Patents are a special asset class because they come into existence – and, therefore, appear on a company’s balance sheet – in an entirely different manner than all other assets.
When a company issues an invoice, the value of that invoice appears under Accounts Receivables. When that invoice is paid, the value of the invoice disappears from Accounts Receivables and moves over to Cash. When a company buys a truck or a computer or a drill press, the cost of that acquisition is taken from Cash and moved over to Capital Equipment. Under modern accounting practices, all income, expenditures, purchases, and divestitures are accounted for – if you will pardon the pun. Except patents.
A business comes up with a new technology. It’s CTO (chief technology officer), its VP of Engineering, its Marketing Director, or any other employee at the company from the executive suite to the loading dock, comes up with an invention that the company could develop into a new product or use to improve or enhance a current product. What does a smart company do? It files a patent application for the new technology.
It probably engages a patent attorney to file the application, and two or three years later – current patent pendency at the USPTO is about 25 months, but it was recently as high as three years – a patent is granted. Congratulations. But here is what does not occur: There is NO accounting transaction that records the acquisition of that patent. When a company buys a lathe, or shelving for the warehouse, or software, or any other capital equipment, an accounting transaction occurs that takes funds out of Cash and adds the value of the acquired truck, lathe, shelving, or computers to the Capital Equipment line on the left side of the Balance Sheet.
If a company buys a patent, an accounting transaction occurs that takes the funds out of Cash and records the value of the acquired patent under Intangible Assets.
But – and this is a very common but – when a company applies for and is granted a patent, there is NO accounting transaction. The filing fees and attorney fees for the patent application are not assets. They are expenses that are properly written off in the year they are expended. The payroll for the employees who worked on the patent invention was also written off in the year it was were expended. So, when that patent is granted, it is most definitely an asset, but it is not one that appears on the company’s Balance Sheet automatically as other assets do.
We come across companies in all industries that have from a handful to dozens of active, granted patents that are not accounted for on the company’s Balance Sheet. These are valuable assets the company owns that are not being reported as assets on the company’s books!
Why is it important for a company to record its patents as assets? Because adding the value of its patents – and other intangible assets such as trademarks and copyrights – to the Balance Sheet increases the company’s value. And a company with greater value has easier access to financing. It is much easier for a start-up business to raise venture capital or other financing if the value of its patents is reflected on its Balance Sheet. Adding the value of its patents to the Balance Sheet of a publicly held company can do wonders for the company’s stock price. And let’s face it, any company’s Balance Sheet should accurately reflect all of a company’s assets as well as its liabilities.
If you represent a company that has home-grown patents, and those patents are not reflected on your Balance Sheet, the time has come to have a professional patent valuation performed for those patents so their value can be accurately reflected on the company Balance Sheet. For the few thousand dollars that patent valuation services cost, a business can add hundreds of thousands – even millions of dollars – of asset value to the business!
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