Patents

Definition

A patent is a form of intellectual property that grants the holder the exclusive legal right to make, use, or sell an invention for a limited period of time, typically 20 years. Patents are an important asset that companies can leverage to protect their innovations and technologies, which are crucial for their financial performance and growth.

5 Must Know Facts For Your Next Test

1. Patents are considered non-current assets on a company's balance sheet, as they have a useful life that extends beyond one year.
2. The costs associated with obtaining and maintaining a patent, such as filing fees and legal expenses, are capitalized and amortized over the patent's useful life.
3. Revenues generated from licensing or selling a patented technology are reported as operating revenues on the income statement.
4. Intangible assets, including patents, are subject to impairment testing to ensure their carrying value on the balance sheet is not overstated.
5. The acquisition of a patent through a business combination is recorded at its fair value and included in the goodwill calculation.

Review Questions

• Explain how patents are classified and accounted for as part of a company's current and non-current assets.
  • Patents are considered intangible non-current assets on a company's balance sheet, as they provide economic benefits that extend beyond one year. The costs associated with obtaining and maintaining a patent, such as filing fees and legal expenses, are capitalized and amortized over the patent's useful life, which is typically 20 years. This ensures that the patent's value is properly matched with the revenues it generates over time. Additionally, patents are subject to impairment testing to ensure their carrying value on the balance sheet is not overstated.
• Describe the impact of patents on a company's revenues and expenses.
  • Revenues generated from licensing or selling a patented technology are reported as operating revenues on the income statement. This allows the company to monetize its intellectual property and generate additional income streams. On the expense side, the costs associated with obtaining and maintaining a patent, such as filing fees and legal expenses, are capitalized and amortized over the patent's useful life. This ensures that these costs are matched with the revenues the patent generates, rather than being expensed immediately.
• Analyze the role of patents in the context of a business combination and the calculation of goodwill.
  • When a company acquires another business, the acquired patents are recorded at their fair value and included in the calculation of goodwill. Goodwill represents the premium paid by the acquirer over the fair value of the target company's identifiable net assets, and it reflects the value of the target's intangible assets, such as patents, that are not separately recognized. The fair value of the acquired patents is determined based on factors such as the patent's remaining useful life, the expected future cash flows it will generate, and the level of risk associated with those cash flows. Properly accounting for patents in a business combination is crucial for accurately reporting the company's financial position and performance.

Related terms

Intellectual Property:

Intangible assets that are the product of creativity, such as patents, copyrights, trademarks, and trade secrets, which provide legal protection for innovative ideas and inventions.

Licensing: The process of granting permission to use a patent, copyright, or other form of intellectual property in exchange for a fee or royalty payment.

Patent Infringement: The unauthorized use, manufacture, or sale of a patented invention, which can result in legal action and damages.