Patents

Definition

Patents are exclusive rights granted by a government to an inventor or assignee for a specific period, allowing them to exclude others from making, using, selling, or distributing their invention without permission. These rights encourage innovation by providing inventors the opportunity to benefit financially from their creations, and they are categorized as identifiable intangible assets that have specific useful lives and amortization considerations.

5 Must Know Facts For Your Next Test

1. Patents generally last for 20 years from the filing date, after which the protected invention enters the public domain.
2. There are different types of patents, including utility patents for new inventions, design patents for new ornamental designs, and plant patents for new plant varieties.
3. To obtain a patent, an inventor must publicly disclose details of their invention so that others can understand and replicate it once the patent expires.
4. Companies often value patents as intangible assets on their balance sheets, impacting their overall financial evaluations during mergers and acquisitions.
5. Failure to adequately protect patent rights can lead to financial losses due to competition and may diminish the value of the company’s intangible assets.

Review Questions

• How do patents function as identifiable intangible assets in a company's financial reporting?
  • Patents are classified as identifiable intangible assets because they can be separately identified and valued. When a company acquires a patent, it records it on its balance sheet at its fair value. This treatment allows companies to reflect the economic benefits derived from patents in their financial statements while also adhering to accounting standards that require clear identification of intangible assets.
• What is the process for amortizing patents, and how does it affect financial statements over time?
  • The amortization of patents involves systematically allocating the cost of the patent over its useful life. This is typically done using the straight-line method, where an equal amount is expensed each year until the patent expires. The effect on financial statements includes reduced taxable income due to amortization expense and a gradual reduction in the carrying value of the patent on the balance sheet.
• Evaluate the strategic importance of patents in mergers and acquisitions and how they influence valuation negotiations.
  • Patents play a crucial role in mergers and acquisitions as they represent significant intangible value that can influence negotiations. A strong patent portfolio can enhance a company's competitive advantage, making it more attractive to potential buyers. During valuation discussions, the presence of valuable patents can justify higher purchase prices due to anticipated future revenues generated from patented technologies. Additionally, understanding patent strength and potential litigation risks can significantly shape the overall deal structure.

Related terms

Intellectual Property: Legal rights that result from intellectual activity in the industrial, scientific, literary, and artistic fields, including patents, copyrights, trademarks, and trade secrets.

Amortization: The gradual reduction of an intangible asset's value through periodic charges to expense over its useful life.

Licensing: A legal agreement where a patent holder permits another party to use their patented invention under specific conditions, often in exchange for royalties.