Question

Patents are a type of long-lived asset.

Required:

1.	Explain the accounting treatment you would suggest including amortization method, with reasons.
2.	Explain how an impairment in value would be recorded?

Answer 1

1. Patents comes under the head of intangible assets but the treatment of patents depends upon what kind of patent it is. That means if a patent is self-developed then we cannot capitalize the cost incurred in developing that patent but if any external legal charges were incurred to have a successful registration of the patent then such cost can be capitalized and shown as asset which will amortized for no.of years for which benefit of such patent is expected. But if registration of patent was not successful then legal charges incurred will not be capitalized.
2. If a patent is capitalized then its amortization is done on the assumption that there will be future benefit from such asset. But if there is a case of impairment that is degradation of the asset then such impaired value has to be recognized immediately by reducing it from the value of capitalized asset.