Accounting for Patents and Depreciation Charges on PPE

Financial Reporting 1
FINANCIAL REPORTING
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Financial Reporting 2
Issue 1: Accounting for Patents
Shadow Ltd has acquired two patents (HDBG459 and UBF871) for 541,000 dollars and
1,500,000 respectively. The Company is further preparing an application for a patent for a new
leather softening process having spent many years refining the process. The standard for
accounting for patent is AASB 138. Patent is an IA as recognized in paragraph 9 of the AASB
138. Accountant’s attention must be drawn to paragraph 10 of the AASB 138 to establish
whether patents meet IA’s definition (para 9). They must meet the identifiability, existence of
FEBs and control over a resource criteria to be IA (Kahn and Kinsolving 2010).
Based on AASB 138 paragraph 11-12, all the two items (HDBG459 and UBF871) and
the one being processed are identifiable and hence qualifies to be IA-patents. Paragraphs 13-16
of AASB 138 also explains control criteria of IA, and from the consideration of these chapters,
the three items qualify as IA-patent. Paragraph 17 of AASB 138 details the FEBs criteria which
is also met by the three items (Osinski et al. 2017).
The next step is to help the accountant with recognition and measurement. We draw his
attention to paragraph 18 and 21-23 of AASB 138. Paragraph 21-23 of AASB 138 gives the
criteria for recognition as it applies to cost incurred initially in acquiring HDBG459 and UBF871
and internally generating an IA (patent being processed for application) (Petrova 2011).
Since the acquired patents- HDBG459 and UBF871 are considered useful in Shadow
Ltd.’s leather handbag’ manufacturing, paragraph 21 recognition criteria is met since it is likely
that the expected FEBs attributable to them will flow to Shadow Ltd (para 21(a); and asset costs
can be reliably measured (para 21 of AASB 138 (b) as $541,000 and $1,500, 000 respectively.
Paragraph 22 of AASB 138 demands the accountant to fully assess likelihood of expected
upcoming economic benefits utilizing reasonable alongside supportive assumption which

Financial Reporting 3
denotes managers’ best estimate of series of economic situations which shall occur across useful
life of these three patents. Paragraph 23 of AASB 138 allows the accountant to use judgment in
assessing certainty degree attributed to FEBs flow attributable to utilization of these patents
based on available evidence at a point of initial recognition, providing higher load to outside
evidence.
We then focus attention on measurement of patents. The accountant should use
paragraph 24 of AASB 138 to measure patents HDBG459 and UBF871 at initial cost- 541,000
and $1,500, 000 respectively. In regards to the third IA (being prepared for patent application
for softening leather process), this IA is treated as an internally generated IA rather than acquired
(AASB 138, para.51).
It is often hard to evaluate if internally-generated IA succeeds for recognition because of
difficulty in identifiability alongside cost determination reliably (para 51 of AASB 138). The
accountant must ensure that besides compliance with general requirements for IA recognition
alongside initial measurements, he applies guidance and requirements in paragraph 52-67 of
AASB 138 to all internally-generated IA. Where the accountant is unable to differentiate
research stage from development stage of this internal project for creating the IA, he should treat
expenditure of this process as though it stood incurred only in research stage (para 54 of AASB
138). Having considered paragraph 54-67, it is concluded that process of preparing an
application for a patent for a new process of softening leather is arising from the development
phase and hence it is an IA which will get recognized as all the requirement in (para 57 of AASB
138) can be demonstrated.
This process qualifies to be in the development phase as outlined in paragraph 58 and 59
(d) of AASB 138. It is an example of a development activity since the Company is designing a