Key Takeaways

  • Patents are intangible assets because they have no physical form but provide measurable economic benefits.
  • They are recorded on the balance sheet only when acquired, not when internally developed.
  • The value of a patent is amortized over its legal life or useful economic life, whichever is shorter.
  • Patents enhance business value by providing exclusive rights, improving competitiveness, and attracting investors.
  • Understanding how patents fit within the intangible asset framework is crucial for accurate financial reporting and valuation

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.

Why Patents Qualify as Intangible Assets

Patents qualify as intangible assets because they represent exclusive legal rights rather than physical property. They enable inventors or businesses to prevent others from making, using, or selling their innovations, thus creating measurable economic benefits without physical substance. Under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), an intangible asset must be identifiable, controlled by the entity, and capable of generating future economic benefits — criteria that patents clearly meet.

Unlike current assets that are quickly converted to cash, patents are non-current intangible assets with long-term value. Their worth is based on the revenue they help generate or the competitive advantage they secure, not on immediate liquidity. Companies often use patents strategically to build licensing revenue streams, protect market share, or enhance goodwill during mergers and acquisitions.

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).

Patent Valuation and Amortization

Determining the value of a patent involves assessing both its legal protection and economic potential. Common valuation methods include:

  1. Cost approach – based on development and registration expenses.
  2. Market approach – comparing similar patented technologies sold or licensed in the market.
  3. Income approach – estimating the future cash flows generated by the patent.

For accounting purposes, the cost of acquiring or registering a patent is capitalized and then amortized over its useful life, which typically does not exceed 20 years — the maximum protection period under U.S. law. However, if the patent becomes obsolete earlier due to technological advances or market shifts, amortization must accelerate to reflect its reduced value.

Businesses may also need to test patents for impairment — a reduction in recoverable value — if market conditions or competitive factors significantly diminish their utility. This ensures that the patent’s book value aligns with its fair market value over time

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.

Accounting Treatment and Recognition of Patents

In financial reporting, patents are recognized on the balance sheet only when acquired externally or through a merger or purchase. Internally developed patents — while potentially valuable — are typically excluded because their cost and future benefits are too uncertain to quantify reliably under GAAP and IFRS guidelines.

When recorded, patents appear as long-term intangible assets, separate from goodwill. The recorded amount includes legal fees, application costs, and purchase prices. Businesses must then systematically amortize this cost over the patent’s legal or economic lifespan. Any litigation or defense expenses that extend the patent’s protection can also be capitalized if they enhance its long-term value.

If a company sells or licenses a patent, the resulting income is recognized as revenue or gain. Similarly, if a patent becomes invalidated or abandoned, any remaining unamortized cost must be expensed immediately, ensuring that the balance sheet accurately reflects the company’s current assets and liabilities

Economic Importance of Patents as Intangible Assets

Beyond their accounting classification, patents play a vital strategic and economic role. They can:

  • Increase market valuation by demonstrating innovation capacity.
  • Attract investors and enhance negotiating leverage in joint ventures.
  • Serve as collateral for financing or investment deals.
  • Generate recurring income through licensing and royalty agreements.

In industries like pharmaceuticals, biotechnology, and software, patents are often among the most valuable intangible assets, driving product pipelines and competitive differentiation. For companies looking to commercialize innovation, understanding how to manage and report patents as intangible assets is crucial to long-term success

Frequently Asked Questions

1. Is a patent an intangible or tangible asset?

A patent is an intangible asset because it provides legal rights without physical form. It holds value through exclusivity and innovation potential.

2. Can a company record a self-created patent as an asset?

Generally, no. Under GAAP and IFRS, only acquired patents can be recognized on the balance sheet. Internally developed patents are expensed as incurred.

3. How is a patent amortized?

Patents are amortized over their useful or legal life—usually up to 20 years—on a straight-line basis, unless market conditions require faster amortization.

4. What happens if a patent loses value?

If a patent becomes obsolete or loses legal protection, the company must record an impairment loss to reflect the decrease in its recoverable amount.

5. Why are patents important to businesses?

Patents protect innovation, attract investors, and generate income through licensing or exclusive market rights, making them crucial intangible assets.

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