Patent reserves exclusive right for a company on any product or technology in the market for predefined period of time. It can be considered as a intangible assets of a company without having a physical form (Barth et al. 2016, p.342). On the other hand, depreciation can be determined as reduction on value of fixed assets from their original value on the basis of their usage until the value becomes zero. It is mandatory to use proper accounting rules and terms to treat patents as intangible assets in balance sheet because, it is seen that some accountants made mistakes during treatment of the patents. Same thing follows with the treatment of the depreciation also.
In this Assignment, Problems faced during treatment of both patents and depreciation of equipment and tools for firms in accounting process is being discussed with detailed solution.
Accounting Procedure for Patents under AASB’s
Patents can be categorized as Intangible Assets as per AASB’s 138 Act in compliance with IAS 38 (Zhou et al. 2016, p.11). Any Kind of invention or thought which can be used for benefit for an organisation, industry, etc is known as Patent. In general accounting terms, Patents is considered as any other intangible assets which follows the same rule for accounting process:
This Process includes recordation of initial asset cost of acquiring patent rights. Company needs to pay for documentation, registration, and other legal fees in order to file a patent application. If company purchase patents from another party they need to pay initial asset cost.
Usually owner of a patent uses straight line amortisation method in order to charge initial cost of usage for the patent over the useful life.
If a patent fails to provide longer value, then it is important to recognize an impairment to eliminate the carrying amount of the intangible assets.
If company not enjoying the use patent ideas for longer period, the same thing can be termed as derecognized and company needs to credit the balance in patents intangible assets account and debit the balance of accumulated amortization account. At the time of derecognition, company must ensure that the unamortized value of remaining part must be recorded as s loss in order to amortized the asset (Choi and Pyun, 2018, p.10).
Following points need to be kept in mind while doing Accounting for Patents:
Research and Development (R&D) Cost:
It is important for companies to ensure that the cost of research and development are not being included in the main cost of capitalized patent while developing the patent ideas. The main reason for not including R&D is inherent risk which offers future benefits to patent owner.
While doing accounting treatment for Patents, Accountants must ensure that the patents lifespan should be taken into account while calculating the amortisation of patents (Graham and Hegde, 2015, p.13). A patent must be amortized within the life span for successful use of those patent rights.
Generally it is seen that larger companies rarely records patent as assets unless purchasing the same from other entities. They usually do so because of their higher capitalization limits. If the cost of acquiring patent is too small then there is no need of treating as asset because it can be also treated as incurred expense.
Illustration of Accounting Scenario for Patents using appropriate Examples
In order to maintain appropriate accounting system for business firm, it is necessary to record patent’s value in accounts book. Maintaining proper entry for patent is very important for business transactions like bankruptcy period, dissolution of the firm, merger, and acquisition of the firm and infringement analysis (Fichtner and Michel, 2015, p.16).
Obtaining a proper value of invention is the main part used in computing the value of patents. As per issue regarding patent accounting, the valuation of patent depends upon the main cost and associated legal cost (Ashaolu, 2016, p.14). In the given scenario company acquired two patents - 1) Patent HDBG459 costing $541000 and 2) Patent UBF871 costing $1500000. In order to maintain these two patent in accounts book, company needs to value the appropriate cost and also need to ensure that if any additional application cost is included or not. However these two costs were need to apportioned on annual basis. For example, assume that both the patents has a lifespan of 15 years, the accountants need to record patent value by dividing the patent value with years of lifespan, the retrieved amount should be recorded on the books in the category of intangible assets until it holds no value (Fichtner and Michel, 2015, p.88).
According to the problem, calculation of patent value should be like this ($541000+1500000)/15= 136067 per year should be the patent value.
Understanding of Depreciation on Machinery or Tools and Equipments
As per AASB 116, Depreciation on Machinery or Equipment is determined as reduction of their original value on the basis of their usage lifespan till the original cost for machinery or equipment becomes zero(Aasb.gov.au, 2019). Depreciation on Fixed assets like machinery, tools and equipments are used for depreciation process to recover the cost from old ones, which will used for buying the same assets in future concern because of their limited life span.
The main objective of AASB 116 Act is to summarise accounting treatment for equipment. The Act provides accounting framework to the users of financial statements so that they can use the prescribed information in order to invest in plan and equipments. The main principles of this act are to determine the carrying and depreciation charges with recognition to impairment loss which are interrelated. (Aasb.gov.au, 2019)
There are certain information’s generally needed while calculating depreciation on assets are:
It is very important accountant to ascertain the data about the useful lifespan of assets in order to calculate depreciation.
After ascertaining the lifespan of given asset, deduct the salvage value with the original cost of the asset.
Divide the cost of asset which includes acquiring cost, transportation cost, set-up cost, training cost, etc.
After the calculation the resulting value would be the book value of the asset.
Let say for an example, the annual depreciation on equipment with lifespan of 10 years, a salvage value of $2000 and a cost of $100000 is ($100000-$2000)/20 = $4900.
Suppose if an asset is acquired in the middle year, Hence, the annual depreciation cost get divided by the number of years from purchase of asset. Let say for an example if any asset purchased in June, the first year depreciation would be ($4900/12*6)= 2450. There are three most common methods used during computation of depreciation. For Example= 1) Straight Line Method or Simple Method, 2) Unit production Method and 3) Double-declining balance method.
Summarization of Correct Accounting Options for Depreciation of Company Equipments
In the terms of accounting, generally depreciation is source of allocating cost of an asset over its beneficial life. In order to calculate depreciation, it is very important to choose best depreciation method according to the business requirements (Krejčí et al. 2015, p.16). In general there are three most popular methods used in depreciation calculation.
According to given scenario of issue 2, The Company should use more aggressive method of depreciation to increase the cost of depreciation. As the company using new technology equipments, it should use accelerated depreciation approach which generally charges higher depreciation starting from the first year followed by the subsequent years (Dutfield, 2017, p.45). The use of accelerated depreciation approach would be more realistic in reflection for taking benefits while using assets. Company can use two alternative depreciation method which best compliments the given requirement of the company for increasing its cost of depreciation on equipment. These two alternatives are:
Company can use straight line (simple method) method of depreciation in order to increase the cost of depreciation demanded by company directors. It is simple method most commonly used by many firms. Generally straight line method includes charging of same amount of depreciation till the lifespan of asset. It gives constant impact to the revenue and asset cost in every accounting period over its useful life. Suppose if company charges higher rate of depreciation, then it will automatically increases the depreciation cost which leads to reduction in book value of asset and it will accelerate the purchasing power of the company for buying equipment (Ashaolu, 2016, p.08).
To increase the cost of Depreciation Company can use the Double-declining balance method. This method is suitable for given company because it follows the general rule of depreciation pertaining from higher amount of chargeable depreciation in earlier years of an equipment lifespan to lower amounts during later years of the equipment lifespan. To calculate amount of depreciation, simply multiply the amount of depreciation using straight line method by 2. It means doubling the straight line depreciation amount.
In this assignment it can be concluded that proper solution of two different scenario of a given company is being evaluated in detail. The explanations used in both issues best satisfy the results. It is seen that problems regarding entry of patents to the business accounting system is being efficiently solved according to the requirements of the company. It also analysed the demand of directors regarding increasing of depreciation charges is being efficiently obtained with the proper illustrations.
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