What it means
To qualify, an invention must be new, useful and not obvious to someone skilled in the field. The inventor files an application with the patent office, which examines it and may ask for changes before granting the patent.
The process often takes a couple of years and can be costly. In the United States, a utility patent generally lasts 20 years from the date the application is filed, as long as maintenance fees are paid at set intervals after it is granted.
If the fees are missed, the patent lapses and anyone can use the invention. Other countries have their own rules, although a 20-year term is common.
There are other types of patent. A design patent protects the ornamental appearance of an item, such as the shape of a bottle, and a plant patent protects new varieties of plants.
A utility patent is different because it protects how the invention works and what it does, not how it looks. For businesses, patents are valuable assets.
They can support a higher price, attract investors, strengthen a negotiating position or generate licence income. They also carry costs, since the filing, legal and maintenance fees add up over the life of the patent.
On the balance sheet, the accounting depends on how the patent was obtained. A patent bought from another party is recorded as an intangible asset at cost, and the legal costs of registering an internally developed patent are usually capitalised, while the research that led to it is normally expensed.
The cost is then written off over the patent's useful life, which is the shorter of its legal life and the period it is expected to generate benefits. Finally, a patent is only as strong as the owner's willingness to defend it.
Suing an infringer is expensive and uncertain, so some companies agree cross-licences instead. Finance teams should include possible enforcement costs when they value a patent portfolio.
In practice
Real-world examples.
Example
A medical device start-up files a utility patent on a new type of heart monitor. The patent helps it raise $5,000,000 from investors, because it shows that competitors cannot copy the core technology. The company records the patent costs as an intangible asset and reviews the carrying value each year for signs of impairment. The company records the patent costs as an intangible asset and reviews the carrying value each year for signs of impairment.
Example
A packaging company licenses its patented closing mechanism to a larger manufacturer. It receives a royalty of 3% on sales, which brings in $240,000 a year. The manufacturer must also pay maintenance fees to keep the patent in force, which the licensor's finance team builds into its annual budget. The manufacturer must also pay maintenance fees to keep the patent in force, which the licensor's finance team builds into its annual budget.
Example
A software company buys a patent on a data compression method for $900,000 to avoid a lawsuit. The finance team records it as an intangible asset and amortises it over its expected useful life. It also asks its lawyers to confirm that the patent has no unpaid maintenance fees before the purchase completes.
Formula
Calculation
Annual amortisation = cost of patent / useful life in years
Suppose a company buys a utility patent for $600,000 and expects it to be useful for 12 years, which is shorter than the remaining legal life. The annual amortisation is 600,000 / 12 = $50,000. After four years, the accumulated amortisation is 4 x 50,000 = $200,000 and the carrying value on the balance sheet is 600,000 - 200,000 = $400,000.Case study
Seen in the real world.
Quillfeather Labs is an illustrative, fictional company that develops a new type of battery separator. It spends $400,000 on research and then pays $60,000 in legal and filing fees for a utility patent.
The finance director records the $60,000 as an intangible asset, because it relates directly to securing legal protection, and expenses the $400,000 of research as incurred. She sets the useful life at 10 years, giving annual amortisation of $6,000.
In this illustrative story a larger manufacturer licenses the patent for $150,000 a year. The director notes that the book value of the patent is tiny compared with its income, which shows why accounting values can understate the worth of intellectual property. She also schedules the maintenance fee payments in the company calendar, because a missed payment could end the protection. She also schedules the maintenance fee payments in the company calendar, because a missed payment could end the protection.
Watch out
Common mistakes.
- Believing a patent lasts forever, when it generally expires after about 20 years and needs maintenance fees to stay in force.
- Assuming a patent application guarantees protection, when only a granted patent gives exclusive rights.
- Treating the book value of a patent as its market value, when accounting records cost and not the income it can generate.
Questions
People also ask.
What is the difference between a utility patent and a design patent?
A utility patent protects how an invention works, and a design patent protects how an item looks.
Can a patent be sold or licensed?
Yes, owners can sell it outright or license it to others in return for fees or royalties.
How are patent costs treated in the accounts?
Purchased patents and certain legal costs are capitalised and amortised, while research costs are usually expensed.
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