Is a Patent Considered an Intangible Asset?

A patent is a legal right granted by a government to an inventor, allowing exclusive rights to an invention for a set period. This prevents others from making, using, or selling it without permission. Patents are a clear example of an intangible asset, a type of asset that lacks physical form but holds significant economic value for a company.

Understanding Intangible Assets

Intangible assets are resources owned by a company that lack physical form but provide economic benefits. Unlike tangible assets such as land or machinery, these assets cannot be physically touched or seen. Their worth stems from the rights and privileges they confer, contributing to the entity’s profitability and competitive standing.

A primary characteristic of an intangible asset is its identifiability. This means it can be separated from the entity and sold, transferred, licensed, or exchanged. An asset is also identifiable if it arises from contractual or other legal rights. This allows for individual ownership, valuation, and potential monetization.

Another feature is control, where the entity can obtain future economic benefits from the asset and restrict others’ access. This control often stems from legal enforceability, such as through intellectual property laws, which grant exclusive rights. This ensures the owner can leverage the asset for their advantage, preventing unauthorized use or duplication.

Finally, intangible assets must generate future economic benefits for the entity. These benefits can include increased revenues, reduced costs, or other advantages that enhance the entity’s financial position. Common examples are copyrights, trademarks, and customer lists.

How Patents Meet the Definition

Patents align with the definition of an identifiable intangible asset. A patent is a legal right granted by the government for a novel invention. This legal grant makes the patent distinct and capable of being bought, sold, licensed, or used as collateral independently of the business. This allows for distinct valuation and transferability in commercial transactions.

The owner of a patent exercises control over the patented invention. Exclusive rights prevent others from making, using, selling, or importing the invention without permission for the patent term. This legal exclusivity ensures the patent holder can exploit the invention’s economic potential and restrict competition.

Patents generate future economic benefits for their holders. These benefits can come from direct sales of the patented product, licensing agreements, or establishing a competitive advantage. Such advantages can lead to higher profit margins, increased market share, and a stronger financial position.

Accounting Treatment of Patents

When a company acquires or develops a patent, it records this intangible asset on its balance sheet at cost. Initial recognition includes all directly attributable expenditures to acquire and ready the patent for use, such as legal and registration fees. For internally developed patents, only direct costs like legal and registration fees are capitalized, while research and development costs are generally expensed as incurred.

Once recognized, patents are subject to amortization due to their finite useful life. Utility patents typically provide protection for 20 years from the filing date. The capitalized cost is systematically expensed over its estimated useful life, which may be shorter than the legal life if the technology becomes obsolete sooner, through amortization.

Amortization allocates the cost of the intangible asset over the periods it generates economic benefits, similar to how depreciation expenses tangible assets. For example, a $100,000 patent with a 10-year useful life would have $10,000 expensed annually. This expense reduces the patent’s carrying value on the balance sheet and impacts the company’s net income.

Patents, like other long-lived assets, must be tested for impairment. If circumstances indicate the carrying amount of the patent may not be recoverable, such as new competing technology or declining market demand, an impairment test is performed. If the carrying value exceeds the patent’s fair value, an impairment loss is recognized, reducing the asset’s value on the balance sheet.