Patents allow inventors, or their signees, the exclusive rights to produce and sell their new inventions, as long as it is new, not obvious, and useful. A patent is an intangible asset to a company (along the same lines as a copyright, trademark, trade name, franchise license, government licenses, depreciable assets, natural resources, etc.) that they only have the rights to for a limited amount of time. The patent's value is dependent on the length of either their useful life or their legal life, whichever is shorter, but neither can span longer than 40 years. The formula to calculate a patent's amortization is similar to the straight-line depreciation calculations for other intangible assets. The method in which businesses allocate the cost of these intangible assets as well as depreciable assets is considered the amortization of assets.
1Find the initial cost of the patent itself. For this example, the initial cost of the patent will be $100,000. A patent's initial cost is based on the invention in which the patent belongs to and its comparison to prior inventions of similar nature.Ad
2Obtain the length of the patent's expected useful life. In this example, the useful life of the patent will be 10 years.
3Divide the value of the initial cost of the patent by the patent's expected useful life. The result is the amortization of the patent. So for this example, the initial cost is $100,000 and the useful life span is 10 years; therefore, the patent's amortization is $100,000 / 10 years = the patent's value of $10,000 per year.Ad
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- Patent costs go far beyond the initial cost and amortization. Some of the regulatory costs include patent application cost, prosecution costs to verify is originality, and an issuing fee. Maintenance fees also are charged every 3.5, 7.5, and 11.5 years to continue the patent's validity. There is also a filing fee which is dependent on the number of claims associated with the inventions particular application, which typically ranges from $400 to $1000 or more. The highest charges for most patent applicants are the charges made by the patent attorney or agent that prepares the actual patent application.
- Only items that have an identifiable economic life span can be amortized. Other intangible assets that have an indefinite life span are not amortized, but instead are evaluated for relevancy or destruction from time to time. If these assets never show a decrease in relevance or destruction of any sort, the indefinite life assets will remain on your balance sheet permanently. The unamortized costs of the indefinite intangible assets are placed on a separate balance sheet from the Property, Plant, and Equipment balance sheet. An example of an indefinite life, unamortized asset would be a digital music download service. As long as the service is free from destruction and continues to be economically relevant, it remains on a balance sheet.
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