Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…
CHAPTER XVIII
1142 words | Chapter 102
INTANGIBLE ASSETS—PATENTS, FRANCHISES, GOOD-WILL
General Considerations
The final place among the assets of the balance sheet is given to the
intangible items. Because this class of assets has so frequently been
used for doubtful or illegitimate purposes, whatever the value given
to them they should be shown boldly in a group by themselves and not
merged with the values of tangible assets. Their real value, if any,
should be open to verification. To list them with tangible items on the
balance sheet is apt to raise a suspicion as to their validity much
more than if they are shown in a group by themselves.
Because the assets of this group are intangible is no reason in
itself for the hasty judgment frequently made that therefore they are
worthless. It is true, as above stated, that the doubtful uses to which
they may be put have caused them to be viewed with suspicion. Yet they
have an entirely legitimate use and oftentimes constitute the most
valuable portion of the assets. Therefore, the values at which these
intangible assets are carried on the books should always be open to
investigation and capable of verification.
It is purposed here to lay down the principles of the legitimate use
of intangible assets, and to point out some of the wrong uses to which
they easily lend themselves. The group comprises patents, copyrights,
trade-marks, formulas, receipts, franchises, organization expense,
going concern value, and good-will.
Patents a Monopoly Grant
A patent is “a grant made by the government to an inventor conveying
and securing to him the exclusive right to make and sell his invention
for a term of years.” The purpose of the government in making such
grants is to encourage and stimulate individual ingenuity along lines
that will ultimately redound to public welfare. Letters of patent
are in the nature of a monopoly grant but, although extreme care is
taken in their issuance to see that they cover really new devices, no
governmental guarantee implies that the patentee shall have free and
uncontested use of his invention. If encroachment is made upon his
rights under the patent, the courts are open to him for protection
and similar privileges are extended to all alike. Oftentimes, until
infringement proceedings have established a clear and uncontested right
and property in an invention, little commercial value attaches to it.
Patents therefore tend to create a monopoly in the marketable product
protected by them and accordingly have value so long as the right to
monopoly continues.
Purchase of Patents
The valuation of patents owned and made use of by a business should
always be on the basis of cost. If owned by purchase from the inventor,
the consideration paid for the patent constitutes cost. When the
consideration is cash, there is no question as to the valuation at
cost. When payment is made in the capital stock of the purchasing
concern the problem is the same here as in the proper valuation of
other fixed assets purchased in the same way, referred to in Chapter
XVII. The federal income tax law takes cognizance of this different
basis for valuation and attempts to establish a true cash basis by
allowing depreciation on patents, when purchased by means of stock,
only on the basis of the cash value of the stock. Prevailing practice
sponsors the bringing of patents onto the books at cost, as shown
either by the cash paid for them or by the _par_ value of the stock
issued for them. Except where deceit and fraud are the points at
issue, no serious objection can be raised to the practice, for any
overvaluation thus occasioned is absorbed in the product by means
of the depreciation charge spread over the life of the patent. Any
additional costs necessary to secure the full enjoyment of the rights
granted under the patent are considered proper charges against the
patent, as giving it additional value.
Patents Developed within the Plant
When the patent is not purchased from outside but is developed within
the plant itself, only the costs of development and of securing the
patent are proper charges to the asset as constituting its value.
In some concerns an experimental laboratory is maintained for the
purpose of working out improved methods and devices. Much of the work
of such a laboratory is often fruitless so far as patentable devices
are concerned, but if the entire effort is directed towards the
development of patents, then the entire cost becomes a proper charge
to whatever patents result from the effort. More often some portion of
the laboratory organization is also used for other purposes. However
developed, whether in the formal laboratory or in any other way, the
full cost of development and of securing letters patent is the figure
for the original valuation of the patent. This cost includes the labor
and material used in the process, drawings, models—including discarded
models—attorney’s fees, government fees, etc.
As in the case of purchase, all the costs, whenever incurred, of
defending the right to the patent or of prosecuting for infringements
constitute additional elements of value, as only by such means can the
real holder be made secure in the exclusive enjoyment of his right.
It is hardly necessary to point out that if such proceedings and
prosecution establish the right of the other party to a device which
practically destroys or greatly diminishes the worth of the contested
patents, not only must such costs usually be charged against revenue
but also the whole or major portion of the value at which the patent
is being carried. However, where the development of patents is one
branch of a concern’s organization, costs of this nature may usually be
absorbed by those patents which are successful. Because inflation of
values is easy at this point, a careful investigation to establish the
legitimacy of all such charges is always desirable. Each case must be
judged on its merits.
Patents Purchased and not Used
Patented devices are sometimes purchased with no intent to use them.
This may be for the purpose of eliminating competition, of forestalling
obsolescence or supersession, and so of postponing the necessity of
making expensive alterations that would be required to meet threatened
competition, even to the point of scrapping a valuable organization.
The ethics of such practice is not under review here. Correct
accounting practice justifies the addition of the purchase price of
such devices to the value of the asset, patents, and its periodic
depreciation in regular course.
Elements of Depreciation on Patents
Patents are subject to depreciation. At the time of their purchase or
acquisition, they should be valued at full cost, as stated above. At
any subsequent time, value should be calculated on the basis of full
cost less depreciation. The elements of depreciation as applied to
patents are (1) time lapse, (2) supersession, and (3) obsolescence.
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