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Is it preferable to expense or capitalize costs of internally developed patents

Greg Collins's Profile

I am working with an early stage/startup medical device company that has never been audited. They are in the process of raising capital. Historically they have capitalized patent costs (management time; legal costs (filing, clearance opinions, etc.) and ongoing patent maintenance fees. In some cases that patents subsequently issued while others are still pending approval. No products relating to the underlying patents have been commercialized and will require a successful clinical study to gain FDA approval. Since there is considerable uncertainty about the underlying value of these patents, I believe the preferred treatment would be to expense these costs as incurred rather than capitalizing them.


(Internal audit) |

I think, I am not so sure, we have 2 issues here. The fisrt one is the consistency principle stating that the company is used to use the same accounting principles and methods from period to period. The second is the materiality of patents costs you are talking about. If the amounts are material, I would suggest to capitalize them otherwise and if they are insignificant you could expense them.

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

Greg: I will assume that you are reporting financial results under US GAAP. The basic rule (ASC 350-30-25-3) is that "Costs of internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business or nonprofit activity and related to an entity as a whole, shall be recognized as an expense when incurred."
Since patents are specifically identifiable, and typically have determinate lives, this leaves open the possibility of capitalizing costs. There is very little specific guidance in the intangible asset section but, generally speaking and by analogy to other guidance, you can capitalize direct incremental costs incurred to acquire an intangible asset. Legal fees for filing could be capitalized. Management time is not generally incremental and would not be capitalized. Costs to maintain the patent would be expensed.
Any costs you capitalize would be subject to (i) amortization and (ii) review for potential impairment.
Bottom line - unless the legal costs for preparing and filing are substantial, the amounts involved may not be material and may not justify the effort required to track, amortize and test the balances.


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