Is Your Business Accurately Reporting All of Its Assets?
A Balance Sheet is supposed to accurately reflect the value of a business – its Assets and its Liabilities – because its Assets less its Liabilities is Stockholder Equity – what the company is worth.
There are many instances in which key corporate assets are NOT included in the company’s Balance Sheet. Not because of any skull doggery or even any incompetence, but because of the unusual process in which these assets become assets. We are talking about patents, the fair market value of which should be included under Intangible Assets, but often are not. And therein lies a tale…
A business comes up with an idea for a new technology. It’s Chief Technology Officer (CTO), its VP of Engineering, its Marketing Director, or any other employee at the company from the executive suite to the loading dock, comes up with an invention that the company could develop into a new product or use to improve or enhance a current product or service. What does a smart company do? It files a patent application for the new technology.
The company most likely engages a patent attorney to file the application, and two or three years later – current patent pendency is about 30 months – a patent is granted by the U.S. Patent and Trademark Office (USPTO). Congratulations. While this is a significant event for the business, here is what does not occur: There is no accounting transaction that records the acquisition of that patent or the value of that transaction.
When a company buys a truck, or machinery for the plant, or shelving for the warehouse, or computers, or any other capital equipment, an accounting transaction occurs that takes funds out of Cash and adds the value of the acquired truck, lathe, shelving, or computers to the Equipment line under Property and Equipment. So as a company builds its assets in the usual course of conducting business, they automatically appear on the left side of the Balance Sheet under Assets along with the proper value for each based on what was paid to acquire the asset.
If a company buys a patent – we hope it buys the patent through IPOfferings from one of our clients – an accounting transaction occurs that takes funds out of Cash and records the value of the acquired patent under Intangible Assets. The patent appears as an asset and its value is what was paid for the patent.
But – and this is a very common “but” – when a company does what we covered back in the third paragraph (go back and read it if you need to), there is NO pro-forma accounting transaction. The filing and legal fees for the patent application are not assets. They are expenses that are properly written off in the year they are expended. So, when that patent is granted, it is most definitely an asset, but it is not one that appears on the company Balance Sheet automatically as other assets do. This newly granted patent does not appear on the Balance Sheet because no accounting transaction occurred – like when the company buys a truck – and since there is no accounting transaction when the patent is granted, the patent has no value associated with it. This is a serious problem!
We come across companies all the time in all industries that have from a handful to dozens of active, granted patents that are not accounted for on the company’s Balance Sheet! And if the company tried to add them to the Balance Sheet, it would have no idea of the patent value.
Why is it important for a company to record its patents as assets? Because adding the value of its patents – and other intangible assets – to the Balance Sheet increases the company’s value. And a company with greater value has easier access to financing. It is much easier for a start-up business to raise venture capital or other financing if the value of its patents is reflected on its Balance Sheet. Adding the value of its patents to the Balance Sheet of a publicly held company can do wonders for the company’s stock price. And let’s face it, any company’s Balance Sheet should accurately reflect all of a company’s assets as well as its liabilities.
A business that has home-grown patents, but those patents are not listed under Intangible Assets on its Balance Sheet, needs to have a professional patent valuation performed for each of those patents so their value can be accurately reflected on the company Balance Sheet.
It is not uncommon for a business to find itself with patents is does not need. The focus of the company’s product line has changed, or it filed for a patent on an invention the company never commercialized, and the business now has a granted patent that is does not need. If a company decides to put up patents for sale, it needs to know the value of those patents.
Alec Schibanoff is Vice President of IPOfferings LLC, a leading patent brokerage firm and provider of patent valuation and IP consulting services.