Are Patents Intangible Assets: Everything You Need to Know
Intangible assets, including patents, are defined as assets that are not physical and which can be useful for longer than 12 months.3 min read
2. Value of Intangible Assets
3. When Do Intangible Assets Appear on the Balance Sheet?
Are Patents Intangible Assets?
Intangible assets, including patents, are defined as assets that are not physical and which can be useful for longer than 12 months. This type of asset is commonly assigned a portion of the purchase price of an acquisition. Intangible assets that are internally generated can usually not be included on an organization or company's balance sheet. Intangible assets are distinguishable from tangible assets such as vehicles, land, product inventory, equipment, cash, bonds, and stocks. Examples of intangible assets include:
- Assets related to marketing, such as newspaper mastheads, trademarks, non-compete agreements, and domain names
- Assets related to customers, such as an order backlog, lists of customers, and existing relationships with these clients
- Artistic assets, such as literature, music, performance, photographs, and movies
- Assets based on contracts, including agreements for licensing, services, franchises, broadcast rights, employment, and use
- Technological assets, including computer software, trade secrets, and patented technology
Intangible assets are either considered definite or indefinite. An example of an indefinite asset is a brand name since it remains with the company until the company ceases operations. An example of a definite asset is a legal agreement to use another company's patent for a specified period of time.
Value of Intangible Assets
Although the value of intangible assets is not always as obvious as the value of tangible assets, they still play a significant role in a company's success or failure over time. For example, major brands like Nike benefit from the substantial value of name recognition, an intangible asset. Even though brand recognition isn't something you can see or touch, it has driven this company's international sales for decades. Intangible assets can be acquired or created by a business. For example, a company can develop its own mailing list of clients or may purchase this list from an external firm; either way, it's an intangible asset.
Intangible assets created by a business cannot be deducted on a tax return, but those that have been acquired can be written off as a capital expense. For example, intangible assets that can be claimed if a business applies for a patent include the salaries paid to inventors, filing fees, the cost of a patent lawyer, and related costs. While the value of the patent itself cannot be written off as a business expense, another company that purchases the patent can write off the purchase cost. According to IRS regulations, businesses must claim intangible costs over several years (amortization).
When Do Intangible Assets Appear on the Balance Sheet?
Intangible assets may have either an identifiable or non-identifiable useful life. It is often challenging for businesses to properly value and account for this type of asset. A balance sheet contains a company's assets and liabilities as well as shareholder equity. Although an intangible asset is technically an asset, it is not always included on the balance sheet. Generally accepted accounting principles (GAAP) indicate that only acquired assets with an identifiable value and useful lifespan should be amortized on a balance sheet.
Accounting laws state that businesses can only recognize acquired intangible assets, not internally generated assets except in rare cases. Despite the huge recognition value of Nike's "swoosh" logo, if it was internally developed, it has no fair market value and thus does not appear on the business's balance sheet. If the logo had been purchased from another business, the purchase price would be considered the fair market value and included on the balance sheet.
On the other hand, a company that created a valuable patent after many years of costly research would be able to write off those costs on the balance sheet and consider expenses as incurred. Intangible assets may never be capitalized upon. If the same company purchased the patent from another company, the fair value of the patent, as defined by the purchase price, could be recognized on the balance sheet. For this reason, many businesses that have spent millions over the years to develop valuable brands have not been able to capitalize on any of the costs of doing so. As a result, the real value of their intangible assets is not captured on their balance sheets.
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