Valuing Patents, Licenses & Nongoodwill Intangible Assets

  • Contributors:
  • Eric Larson
Image of valuation professional calculating value of intangible assets

Occasionally, medical manufacturers will acquire patents or licenses in developing new technology. When valuing these patents, licenses, or other intangible assets for tax purposes, it’s important to be aware of the accounting guidance.

FASB Accounting Standards Codification 350, “ASC 350” is the authoritative statement concerning (1) the accounting for the acquisition of intangibles (except for those acquired in a business combination), and (2) the manner in which intangibles should be accounted for, subsequent to initial recognition.

Nongoodwill intangible assets include:

  • Patents
  • Licenses
  • Trademarks
  • Copyrights

According to the technical guidance in ASC 350, intangible assets should be recorded at their cost to the acquiring entity. In the event a group of assets are acquired, the cost of the acquisition should be allocated to the individual assets based on their relative fair market value.

Once the value of the intangible asset has been recorded, the subsequent accounting is based on the useful life to the company. The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity.

When determining the useful life of an intangible asset, the following factors should be considered:

  • The expected use of the asset
  • The expected useful life of a related asset or group of assets
  • Legal, regulatory or contractual provisions that could limit its useful life
  • Effects of obsolescence, demand, competition and other economic factors
  • The level of future expenditures required by management to obtain the expected future cash flows from the asset

If none of these factors limit the useful life of the intangible asset to the company, then the useful life shall be considered indefinite.

An intangible asset with a finite life should be amortized, whereas an intangible asset with an indefinite life shouldn’t be amortized. It should be tested for impairment annually.


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