Patent amortisation

Patent amortisation refers to the accounting allocation of the cost of a patent over its foreseeable period of use. The patent is an intangible fixed asset. Like any asset whose utility is limited in time, it loses value as its protection runs. The company’s accounts translate that loss through amortisation, which also partly conditions the valuation of the patent.

Acquired patents and internally generated patents

First, a company records as an asset a patent acquired from a third party at its acquisition cost, ancillary costs included. That is the case, for example, after a patent assignment contract. Second, a patent stemming from internal research follows more restrictive rules. In principle, the company records research costs as expenses. It may however capitalise development costs if the project has serious chances of technical success and commercial profitability. Third, the costs of filing and maintaining the title, such as the renewal fees, follow the treatment adopted for the project.

The duration and method of amortisation

The amortisation period corresponds to the period of use the company expects of the patent. It cannot exceed the legal term of protection, twenty years from filing. It is often shorter, because the technology becomes obsolete before the title expires. In practice, the straight-line method dominates. The company must moreover carry out an impairment test as soon as an indication reveals a loss of value. That is the case of a nullity action against the patent or of the arrival of a competing technology.

The tax stakes

On the tax side, amortisation is deducted under the ordinary rules. Article 238 of the French General Tax Code moreover opens an option for a reduced rate. That regime targets the net income drawn from the assignment or licensing of patents and similar assets. It however requires the calculation of a ratio linked to research expenditure. The texts are available on Légifrance.

Amortisation and tax options must therefore be coordinated with the filing, licensing and litigation strategy. To that end, the firm works with its clients’ accountants and tax advisers, as part of the management of the patent portfolio.