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Archived updates for Wednesday, July 07, 2004

WIPO: Accounting and Intellectual Property

According to an article in the May/June 2004 issue of WIPO Magazine, concerns raised by the U.S. Financial Accounting Standards Board (FASB) led to a revision of the way in which IP is treated in Mergers and Acquisitions under Financial Accounting Standards (FASs) 141 and 142. For FAS 141, the “pooling of interest for business combinations,� where the balance sheets of two merging companies were simply added together, was replaced with a "purchase method" requiring the identification of each single acquired asset and the determination of its "fair value." FAS 142 abolished the amortization of goodwill so that companies now need to review, on an annual basis, their acquired IP and conduct an "impairment test."

In contrast to such "purchased IP," internally-generated IP is treated as an immediate expense that does not appear on the balance sheet. Therefore, from an accounting perspective, internally-generated IP is considered to be worth nothing, while IP that changes hands may be worth hundreds of millions of dollars. Conversely, a company that decides to sell or license internally-generated IP appears to create profits virtually out of nothing because the IP that generated these profits does not appear as an asset on the balance sheet.
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