ing Research Memo Proj Acct 540 3n2b6j

ant:

ing 540

Meeting:

XYZ Research Company

Topic:

ing Regulations and Treatment of Patents

Case Studied:

You have been hired as a consultant for XYZ Research Co. XYZ Research Co. incorporated in 2010. XYZ ‘s business centers on developing new technology for interplanetary exploration. The company has many patents and has historically expensed all of the costs associated with obtaining their patents. The owners of XYZ Labs are unsure whether or not if any or all of its patent costs can be capitalized. They also are unsure if any impairment testing should be done periodically on their patents. You have been asked by the owners to look into these issues and provide the appropriate ing treatment for patents.

Purpose:

To research how the ing is handled for Patents. Has XYZ Company been ing for these costs correctly or does there need to be changes made to their ing practices. Can The cost to obtain a patent be capitalized? Also is impairment testing required periodically on their patents? How will this affect the financial reports?

ing Standards and Regulations

IAS 38 – Intangible assets are non-monetary assets which are without physical substance and identifiable (either being separable or arising from contractual or other legal rights). Those meeting the relevant recognition criteria are initially measured at cost, subsequently measured at cost or using the revaluation model, and amortized on systematic basis over their useful life, unless the intangible has an indefinite useful life, in which it is not amortized. IAS 38 requires an entity to recognize an intangible asset whether purchased or selfcreated at cost if, and only if it is probable that the future economic benefits that attributable to the asset will flow to the entity and the cost of the asset can be measured reliably (IAS 38.21). Additional recognition is required for internally generated intangibles; the probability of future economic benefits must be based on reasonable assumptions about conditions that will exist over the life of the asset (IAS 38.22). After initial recognition intangible assets should be carried at cost less amortization and impairment losses. (IAS 38.74). An asset with an indefinite useful life should not be amortized (IAS 38.107)

IAS 38.54 initial recognition of research and development (R&D) costs is charged to expense. R&D costs are capitalized on after the asset is ready for use or sell. Research expenditure is recognized in the income statement in the year in which it is incurred. IAS 38.50 costs incurred in the development phase can be capitalized only if the company can meet all of the following   

Completing the asset so it will be available for use of sale It has the intention to complete the intangible asset and use it in the business or sell it The asset has the ability to be used or sold

Statement 142 This statement addresses the financial ing for acquired goodwill and other intangible assets and supersedes APB Opinion No 17 Intangible Assets. It explains how to for assets that have been acquired individually, or with a group of other assets, and how they should be presented on the financial statements. Not included in the explanation are intangibles acquired through a business combination. ASC 350-30-35-1 – A recognized intangible asset is ed for based on it useful life to the entity. An intangible with a finite useful life shall be amortized; one with an indefinite useful life shall not be amortized ASC 350-30-35-3 - The estimate of the useful life of an intangible asset to an entity shall be based on an analysis of all pertinent factors, in particular, all of the following factors; the expected use of the asset by the entity, the expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate, and any legal, regulatory, or contractual provisions that may limit the useful life. The cash flows and useful lives of intangible assets that are based on legal rights are constrained by the duration of those legal rights. 350-30-35-18 - An intangible asset that is not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. ASC 350-30-45-1 – All intangible assets have to be aggregated and presented in the financial reports as separate items. However any individual intangible assets or classes must be presented on a separate line item ASC 350-30-45-2 - Amortization expense and impairment losses for intangible assets shall be presented in the income statement within continuing operations. IAS 36 – Impairment of Assets seeks to ensure that an entity’s assets are not carried at more than their recoverable amount. With the exception of goodwill and certain intangible assets for which

the impairment test is required, companies are required to conduct the impairment test if there is an indication of a possible loss. IAS 8 - Changes in ing estimates, preparation of financial statements may involve the use of ing estimates in determining the carrying amounts of assets & liabilities and the associated expense or income for the period where such amounts cannot be measured precisely. Examples of ing estimates include the following:  Valuation of land where it is ed for at revalued cost  Impairment of non-current assets  Useful lives of non-current assets  Pattern of economic benefits expected to be received from non-current assets for calculating depreciation Financial ing Is important to all businesses, it is a way for them to keep records of all transactions that occur in the business during a specified timeframe, usually a year. By using double entry ing each transaction will affect at least two s. Financial ing provides a look into the business and will tell outsiders how the company is doing financially. Since ing is regulated by standards and GAAP, the financial statements provide the company, internal and external s’ comparability from one company to another. By analyzing financial information you will be able to see where the company is, and make the best decisions that will further the business and profitability. ing for Patents Only intangible assets that have been acquired are reported on the balance sheet and reported at their purchase price. A company doesn't report internally developed intangible assets on the balance sheet. To be able to capitalize an asset it must have a useful life that extends beyond the current year, the asset must be used to conduct business, and provide the company with a benefit. The costs you pay to use a trademark, copyright, patent, or similar intellectual property can be amortized (Joyner).

A business will use amortization for definite life intangibles such as a patent. This process will reduce the intangible asset’s value on the balance sheet in equal annual installments over the life of the asset and transfers each amount to an amortization expense on the income statement. The method used and the amount of amortization expense is presented in the financials. Annual amortization reduces net income on the income statement which also reduces retained earnings in the stockholders’ equity section of the balance sheet. R&D can be found on the income statement as an operating expense in the current year. R&D expenses are subtracted from revenues every year directly. Therefore, R&D spending is treated as an expense rather than as an investment (YCharts). You cannot capitalize R&D costs on the balance sheet as an asset. Impairment testing should be done on an asset, if there is a loss, it will reduce income in the income statement and reduce total assets on the balance sheet (Boundless, 2014). Research and development (R&D) costs that are required to develop the idea being patented are not included in the in the cost of the patent but are expensed.

Debit Patent (Bal)

Credit xxx Cash (Bal)

xxx

Cash (Bal)

xxx

R&D (IS) exp xxx Amortization xxx Patent (BS)

Patent Exp (IS) xxx Loss Impairment xxx Patent (IS)

Accum Impairment Losses xxx (BS)

Patent (BS) xxx To show decrease in value

Recommendation XYZ Research Company has been in business since 2010, and is unsure whether the company has been ing for patent costs correctly. They have been expensing all the costs to obtain a patent. The client has come to our firm so we can research and improve the ing for these costs and to ensure that it is in compliance with current ing rules and regulations. After review of ing authorities and other data regarding the treatment of these costs, I have come to the conclusion that some changes should be made. A patent is; rights that have been granted by the government to the inventor for a particular amount of time to stop others from using, making, or selling the idea for a limited time. Patents have a legal life of 20 years. An intangible asset does not have any monetary value and are without physical substance. Costs incurred to develop and maintain an internally developed intangible asset are recognized as an expense when incurred (IASPLUS.com). Intangibles with a definite life are amortized to expense and can’t exceed 40 years. Research and development (R&D) costs required to develop the idea being patented are not included in the in the cost of the patent. You can elect to amortize your research and development costs, deduct them as current business expenses, or treat them as a capital expense and write them off over a 10-year period under IRS rules. If you elect to treat the costs as a capital expense, deduct the costs in equal amounts over 60 months or more. The amortization period begins the month you first receive an economic benefit from these costs. XYZ’s patents will have a limited useful life and I will advise them to determine the useful life for any future or current patents.

I recommend that XYZ Company recognize Research and Development costs as a current expense. XYZ is developing their own product that will result in obtaining a patent; any material and labor used will be an expense to the company and will be recorded as incurred, which may

not be the same period in which the related cash is paid. It is often better to take the hit for this type of expenditure up front against your profits. Then, when your company starts to sell the product resulting from this research, you can show profitability then, because you have taken of the R & D already.

Once the patent is granted only the cost for registration, and legal fees are included and recorded as the cost of the patent. The Straight line method for amortization is calculated by using the cost of the patent and dividing by the years of useful life. This timeframe varies depending on how long the company will receive some monetary benefit out of the patent and the length of time remaining on the patent registration. Impairment testing is not required but would be needed if there are changes in the industry or market that would affect the value of the intangible asset or in this case any patents. An intangible asset’s annual amortization expense reduces its value on the balance sheet, which reduces the amount of total assets in the assets section of the balance sheet. This occurs until the end of the intangible asset’s useful life. Amortization expense reduces net income on the income statement. ants for XYZ Company will need to review the rules and regulations that have been established by the FASB and GAAP, paying close attention to those mentioned in this memo. Since XYZ Research Company has not been recording the Research and Development costs, which is an omission error; this will be corrected by a journal entry between the s affected. Now that the cost of the patents will be amortized over its useful life, and this has never been recorded in the financial reports it will be handled as a c hanges in ing estimates. This must be

ed for in the financial statements, and incorporated in the ing period in which the estimates are revised. Therefore, carrying amounts of assets, and any associated expense and gains are adjusted in the period of change in estimate (ing-simplified.com).

With the ing practices being changed, XYZ could be entitled to some tax benefits if this is the case then the company will need to amend prior financial reports and file amended tax return. I hope you find these recommendations helpful to your business.

Works Cited ing-simplified.com. (n.d.). Retrieved February 13, 2015, from ing Simplified IAS 8: http://ing-simplified.com/standard/ias-8/changes-ining-estimates.html ASC.FASB.org. (n.d.). Retrieved January 21, 2015, from FASB Intangibles - Goodwill and Other 30.35: https://asc.fasb.org/section&trid=2144487 ASC.FASB.org. (n.d.). Retrieved January 21, 2015, from FASB Intangibles-Goodwill and Other 30.45: https://asc.fasb.org/section&trid=2144491 Boundless. (2014, July 3). "Impairment Recognition." Boundless ing. . Retrieved February 6, 2015, from https://www.boundless.com/ing/textbooks/boundless-ingtextbook/controlling-and-reporting-of-real-assets-property-plant-equipmentand-natural-resources-6/impairment-of-assets-45/impairment-recognition245-3734/ FASB.org. (n.d.). Retrieved January 28, 2015, from FASB Statement No. 142: http://www.fasb.org/summary/stsum142.shtml IAS 36 Impairment of Assets. (n.d.). Retrieved January 28, 2015, from IASPLUS: www.iasplus.com/en/standards/ias/ias36 IAS 38 Intangible Assets. (n.d.). Retrieved January 27, 2015, from IASPLUS: www.iasplus.com/em/standards/ias/ias38 IASPLUS.com. (n.d.). Retrieved February 6, 2015, from Goodwill and Other Intangible Assets: http://www.iasplus.com/en-us/standards/ifrs-usgaap/goodwill IRS.gov. (2015, February 7). Retrieved from IRS Publication 535 Business Expenses: http://www.irs.gov/publications/p535/ch08.html#en_US_2013_publink100020 9024 Joyner, J. (n.d.). smallbusiness.chron.com. Retrieved January 28, 2015, from Small Business: http://smallbusiness.chron.com/ing-rules-expensing-vscapitalizing-amortizing-costs-37284.html Keythman, B. (n.d.). Small Business, Chron. Do Intangible assets Carry over From Year to Year on a Balance Sheet? Retrieved February 6, 2015, from smallbusinessl.chron.com: http://smallbusiness.chron.com/intangible-assetscarry-over-year-year-balance-sheet-61091.html Keythman, B. (n.d.). smallbusiness.chron.com. Retrieved January 29, 2015, from Small Business: How Does Amoritzation Affect a Balance Sheet?: http://smallbusiness.chron.com/amortization-affect-balance-sheet-37876.html

McIntosh, K. A. (2015, January 31). Ehow. Retrieved from Ehow.com: http://www.ehow.com/info_8079234_expenses-patent-ing.html Rojas, E. (2015, February 7). Ehow.com. Retrieved from GAAP Rules on Amortization: http://www.ehow.com/info_12072228_gaap-rules-amortization-capitalizationcosts.html uspto.gov. (n.d.). Retrieved January 2015, from The United States Patent and Trademark Office: http://www.uspto.gov/inventors/patents.jsp#heading-5 YCharts. (n.d.). Retrieved February 6, 2015, from Ycharts.com: http://ycharts.com/glossary//r_and_d_expense