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Capitalization of patent expenses

Capitlalization of patent costsI have just reviewed a balance sheet prepared by a company that has capitalized , and continues to capitalize patent expenses, including legal  and filing fees, and then amortizes the expense over a fixed term of x years. While this may have the advantage of smoothing the monthly amortization expense, I have not previously seen such treatment. I have always expensed patent expenses as incurred since there can be no garauntee of any specific patent application being granted, nor of any commercial value being achievable from the granting of a specific patent.

What is the general concensus of whether to capitalize or expense?
 

Answers

Vince Schreiber
Title: Principal
Company: Schreiber Development
(Principal, Schreiber Development) |

Capitalizing the legal and filing fees, as well as defense costs is typical if successful. In my previous role, we had a "patent department", and tracked each application, and subsequent award as if it were an individual project, similar to CIP accounting. We held a small reserve based on our experience that some would be unsuccessful (in our experience, less than 10% of our applications were either not ultimately awarded, or we abandoned the application in process for some reason). We capitalized the fees, the "department manager" (a part time consultant), and any internal time that was specifically allocated to pursuing the patent award (documentation, etc). Note that the early stage idea generation that reulted in the patent application belonged in other budgets, either operating or capital depending on what that person was doing when he or she generated the idea. Once it was awarded, we put the asset on the balance sheet and amortized it. If we abandoned it or it was not awarded, we took the write-off against the reserve account. As a side note, we paid non-executive employees a bonus if the patent was awarded, because the time commitment to get everything documented was sometimes considerable, and we didn't give them a break on their day job to work on patent documents.

Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Thanks for your input. there are onvoiusly at least two ways to deal with these expenses, and I am wondering whether there are any official guidance on this issue. Was your motive the matching of cost and subsequent revenue? Did you amortise over the valid life of the patent, or the expected life of a specific product created from the patent IP?

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Simon,

From the IRS's point of view, my understanding is....you make the call. Both as to whether or not to capitalize, and if so, under what circumstances.

Vince's approach sounds completely appropriate, and relatively easy to administer.

I tend to not like to capitalize legal expenses unless I have to (for example in relation to an investment event). I'd rather take the deduction now. That being said, if you do a lot of patenting, this is an excellent thing to track.

Cheers,

KP

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