A patent can last 20 years. That doesn't mean its value will.

What founders and investors should understand about intellectual property, accounting value and the commercial risks behind a patent portfolio.

A company develops a promising technology, secures a patent and records the associated costs as an intangible asset in its financial statements. Its accounting policy amortises those costs over the patent's expected useful life, potentially spanning 20 years.

On paper, the arrangement appears straightforward. But behind that accounting treatment lie three fundamentally different questions: what is the patent worth on the balance sheet, what does it legally protect, and how much commercial value can the business actually extract from it?

Confusing those questions can lead founders and investors to misunderstand the value of one of a technology company's most important assets.

A patent's accounting value is not its commercial value.

Under Australian Accounting Standard AASB 138, qualifying intangible assets may be recognised at cost and subsequently measured under the cost model, less accumulated amortisation and impairment losses.

Amortisation is essentially the systematic allocation of an asset's recognised cost over its expected useful life. If a company recognises $200,000 in patent-related costs and determines that the asset has a useful life of ten years, straight-line amortisation would generally result in an annual expense of $20,000, assuming a nil residual value.

But that accounting calculation tells us relatively little about what the patent might actually be worth to a prospective purchaser, competitor or investor.

A patent recorded at a relatively modest carrying value could support a technology generating substantial profits. Conversely, a patent with high capitalised costs might ultimately provide little commercial advantage if the underlying technology fails to attract customers or becomes obsolete.

Accounting value and commercial value measure different things.

The distinction matters most when founders use their intellectual property portfolio to support a valuation or investment proposal. The existence of a recognised intangible asset does not establish that the business possesses an equally valuable competitive advantage.

A 20-year patent does not necessarily have a 20-year economic life.

In Australia, a standard patent generally has a maximum term of 20 years from its relevant filing date, subject to renewal requirements. Certain pharmaceutical patents may qualify for an extension.

But the legal duration of a patent is not necessarily the period over which it will generate economic benefits.

A patented technology may become commercially obsolete long before its legal protection expires. Competitors may develop alternative solutions, consumer preferences may shift, or the relevant market may never develop as anticipated.

For accounting purposes, an intangible asset's estimated useful life must reflect the period over which economic benefits are expected to arise, subject to the limits imposed by the underlying legal rights. A patent should not automatically be amortised over 20 years merely because that is its maximum statutory term.

Australian accounting standards also require the useful life and amortisation method of finite-life intangible assets to be reviewed at least annually. Where circumstances change, the accounting estimates may need to change accordingly.

The more interesting implication is that the legal life of intellectual property and its economic life can diverge substantially.

A granted patent is not a guarantee of meaningful protection.

Consider a technology company that holds a granted Australian patent but has additional patent applications pending in other jurisdictions.

The company may legitimately describe its patent portfolio as an important part of its competitive strategy. However, the portfolio's commercial strength depends on much more than the number of patents granted or applications submitted.

A patent protects what falls within the scope of its legally operative claims. Those claims may ultimately be narrower than the invention described in the application or the commercial product developed by the company.

A patent application may also be refused, opposed, narrowed during examination or subsequently challenged. Even where a patent is granted, competitors may develop alternative technologies that achieve similar commercial outcomes without infringing its claims.

This creates an important distinction between owning a patent and possessing a commercially defensible market position.

A patent can be legally valid without being commercially decisive.

For investors, the appropriate question is not simply whether a company owns registered intellectual property. It is whether those rights meaningfully protect the features of the technology that customers value and competitors would otherwise seek to reproduce.

Patent searches reduce uncertainty. They do not eliminate it.

Technology companies frequently conduct patent searches before filing applications or commercialising new products.

Those searches are valuable, but they have limitations. Patent applications are generally not published until approximately 18 months after their earliest priority date, meaning relevant applications may exist without yet being publicly searchable.

Search results also depend on the databases examined, the search methodology employed, and the information available. Some forms of potentially relevant prior art, including certain public uses or disclosures, may be particularly difficult to identify systematically.

Another distinction is worth recognising: searching for patentability is not the same as determining whether the company is free to commercialise it.

A company might obtain a patent covering an improvement to existing technology while still requiring a licence to practise an earlier invention protected by someone else's patent.

This is why freedom-to-operate analysis can be commercially important. Owning intellectual property rights does not necessarily mean a company can use the technology those rights described, without restriction.

Patent protection involves a trade-off between disclosure and exclusivity.

Patents operate on a bargain: an inventor discloses the invention to the public in exchange for a time-limited exclusive right, provided the legal requirements are satisfied.

Once a patent application is published, the disclosed technical information generally ceases to be secret. That disclosure cannot simply be reversed if the application is later refused or the patent ultimately provides narrower protection than expected.

This creates a consequential strategic decision for businesses developing proprietary technology.

Should the company disclose the invention to pursue patent protection, or would preserving certain information as confidential know-how provide a more durable competitive advantage?

The answer depends on the nature of the technology, how easily competitors could reverse-engineer it, the likely pace of technological change and the company's intended commercial markets.

An indiscriminate approach to patent filing can therefore be almost as problematic as failing to protect valuable intellectual property at all.

Impairment is where accounting assumptions confront commercial reality.

Accounting standards recognise that intangible assets may cease to deliver the economic benefits originally anticipated.

Under AASB 136, a company must assess whether there are indications that an asset has become impaired. Where the relevant requirements are met, the company may need to recognise an impairment loss because the asset's carrying amount exceeds its recoverable amount.

For a technology company, changing market conditions, technological obsolescence, unsuccessful commercialisation or adverse developments affecting patent rights may raise important impairment questions.

This is not simply an accounting technicality.

An impairment assessment can expose a more fundamental question about the business: whether the commercial assumptions supporting the original investment in intellectual property remain defensible.

The same discipline should apply to management decisions even where no accounting impairment is required. Founders should continually reassess whether the cost of maintaining, extending and enforcing their patent portfolio remains proportionate to the commercial value it provides.

The same principle extends beyond patents.

A company's financial statements may also recognise certain website development costs as intangible assets. However, not all website expenditure qualifies for capitalisation, and Australian accounting requirements generally treat websites developed solely or primarily to advertise the company's products or services differently.

The distinction illustrates a broader point: spending money on technology or intellectual property does not automatically create an asset that can be recognised in financial statements, much less one that possesses substantial independent commercial value.

The value depends on what the expenditure produces, the rights the company controls and the economic benefits reasonably expected to follow.

What should founders and investors actually examine?

For founders, the challenge is to ensure that intellectual property protection follows the business's commercial strategy rather than becoming an end in itself.

For investors, the challenge is to look beyond the number of patents, the accounting carrying value, and an impressive portfolio description.

A meaningful assessment should consider the ownership of the relevant rights, the scope and enforceability of patent claims, remaining protection periods, freedom to operate, geographic coverage, commercialisation prospects and the cost of maintaining or defending the portfolio.

Those considerations are interconnected. A patent with broad claims may be commercially valuable but expensive to enforce, while a narrower patent may provide meaningful protection if it covers a particularly important aspect of a successful product.

The aim is not necessarily to maximise the number of registered rights. It is to develop an intellectual property position that supports the company's commercial objectives and justifies the capital committed to protecting it.

A patent is an asset. Its commercial value is a proposition that must be tested.

A patent may last 20 years, but legal protection does not guarantee its value, and accounting for its costs does not establish it.

The most important questions sit at the intersection of law, finance and commercial strategy. Does the company control something genuinely valuable, can competitors lawfully reproduce the advantage it provides, and will that advantage remain relevant long enough to justify the investment?

For technology founders, answering those questions early can shape decisions about product development, fundraising, licensing and market expansion.

For investors, they help distinguish a company that merely possesses intellectual property from one that has built a defensible business around it.

The real value of intellectual property is not what a company has spent acquiring or developing it, but the commercial advantage it can lawfully and sustainably extract from it.