The Valuation of Patents

The valuation of patents is essential in many circumstances. Just as important are the accounting, tax and reporting treatments associated with patents. This is an overview of the financial and tax reporting treatments of patents and their values. Here are two common scenarios involving patents: (Rutter, 2004).

Self-Created Patents:

Reflected as Asset on Financial Statements:

The Rutter (2004) website stated that often a company will develop the patent and the associated costs are deducted as current operating expenses. This is common for companies reporting on the cash basis of accounting or another consistent basis of accounting other than the GAAP (Generally Accepted Accounting Principles). When this cash basis situation occurs, the development cost of the patent is not reflected as an asset on the balance sheet of the company. However, the legal fees and filing costs associated with the patent are carried as an intangible asset on the financial statements of the company. If legal costs are incurred to defend the patent rights, those costs are capitalized as an asset if the defense of the patent is successful. If defense of the patent is unsuccessful, legal costs of defense are expensed. If the company prepares its financial statements according to Generally Accepted Accounting Principles, then costs associated with the development of the patent may be carried as an asset on the balance sheet of the company. However, the carrying costs of developing the patent may not have any correlation to the actual economic value of the patent. (Rutter, 2004).

Treatment as Expense on Financial Statements: In the "cash basis" method of accounting, the development costs have been expensed, and no asset is carried on the balance sheet of the books. Accordingly, the cost has offset current period income in the period the costs were incurred. There is, however amortization of legal and filing fee costs over the useful life of the patent. If the company reports on the...