Is a Patent an Intangible Asset? Here’s Why
Learn how patents are classified as intangible assets, their recognition criteria, and their role in a company's financial standing.
A company’s assets are resources it owns or controls that are expected to provide future economic benefits. These assets are fundamental to a business’s operations, enabling it to generate revenue and sustain its activities. Understanding the different types of assets a company holds is important for assessing its financial health and operational capabilities. This includes both tangible items that can be physically touched and non-physical resources that contribute to value.
Understanding Intangible Assets
Intangible assets are resources that lack physical substance but possess identifiable value for a company. These assets are distinct from tangible assets, such as property, plant, and equipment. A defining characteristic of intangible assets is their ability to generate future economic benefits for the entity that controls them. This benefit might arise from their use in production, their ability to reduce costs, or their capacity to generate revenue.
To be recognized on a company’s financial statements, an intangible asset must also be identifiable. This means it can be separated from the company and sold, transferred, licensed, rented, or exchanged, or it arises from contractual or other legal rights. Common examples of identifiable intangible assets include copyrights, which protect original works of authorship, and trademarks, which are symbols or names used to distinguish products or services. Another example is goodwill, which represents the value of an acquired company that exceeds the fair value of its identifiable net assets.
Patents as a Specific Intangible Asset
A patent is an intangible asset because it grants its owner exclusive legal rights to an invention for a set period. This exclusivity allows the patent holder to prevent others from making, using, or selling the patented invention. The identifiable nature of a patent stems directly from these legal rights, which are granted by a governmental authority and can be legally transferred or licensed.
The economic benefits derived from a patent are a primary reason it is classified as an intangible asset. These benefits can materialize through the direct sale of patented products or services, the licensing of the patent to other parties for royalty payments, or by providing a competitive advantage that deters rivals from entering a specific market. For instance, a pharmaceutical company’s patent on a new drug can ensure substantial revenue streams. The value of a patent is therefore tied to its potential to generate future cash flows and protect market position.
Recording and Valuing Patents
When a company obtains a patent, costs directly related to securing the patent are recognized as an intangible asset on the balance sheet. These capitalizable costs typically include legal fees, application fees, and other registration expenses incurred during the patenting process. For example, legal fees for a non-provisional patent application can range from $8,000 to $15,000 or more, while United States Patent and Trademark Office (USPTO) filing fees can be around $300 for a small entity. The total cost to obtain a patent, including legal and filing fees, might range from $12,000 to $22,000, with many companies budgeting $15,000 to $20,000 for the entire process.
Conversely, research and development (R&D) costs incurred to develop the underlying invention before the patent application are generally expensed as they occur, rather than capitalized. Only costs directly attributable to the successful application and legal protection of the patent are added to its capitalized value.
Once capitalized, the cost of the patent is systematically expensed over its useful life through a process called amortization. The amortization period is the shorter of the patent’s legal life, which is typically 20 years from the date of filing, or its estimated useful life to the company. Amortization usually begins once the patent is officially granted. For instance, if a patent has a legal life of 20 years but is only expected to provide economic benefits for 10 years due to rapid technological change, it would be amortized over 10 years. The straight-line method is commonly used for amortization, spreading the cost evenly over the patent’s useful life.
The accumulated amortization reduces the patent’s carrying amount on the balance sheet, reflecting the consumption of its economic benefits over time. Beyond initial capitalization and amortization, companies must also assess patents for impairment if their value has declined. Maintenance fees, which are mandatory payments to keep a patent valid, are due periodically (e.g., at 3.5, 7.5, and 11.5 years after issuance) and range from hundreds to thousands of dollars depending on the type of patent and the entity’s size.