Is a Patent an Asset?
Patents play a vital role in protecting an inventor’s innovations. But are patents considered assets?
A patent can indeed be considered an asset, especially from a business standpoint.
An asset is anything of value that can be owned or controlled to provide future benefits. In the context of patents, they offer exclusive rights to the inventor or patent holder, granting them a monopoly over the invention for a limited period, typically 20 years from the filing date.
As a valuable asset, a patent holds substantial financial worth. It can be sold, licensed, or utilized as collateral for securing loans or attracting investments. Moreover, patents can serve as strategic assets, providing a company with a competitive advantage in the market.
Possessing a robust patent portfolio can dissuade potential competitors from entering the same market, bolstering the company’s market standing and growth prospects.
Understanding Patents as Assets
A patent is considered an intangible asset; this is because a patent does not have physical substance, and provides long-term value to the owning entity. As such, the accounting for a patent is the same as for any other intangible fixed asset:
Initial recordation
The initial asset cost for a patent is recorded as the acquisition cost. If a company applies for a patent, this expense incorporates registration, documentation, and legal fees linked to the application. Alternatively, if the company acquires a patent from another entity, the purchase price becomes the initial asset cost.
Depreciation
The individual who holds the patent gradually spreads out the cost of the patent over its useful lifespan, usually utilizing the straight-line amortization approach.
Impairment
In case the patent loses its value or experiences a decline in value, the owner should recognize an impairment to decrease or eliminate the asset’s carrying amount.
Derecognition
Once the company ceases to utilize the patented concept, the asset can be removed from the records by crediting the patent asset account and debiting the accumulated amortization account. If the asset hasn’t been entirely amortized at derecognition, any remaining unamortized balance should be recorded as a loss.
However, it’s crucial to note that not all patents are equally valuable. The strength and value of a patent depend on factors like the uniqueness of the invention, its commercial potential, and the scope of the patent claims.
Types of Assets
Assets are valuable resources owned or controlled by an individual, organization, or entity. They represent economic value and can be categorized into different types based on their nature and characteristics. Here are the main types of assets:
1. Tangible Assets
Tangible assets are physical assets that have a physical form and can be touched, seen, and quantified. These assets have a physical presence and represent tangible or real property owned by individuals, businesses, or organizations. Tangible assets are an essential component of a company’s balance sheet, and they are used in day-to-day operations to generate revenue and support business activities.
Here are some common examples of tangible assets and their typical useful life:
- Machinery and Equipment: The useful life of machinery and equipment depends on factors such as the type of asset, the level of usage, and maintenance. In general, the useful life of machinery and equipment can range from 5 to 20 years or more.
- Buildings: Buildings have a longer useful life compared to machinery and equipment. The useful life of buildings can span several decades, often ranging from 20 to 50 years or even more, depending on construction materials and maintenance.
- Vehicles: The useful life of vehicles can vary depending on their type and usage. Commercial vehicles may have a useful life of 5 to 10 years, while well-maintained personal vehicles can last longer.
- Furniture and Fixtures: The useful life of furniture and fixtures used in business operations typically ranges from 5 to 15 years, depending on the quality and durability of the items.
- Computer Hardware: The useful life of computer hardware, such as desktops, laptops, and servers, is usually around 3 to 5 years, as rapid technological advancements often make older hardware obsolete.
2. Intangible Assets
Intangible assets are non-physical assets that represent valuable rights or advantages for a business. That’s where patents fall into. They do not have a tangible form but can significantly contribute to a company’s competitiveness, revenue generation, and overall worth. Intangible assets are typically categorized into two main types:
- Intellectual Property: This includes patents, trademarks, copyrights, and trade secrets. Patents protect inventions, trademarks safeguard brands and logos, copyrights protect creative works, and trade secrets guard confidential business information.
- Goodwill: Goodwill represents the premium value a company has beyond its tangible assets and liabilities. It includes factors like brand reputation, customer loyalty, skilled workforce, and favorable supplier relationships.
3. Financial Assets
Financial assets are instruments or contracts that represent ownership of an entity’s claim to future cash flows or potential economic benefits
- Cash Equivalents: Highly liquid assets that can be easily converted into cash within a short period, typically with maturities of three months or less. Examples include Treasury bills and money market funds.
- Marketable Securities: Financial instruments that can be readily bought or sold in public markets, such as stocks and bonds.
- Accounts Receivable: Money owed to a company by its customers for goods or services sold on credit.
4. Real Estate
Real estate refers to property consisting of land and any structures or improvements built on it. Residential real estate comprises houses, apartments, and condominiums used for living purposes.
- Residential Properties: Houses, apartments, and condominiums used for living purposes.
- Commercial Properties: Office buildings, retail spaces, and warehouses used for business operations.
- Agricultural Properties: Farms, ranches, and agricultural land used for cultivation or raising livestock.
5. Natural Resources
Natural resources refer to the Earth’s valuable assets that exist naturally and are available for human use. These resources play a crucial role in sustaining life and supporting economic activities.
- Oil and Gas Reserves: Underground deposits of oil and gas that can be extracted and used for energy production.
- Timberland: Land with forests used for logging and timber production.
- Mineral Reserves: Deposits of valuable minerals like gold, silver, copper, and coal.
6. Investments
Investments refer to the allocation of funds, assets, or resources into various financial instruments or ventures with the expectation of generating a return or earning a profit over time
- Equity Investments: Ownership stakes in other companies through stocks or shares.
- Debt Investments: Loans or bonds issued by other entities, representing the lender’s claim on the borrower for repayment.
Besides these, there is also human capital which refers to the skills, knowledge, experience, and capabilities possessed by individuals that contribute to their productivity, economic value, and potential for future earnings.
Protecting Your Patent as an Asset
While obtaining a patent grants exclusive rights, it is crucial for inventors and businesses to actively protect their patents as assets. Patent infringement can occur when others use, manufacture, or sell a product or technology covered by the patent without permission.
To safeguard their patent assets, patent owners should regularly monitor the market for potential infringement, enforce their rights through legal actions if necessary, and keep their patent information up-to-date with the relevant authorities.
LegalZoom, a leading online legal service provider, offers valuable assistance to inventors and businesses in protecting their patent assets. They provide patent search services to ensure your invention is unique before filing for a patent, and they can help with the preparation and filing of patent applications. Moreover, LegalZoom’s network of experienced patent attorneys can provide legal counsel and representation in case of patent disputes or infringement issues.
FAQs
Here are some commonly asked questions below:
What is the useful life of a patent?
The useful life of a patent varies, with utility patents lasting up to 20 years from filing and design patents for about 15 years from grant.
How is straight-line depreciation calculated for tangible assets?
Straight-line depreciation divides the initial cost minus salvage value by the asset’s useful life for equal annual depreciation expenses.
Can you explain fair market value for intangible assets?
Fair market value for intangible assets is the price at which they would be exchanged between knowledgeable and willing parties.
How does the useful life of intangible assets impact financial planning?
The useful life of intangible assets affects financial planning, influencing resource allocation and investment decisions.
