Quantifying the Value of Goodwill and Patents
Goodwill and patents are intangibles that may be assigned a value for accounting purposes.
Goodwill is used in relation to company acquisitions, to express the difference between the book value of a company and the amount actually paid for it. Patents can be bought outright or developed in-house. Establishing the value of both these intangibles enables companies to include them on their balance sheets. Inevitably their value will be subjective, based on opinion and judgment.
Usually, financial statements make no mention of goodwill—but if one company acquires another, goodwill is recognized as an intangible asset and included on the balance sheet. It is calculated as the purchase price of the newly acquired company, minus its net tangible assets:
Suppose one business buys out another for $90 million, and the value of the newly acquired company's net assets is $60 million. As the amount paid for the company exceeded its book value by $30 million, the extra will appear on the balance sheet under "goodwill." Typically, the reasons behind such a difference are factors like a high-profile brand, high productivity, staff expertise, or a good customer base—anything that gives the company a strong position in the marketplace.
The value of a patent may be the amount paid to its creator, or the cost of internal development. It's accepted practice to spread the cost—not necessarily across the 17-year life of a patent in the U.S., but across its "useful life." This is the period for which the patent is deemed to be of economic value to the company.
Example:
Suppose a company buys a patent that is already seven years old. The company considers that the patent only has five years of "useful life" left, so it spreads (amortizes) the cost across five years, rather than the seven that remain before the patent expires.
- Different countries may have varying accounting procedures for goodwill, which needs to be addressed if dealing with companies based abroad.
- The rules do change—for example, goodwill used to be amortized across 40 years in the U.S.
- The development of a patent may take a number of years—so its cost may bear little relation to the income it generates.
Patent Café: www.patentcafe.com
United States Patent & Trademark Office: www.uspto.gov