To: XYZ Research Co.
Subject: Accounting Treatment for Patents
XYZ Research Co, (XYZ) came to our firm, requesting clarification on the accounting treatment for patents the company purchased.
The company possesses many patents and has historically expensed all of the costs associated with obtaining their patents.
The company is unsure if any or all of its patent costs can be capitalized.
The company is unsure if impairment testing should be done periodically on their patents.
a) Should any costs related to purchasing patents be capitalized?
What costs should be capitalized?
What costs should be immediately expense?
b) How often should impairment testing be performed on the patents?
c) What is the proper accounting treatment for patents?
XYZ should capitalize the costs when obtaining patents from another entity or person.
XYZ should conduct impairment testing annually.
4. REASONINGS AND AUTHORITIES (R&A)
A patent is “a property right granted by the Government of the United States of America to an inventor to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing in the United States for a limited time in exchange for public disclosure of the invention when the patent is granted” (USPTO, 2014). A patent expires 20 years after of the issuance date.
Companies capitalize the cost to acquire the patent and the amount appears on the balance sheet as an intangible asset which is also known as a long-lived asset. The purchase price includes the legal fees, formula, invention, patent, pilot model, process, technique, and property similar to the items previously listed” (IRS, 2014). Capitalized costs must have a direct relationship to the revenue generated through the purchase. While the costs left out of
References: FASB ASC 350-30-35-2 Intangibles- Goodwill and Other FASB ASC 350-20-35-2 Intangibles- Goodwill and Other FASB ASC 360-10-35-21 Property-Plant-and Equipment IRS. (2014). Research and experimental cost defined. Retrieve from http://www.irs.gov/publications/p535/ch07.html United States Patent and Trademark Office. (2014). Patents. Retrieved from http://www.uspto.gov/inventors/patents.jsp#heading-1