministry of Knowledge Economy, A Practical Guide to the Technological Value

Appraisal¸December 2011.

5. KAVA & Royal Appraiser, IFRS, IVS & Fair Valuation, Gosinet, May 2018.

6. Kim Jongseo, "Agent in assessing the fair value of intangible assets", Korea

Appraisal Society, Collected Papers in Studies of Appraisal | Vol. 13, No. 2, p.13-20.