NT- Accounting Question

[Terry D EA]

If a patent is developed internally or purchased externally from another inventor and is later successfully defended in a law suit, are the expenses for both types of patents capitalized? I know the initial legal and filing fees for both are capitalized and it makes sense to me that the costs of a successful legal defense would be capitalized but I have found conflicting answers. What say ye?

Terry D.

[schirallicpa]

Hey - I taught intermediate accounting for a few years at Alfred University as an adjunct. We did patents. I even have the text!!

If a patent is purchased, the purchase price is the cost and is amortized.

If the patent is created internally, all costs in connection with securing the patent including atty fees are capitalized and amortized. However, the R&D costs on the development side must be expensed as incurred. So the internally created patent doesn't appear to have the same value on the balance sheet.

(Hence big pharma's development of the small, separate R&D companies. Let the R&D company get a grant or investor and expense all the R&D and run all the loss. Then big pharma buys the patent and has a nice asset without the "expense." My brother works for one of these little R&Ds. They run losses for years, sell the patent, and dissolve the company. Then hire everyone back under a new name with a new R&D project to work on.)

The legal life is 20 years. The patent cannot be amortized more than 20 years, but may be amortized less than 20 years if it appears that the useful life will be shorter (ie: drug patents are usually less than 20.)

Any subsequent legal fees in defending a patent are added to the cost and amortized over the remaining life.

If patent becomes worthless, gets written off immediately.

Hope this helps.

[Terry D EA]

Thanks for the response. I am aware of how to handle the purchase and the developmental costs involved with patents. The question is the legal fees for a future defense. Are they capitalized for both internal and external patents.

Thanks,

Terry D.

[schirallicpa]

yes - any subsequent legal fees for defending any patent are added to the basis and amortized over the remaining life of the patent.

What kind of patent? I never get interesting things like patents in my business.....

[Terry D EA]

Thanks for your help. I am not dealing with any clients who have a patent issue. This is a question for an exam from and Intermediate II accounting class. One more class and I will have the required hours for the NC CPA exam. I have a 3.8 GPA and tend to spend too much time on questions that I can't find a clear answer on. It only made sense to me that if you own the patent period, and you defend it, then capitalize the costs. Had to be sure.

Thanks,

Terry D.

[schirallicpa]

Good luck with the exam. I don't think I could ever get through it again. That was 16 years ago!!!! Actually, the first time I sat would be 18 years ago. UGH!

[Terry D EA]

Thanks, and I am sure I will need it. I plan on a refresher course before I sit. Before I spend 1k on the exam I want to be sure I will be in the 16% who pass it.

Terry D.