XYZ Research Company

XYZ Research Company XYZ Research Company was incorporated in 2010 and centers on developing new technology for interplanetary exploration. The company has many patents and has historically expensed all the costs associated with obtaining their patents. The owners of XYZ Research Company are unsure whether patent costs that have been expensed can be capitalized and whether or not periodic impairment testing is required. I have been hired as a consultant to research the proper accounting standards currently in place for the methods or recording patents, the useful life of patents amortization of patents, capitalization limits of patents and the impairment testing required. My immediate assumptions would be that no costs have been capitalized and no impairment testing has been done since I have been hired to research the proper accounting standards.
A patent is the exclusive right granted by a government to the inventor to manufacture, use, or sell an invention for a certain number of years. A patent is considered an intangible asset, because a patent does not have physical substance and provides no long-term value to the owning entity. There are three different types of patents, a utility patent, a design patent and a plant patent. A U.S. patent lasts for 20 years. Patent expenses are any costs associated with obtaining the patent, which include application, registration, documentation and other legal fees as necessary. XYZ Research Company has historically expensed all the costs associated with patents by amortization. Amortization is spreading out expenses for intangible assets over a specific period of time, in this case the useful life of the patent, for accounting and tax purposes. Once a patent is acquired, GAAP requires that it be included on the business’s balance sheet at its fair value. Fair value is the cost to