What Indian entrepreneurs can learn from these IP-Driven companies?

Today the tech companies as well as other industries, are increasingly based on innovation as their primary value driver. Developing IP portfolio is now a basic requirement even for a tech start-up that hopes to raise early-stage financing. Additionally, desire to acquire intellectual property, particularly patents and trade secrets know how that exists is the main reason behind most of the mergers and acquisitions transactions.

As a country, where Indian entrepreneurs are producing globally-competitive IP-driven innovations across themes such as healthcare and biotech, agriculture, energy and enterprise tech. All these innovations are enabled by cutting edge research and trends, including artificial intelligence, machine learning, internet of things etc. The transformation that these deep tech start-ups are trying to bring is phenomenal. But if their innovation is not protected, then the competitive advantage and sustainability of the business to cover R&D costs and generate profits won’t be there in the long term. Here are just a  few examples of Indian companies that will motivate you to patent your innovation.

Arrow Greentech Ltd. monetized 3 out 30 patents which will expire after 20 Years. These three patents generated revenues of Rs.450 Million p.a. over the last three years.

Innorel Systems, a world class innovative reliable solutions provider company both in solar as well as conventional systems. They have a core team having more than 34 patents amongst them.

Cosmic Circuits, a leading provider of analog and mixed signal intellectual property (IP) cores. Cosmic circuits was acquired by Cadence in May 2013. Cosmic’s IP strengthens Cadence’s side in its IP battle with Synopsys, giving it heads up in its solutions to address mobile, Cloud/datacenter and ‘Internet of Things’.

Forus Health is a Bengaluru based technology company that develops innovative products in the field of Ophthalmology to eradicate preventable blindness. The company has protected their technology with 14 patents. Forus Health’s systematic IP creation and management has allowed them to remain competitive in the growing healthcare industry worldwide.

Ittiam is a Bengaluru based technology company that was established in 2001. The company develops solutions in the areas consumer and mobility, digital and broadcast media, industry and defense had automobile infotainment. From the very beginning, Ittiam’s focus was on IP creation. Today, the company has over 128 granted and published patents for their unique inventions. Ittiam earns substantial revenue through licensing and royalty of their IP.


Recently there was a case of software IP infringement of an Indian firm named Reverie language Technologies by a Chinese tech firm. Reverie filed a case of software infringement against Chinese firm and won the verdict in its favor. The Chinese Tech firm has been restrained from using Reverie’s software.

Reverie issued that this incident has been an eye opener for them. It’s a warning for the larger Indian start-up community, as a reminder to keep IPs safe. We can’t let foreign companies, specially Chinese prey on our efforts, work and innovation. 

The number of patents granted by India shoot up by 50 per cent in 2017, keeping a trend of steep increases, according to UN’s World Intellectual Property Organisation(WIPO).

Lesson learned :

Start-ups should also focus in building successful IP portfolios for their businesses. Investors and Venture Capitalists like Yournest invests only in patent-led start-ups. Therefore, IP constitutes an important strategic, competitive and financial asset for start-ups. It is a valuable outcome of the creative and intellectual endeavors of individuals and organizations. They should take IP protection and portfolio strategy more seriously.

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Intellectual property Accounting

How to use accounting for IPR

According to accounting standard 10 for fixed assets, assets are grouped into various categories. Patents, Trademark and design are grouped together for accounting.  This category fall under intangible assets.

So how we define Intangible assets?

According to IND AS 26, Intangible assets is defined as:

  • An Identifiable non-monetary asset.
  • Held to be used in production or supply of goods or services.
  • Held for rental to others.
  • Held for administrative process.
  • Without physical substance

Goodwill is not a part of intangible assets and cannot be considered as asset. All the items defined in IND AS 26 are not intangible asset. Criteria for determination consists of 3 main parameters: Identifiability, control and future economic benefit.

  • Identifiability- An asset is identifiable if it either
  1. is separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so;

or

2. arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

  • Control- An entity has the power to control as asset if it can obtain the economic benefit from it and restrict others from its benefit. Benefits from intangible asset come from legal rights that the company have and can be enforced by court. Legal rights are not necessary as the entity can get the benefits from the asset in other ways also.
  • Future economic benefit- This consist of benefit that a company can get from an intangible asset in the form of revenue from the sale of service or a product, cost saving, any benefit that the company can get from using the asset.

Recognition criteria for an Intangible asset

 

An intangible asset shall be recognized if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

(b) the cost of the asset can be measured reliably.

An intangible asset shall be measured initially at cost.

 

Internally generated Intangible asset

 

Recognition of internally generated intangible asset is hard because:

  • Identifying that an identifiable asset can generate expected future economic benefits.
  • Determining the cost of the asset reliably.

Internally developed intangible assets do not appear as such on a company’s balance sheet as it does not have a price that can be used to assign fair market value.

To solve this problem whether intangible asset meets the recognition criteria or not, Company can classify the asset generation into:

  1. Research Phase
  2. Development Phase

Research Phase- No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred.

Development phase- An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following:

  • the technical feasibility of completing the intangible asset so that it will be available for use or sale.
  • its intention to complete the intangible asset and use or sell it.
  • its ability to use or sell the intangible asset.
  • how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
  • the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
  • its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Following parameters needs to be matched before an intangible asset can be recognised:

  • Technical feasibility of completing the asset.
  • Company’s intention to complete it and use/sell it.
  • How asset will generate future economic benefits.
  • Availability of resources to complete the development and to use or sell the intangible asset
  • Its ability to measure the expenditure attributable to the intangible asset during its development reliably.

Recognition of an Expense

 

Expenditure on an intangible item shall be recognised as an expense when it is incurred unless:

  1. it forms part of the cost of an intangible asset that meets the recognition criteria;

or

  1. the item is acquired in a business combination and cannot be recognised as an intangible asset. If this is the case, it forms part of the amount recognised as goodwill at the acquisition date.

Expenditure on an intangible item that was initially recognised as an expense shall not be recognised as part of the cost of an intangible asset at a later date.

 

Amortisation of intangible assets with finite life

 

For an intangible asset with a finite useful life the depreciable amount of is allocated on a systematic basis over its useful life. Amortisation begins when the asset is available for use. The amortisation method used will reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the company. If that pattern cannot be determined reliably, the straight-line method should be used. The amortisation charge for each period will be recognised in profit or loss.

Residual value

The residual value of an intangible asset with a finite life is considered to be zero unless.

  • Commitment by third party to purchase it at the end of the useful life.
  • There is an active market for it at the end of its useful life.

Review of amortisation period

At the end of each year, the amortisation period and method for an intangible asset with a finite life is reviewed. If any difference is found in the expected useful life of the asset from previous estimates then amortisation period should be changed accordingly. And if there is a change in the expected consumption of the future economic benefits related with the asset, amortisation method should be change to reflect the change pattern.

 

Intangible asset with indefinite life

An intangible asset with an indefinite useful life will not be amortised. And the useful life is reviewed each year to check whether the conditions prevails to support an indefinite useful life for the asset. If not then change the useful life assessment from indefinite to finite. And use finite accounting standards.

 

Monetising IP and Accounting

 

Before monetising your Intellectual property, you need to find out its value. This can be done in 2 ways:

  • By using Quantitative methods- It relies on measurable data or numerical information to produce an estimate of the value of your assets
  • By using Qualitative methods- This valuation attempt to provide a non-monetary estimate of the value of intellectual property by rating it on the basis of its strategic impact, and other intangible metrics that do not rely solely on numbers.

Quantitative methods have 4 methods through which one can find the value of IP.

  • Cost based
  • Market based
  • Income based
  • Option based

Qualitative me