Since 1973, the Financial Accounting Standards Board (FASB) has been designated as the organization in the private sector for establishing standards of financial accounting and reporting. These standards govern the preparation of financial reports.

In July 2001, the FASB approved new accounting standards that have significant consequences for the valuation of a company’s goodwill and other intangible assets such as intellectual property. Specifically, FASB Accounting Statement 141 (Business Combinations) eliminates the pooling of interest method for booking mergers. FASB Accounting Statement 142 (Goodwill and Other Intangible Assets) alters the bookkeeping for goodwill and intangible assets.

The new standards underscore the importance of intellectual property assets in general, and more specifically in the acquisition process. In the past, companies simply aggregated goodwill and other intangibles into one line item and amortized it all together. Therefore, there was little need to carefully assess the actual value of intellectual property assets. Going forward, however, a company is required to identify patents, trademarks, trade secrets, licensing agreements and other intellectual property as intangible assets, separate and apart from its goodwill. While goodwill will no longer be amortized, certain intangibles must be.

For a company that considers its intellectual property to be a valuable asset, it is imperative that it accurately report its value. Many companies, however, may not be prepared to provide precise accounting of their intellectual property assets. At a minimum, a company must identify and index its intellectual property assets, outline a strategy to exploit the value of the assets and then begin the process of assigning value to each asset.

Failure to value intellectual property assets properly has its consequences. For example, a company might want to undervalue its intellectual property assets as a means of avoiding amortization in connection with an acquisition, but undervaluing the assets could trigger an investigation by the SEC or limit a company’s ability to recover damages in the event of a future infringement or dilution litigation.

While it is too soon to predict all the consequences of the new accounting standards, it is already apparent that the new standards will require companies to address the increasing importance of their intellectual property assets.