Accounting for Patents

Melissa MitchellAccounting 540Dr. PrevratilAccounting for Patents1Are research and development cost included with the costs of patents?What is the normal life of the patents?What is the typical cost to go through the whole process of registering a patent?How many patents do you register per year?

Research QuestionsAs XYZ is unsure how to correctly account for the costs of Patents some questions should be asked to help with research.2This statement addresses the financial accounting for acquired goodwill and other intangible assets and supersedes APB Opinion No 17 Intangible Assets. It explains how to account for assets that have been acquired individually, or with a group of other assets, and how they should be presented on the financial statements. Not included in the explanation are intangibles acquired through a business combination.

Statement 142 does not treat them as wasting assets as Opinion 17 did. Instead goodwill and intangible assets that have an indefinite useful life will not be amortized but rater will be tested annually for impairment. Assets with a finite useful life will continue to amortized but without the ceiling.

This Statement provides specific guidance on testing intangible assets that will not be amortized for impairment and thus removes those intangible assets from the scope of other impairment guidance (FASB.org).

Statement 142Statement 142 addresses the accounting for acquired goodwill and intangible assets. However XYZ Research will be dealing with an internally developed patent.3IAS 36 Impairment of Assets seeks to ensure that an entitys assets are not carried at more than their recoverable amount. With the exception of goodwill and certain intangible assets for which the impairment test is required, companies are required to conduct the impairment test if there is an indication of a possible loss.

Applies to all assets except (IAS 36.2):Inventories, deferred tax assets, and assets arising from construction contractsApplies to assets such: Land, building, intangible assets, and goodwillIndication of Impairment (IAS36.12)

External and Internal factors:Market value decline; negative changes in technology, markets, economy or laws; increase in market interest rate; obsolescence or damage; and worse economic performance than expected (IAS 36 Impairment of Assets)

IAS 36seeks to ensure that an entitys assets are not carried at more than their recoverable amount. With the exception of goodwill and certain intangible assets for which the impairment test is required4IAS 38 Intangible assets are non-monetary assets which are without physical substance and identifiable (either being separable or arising from contractual or other legal rights). Those meeting the relevant recognition criteria are initially measured at cost, subsequently measured at cost or using the revaluation model, and amortized on systematic basis over their useful life, unless the intangible has an indefinite useful life, in which it is not amortized.

Three critical attributes (IAS 38.12)Identifiable; meaning can be separated and sold, transferred, licensed. Examples patented technology, computer software, trademarksControl; power to obtain benefits from asset. Future economic benefits such as revenue

Recognition Criteria (IAS 38.21)It is probable that the future economic benefits from the asset will flow to the entity and the cost of the asset can be measured reliably

IAS 38IAS36 and IAS38 address internal patents. Internally generated assets costs are incurred during the research phase. Examples include time spent gaining new knowledge, and the search for alternatives. Certain requirements must be met to capitalize research costs.5Accounting for Research and Development CostsRequires that R&D be expensed as incurred and that each years total be disclosed in the financial statementsSFAS 2R&D activities that fall under this standard include; lab research to discover new knowledge, testing done for evaluation of product or process, and design, constructions and testing or preproduction prototypes.6Correction of Prior Period Accounting ErrorsPrior Period Errors are omissions from, and misstatements in, prior period financial statements resulting from the failure to use, or the misuse of, reliable information that was available, or could be reasonably expected to have been obtained, at the time of preparation of those financial statements.

Accounting EstimatesPreparation of financial statements may involve theuse of accounting estimatesin determining the carrying amounts of assets & liabilities and the associated expense or income for the period where such amounts cannot be measured precisely.Examples:Valuation of land where it is accounted for at revalued costImpairment of non-current assetsUseful lives of non-current assets- See more at: http://accounting-simplified.com/standard/ias-8/changes-in-accounting-estimates.html#sthash.H8Ems1I9.dpufIAS 8Is rights that have been granted by the government to the inventor for a particular amount of time to stop others from using, making, or selling the idea for a limited timeutility and plant patents are granted for a term which begins with the date of the grant and usually ends 20 after the date it was applied for The cost of the patent is amortized over the shorter of its 20-year legal life or its useful life.

PatentInventors have to apply for a patent. When applying for a patent the inventor wants to make sure that there is something that makes their creation unique. Information on the application process can be found on http://www.uspto.gov/patent. Patents have a legal life of 20 years.

8What kind of protection do you needDetermine if the invention is patentableWhat kind of patent do you needApply and submit applicationWork with patent examinerReceive approvalMaintain your patentPatent Application ProcessThere are 3 types of patents utility granted to those who invent or discover a new machine, article of manufacture, or useful improvement. Design patent are granted to those invent a new, original and ornamental design. Last the Plant patent is granted to those who invents or disconvers and asexually reproduces any distiinct and new variety of plant. Know who can apply for a patent what can and can not be patented. Be prepared to pay the basic fee and any additional fees that include a search fee, examination fee and issue fee, the fees will vary depending on the type of application. You may want to hire an attorney to help you through the application process. If the there are any issues you will receive a notice from your examiner explaining what the errors are in the application, if the application is satisfactory you will receive a Notice of allowance and it will list issue fees and any publication fees prior to the Patent being issued.9Things a company owns

Current Assets are things a business owns that are easy to convert to cash

Non-current Assets are anything not classified as a current asset and usually include items such as plan, property, and intangibles assets

1. Tangible (with physical substance)2. Intangible (without physical substance).AssetsTwo kinds of assets include tangible and intangible. Patents will be classified as an intangible asset10Any asset that does not have any monetary value and are without physical substance, with a useful life greater than 1 year

Examples of Intangible Assets:PatentCopyrightTradenamesCustomer Lists

ASC 350-30-45-1 All intangible assets have to be aggregated and presented in the financial reports as separate items. However any individual intangible assets or classes must be presented on a separate line item

Intangible AssetThese intangible assets can be either developed internally by a company or acquired from another business. Intangible assets provide future benefits.11Definite Useful LifeIndefinite Useful LifeIntangible that is not restricted by a legal, or contractual factor. It useful until the business no longer operates.CapitalizeIntangible with a definite useful life is limited by a contractual, legal, or regulatory factorExpense and AmortizeIntangible useful lifeDefinite intangibles include patent, and copyrights. Indefinite intangibles include trademarks and franchises. 12Patents are either acquired or generated internally.Accounting standards requiring to expense those created internally are excluding whether it is known if they will generate future benefits

Only intangible assets that have been acquired are reported on the balance sheet and reported at their purchase price.

A company doesn't report internally developed intangible assets on the balance sheet.

Acquired and Internal Intangibles

To capitalize the cost it must have a useful life beyond the current year, used to conduct business, and provide a benefit to the company. Research and development cost are also reported.13Costs incurred to develop and maintain an internally developed intangible asset are considered Research and DevelopmentGAAP requires the disclosure of total R&D expense incurredUnder IFRS Research and development costs are often accounted for as an asset by companiesIntangibles with a definite life are amortized to expense and cant exceed 40 years. The total cost incurred each period for research and development appears on the income statement as an expense regardless of the chance for successDebitCreditR&D Exp$$$Cash$$$Research and DevelopmentResearch and development (R&D) costs required to develop the idea being patented are not included in the in the cost of the patent. R&D expenses are recognized when incurred. Amortization is allocation of a balance sheet item such as an asset to expense or revenue on the income statement. Record R&D with a debit to Research and Development (increase) and Credit to Cash (decrease).

14Once the patent has been granted only the cost for registration, and legal fees are included.Costs of the patent is amortized over its useful lifeASC 350-30-35-3 - The estimate of the useful life of an intangible asset to an entity shall be based on an analysis of the following factors; the expected use of the asset, the expected useful life of another asset or related intangible asset, and any legal, regulatory, or contractual provisions that may limit the useful life. The cash flows and useful lives of intangible assets that are based on legal rights are constrained by the duration of those legal rights.

Costs to obtain PatentDebit CreditPatent96,000Cash96,000Patent Cost The costs associated with getting the patent are included as the costs and recorded for accounting purposes. The useful life is determined by the company not to exceed the 20 years. The company may consider impairment testing. So if the registration is 62,000 and the legal fees are 34,000. The amount recorded for the cost of the patent is $96,000.15XYZ pays $96,00.00 for the registration and other legal fees to obtain a patent. Its useful life is determined to be 8 years. The annual amortization is 96,000/8=12,000.

Annual Amortization is $12,000

Dec 31 20xxDebitCreditAmortization exp patent12,000Patents12,000Recording Amortization of PatentPatent expense is an operating expense found on the income statement16Will reduce the intangibles assets value on the balance sheet in equal amounts

Transferring this amount over to the income statement as an expense

GAAP requires a business to amortize only intangible assets with definite lives

ASC 350-30-45-2 - Amortization expense and impairment losses for intangible assets shall be presented in the income statement within continuing operations.

Amortizations Affects on FinancialsThe business will use amortization on definite life intangibles. This will affect the balance sheet and the income statement. Factors used in amortization include cost, useful life, and value.17Balance SheetIncome StatementAnnual amortization reduces net income on the income statementR&D can be found on the income statement as an operating expense in the current year

Income Statement AccountsResearch and Development expensePatent ExpenseLoss Impairment- Patent

Annual amortization reduces retained earnings in the stockholders equity section of the balance sheetAmortization will reduce the intangible assets value on the balance sheet in equal annual installments

Balance Sheet AccountsPatentCashAmortization Patent (contra acct)Accumulated Impairment loss (if needed)Affect on Financial StatementsExpensing the cost all up front will allow you (XYZ) to show a profit in later years.18IAS 36 Impairment of Assets seeks to ensure that an entitys assets are not carried at more than their recoverable amount. With the exception of goodwill and certain intangible assets for which the impairment test is required, companies are required to conduct the impairment test if there is an indication of a possible loss.

Impaired AssetA company's assets that market value is less than the book value. If there is a loss, it will reduce income in the income statement and reduce total assets on the balance sheet

Impairment StandardThough a patent may a legal life of 20 years its useful life will be shorter. Impairment testing may be needed if there are changes in technology, or the market. It is recommended that impairment test be done on the patents once useful life is determined and every year, making sure to keep up with technology and trends in the industry19A company's assets that market value is less than the book value. If there is a loss, it will reduce income in the income statement and reduce total assets on the balance sheetDisclosing the circumstances surrounding the impairment of a long-term asset is a necessary element in creating a company's income statement.

Impaired Asset

As defined by investopedia. This will result in a write-down of that same asset account to the stated market price.

20The cost you pay to use a trademark, copyright, or obtain a patent can be amortized.Amortization will reduce the intangibles assets value on the balance sheet in equal amounts over its useful life. You will present the method used and the amount in the financials. Research and development cost will be expensed. R&D is found on the income statement as an operating expense. These cost will not be included in the cost to obtain the patent Once the Patent is obtained only the cost of registration, and legal fees are included as the Patent costsStraight-line method will be used to amortize the patent costsImpairment testing will done on the patents to determine useful life if there is a change or advancement in the technology industry

RecommendationsCan not report internally developed assets on the balance sheetTo capitalize an asset its useful must extend beyond the current year, used to conduct business, and provide the company with a benefitDefinite life intangibles are amortized such as a patentR&D expenses are subtracted from revenue annually, these cost will be expensed as incurredThe IRS will allow you to deduct, amortized, or treat them as a capital expenseExpensing the cost of R&D allows the company to show a profit once the product or service is ready for saleR&D cost have not been recorded so there will be a correcting entry and the amortizing of the patent will be handled as a change in estimate21Error of omission occurs when a transaction has never been recorded.corrected by means of a journal entry between the accounts affected

A change in Accounting Estimate Shall be recognized in the period of the change or the period of change and future A change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods Correcting ErrorsErrors in accounting are common. It is a non-fraudulent discrepancy in documentation. A change in estimate is included in the period of change and any expenses or gains are adjusted in the period also. These must be accounted for in the financials.22accounting-simplified.com. (n.d.). Retrieved February 13, 2015, from Accounting Simplified IAS 8: http://accounting-simplified.com/standard/ias-8/changes-in-accounting-estimates.htmlASC.FASB.org. (n.d.). Retrieved January 21, 2015, from FASB Intangibles - Goodwill and Other 30.35: https://asc.fasb.org/section&trid=2144487ASC.FASB.org. (n.d.). Retrieved January 21, 2015, from FASB Intangibles-Goodwill and Other 30.45: https://asc.fasb.org/section&trid=2144491Boundless. (2014, July 3). "Impairment Recognition." Boundless Accounting. . Retrieved February 6, 2015, from https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/controlling-and-reporting-of-real-assets-property-plant-equipment-and-natural-resources-6/impairment-of-assets-45/impairment-recognition-245-3734/FASB.org. (n.d.). Retrieved January 28, 2015, from FASB Statement No. 142: http://www.fasb.org/summary/stsum142.shtmlIAS 36 Impairment of Assets. (n.d.). Retrieved January 28, 2015, from IASPLUS: www.iasplus.com/en/standards/ias/ias36IAS 38 Intangible Assets. (n.d.). Retrieved January 27, 2015, from IASPLUS: www.iasplus.com/em/standards/ias/ias38IASPLUS.com. (n.d.). Retrieved February 6, 2015, from Goodwill and Other Intangible Assets: http://www.iasplus.com/en-us/standards/ifrs-usgaap/goodwill

Works Cited23IRS.gov. (2015, February 7). Retrieved from IRS Publication 535 Business Expenses: http://www.irs.gov/publications/p535/ch08.html#en_US_2013_publink1000209024Joyner, J. (n.d.). smallbusiness.chron.com. Retrieved January 28, 2015, from Small Business: http://smallbusiness.chron.com/accounting-rules-expensing-vs-capitalizing-amortizing-costs-37284.htmlKeythman, B. (n.d.). Small Business, Chron. Do Intangible assets Carry over From Year to Year on a Balance Sheet? Retrieved February 6, 2015, from smallbusinessl.chron.com: http://smallbusiness.chron.com/intangible-assets-carry-over-year-year-balance-sheet-61091.htmlKeythman, B. (n.d.). smallbusiness.chron.com. Retrieved January 29, 2015, from Small Business: How Does Amoritzation Affect a Balance Sheet?: http://smallbusiness.chron.com/amortization-affect-balance-sheet-37876.htmlMcIntosh, K. A. (2015, January 31). Ehow. Retrieved from Ehow.com: http://www.ehow.com/info_8079234_expenses-patent-accounting.htmlRojas, E. (2015, February 7). Ehow.com. Retrieved from GAAP Rules on Amortization: http://www.ehow.com/info_12072228_gaap-rules-amortization-capitalization-costs.htmluspto.gov. (n.d.). Retrieved January 2015, from The United States Patent and Trademark Office: http://www.uspto.gov/inventors/patents.jsp#heading-5YCharts. (n.d.). Retrieved February 6, 2015, from Ycharts.com: http://ycharts.com/glossary/terms/r_and_d_expense

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