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US GAAP—Issues and Solutions for the Pharmaceuticals and Life Sciences Industries
39.Patent protection costs
Relevant guidance
“Assets are probable future economic benefits obtained or
Research and development
Company A has a registered patent on a currently marketed drug.
Company B copies the drug’s active ingredient and sells the drug
during the patent protection period. Company A goes to trial and
is likely to win the case, but has to pay costs for its attorneys and
other legal charges.
controlled by a particular entity as a result of past transactions or
events [CON 6, par. 25].”
…the legal and other costs of successfully defending a patent
from infringement are “deferred legal costs” only in the sense
that they are part of the cost of retaining and obtaining the future
economic benefit of the patent [CON 6, par. 247].”
If defense of the patent lawsuit is successful, costs may be
capitalized to the extent of an evident increase in the value of
the patent. Legal costs which relate to an unsuccessful outcome
should be expensed [AICPA TPA Sec 2260].
Should legal costs relating to the
defense of pharmaceutical patents
be capitalized? 
Capitalizing or expensing patent defense costs has evolved into an accounting policy decision. Generally in the pharmaceuticals
and life sciences industries, patent defense costs are not viewed as enhancing the value of a patent. In cases where it is believed that
the defense of the patent merely maintains rather than increases the expected future economic benefits from the patent, the costs
would generally be expensed as incurred.
Companies could capitalize external legal costs incurred in the defense of its patents when it is believed that a successful defense is
probable and that the value of the patent will be increased by virtue of a successful outcome; in that case, costs may be capitalized
to the extent of the increase. Capitalized patent defense costs are amortized over the remaining life of the related patent.