Hidden legal costs, including capitalized legal expenses

Whether or not responsible for them in their budgets, general counsel should track and report capitalized legal costs. The accounting treatment of a legal expense doesn’t whisk away the cost to the company. Checks written are real (See my post of July 30, 2005: capitalized legal expenditures; Nov. 25, 2006: stock options and how to account for their value; Nov. 9, 2008: more legal costs will have to be expensed; Feb. 25, 2009: capitalized (depreciated) patent costs; March 11, 2009: capitalized legal fees; Aug. 12, 2008: options expensed; and Nov. 9, 2008: deal costs must be expensed, not capitalized.).

A similar reasoning applies where business units pay for parts of patent costs. For example, a law department might absorb the costs of prosecution but once a patent is granted, the business unit that “owns” it pays for maintenance fees and other costs. Likewise for settlement costs. To shift a legal cost to some other budget line should not hide it.

I would go so far as to include legal fees paid by insurance companies. Premiums reflect those payments at some point to some degree. Capitalization, cost absorption, and cost transmutation make it harder to accumulate, report on and analyze what is truly the total legal expenditures by a company. If not done, however, a company cannot get an accurate read on the budgetary impact of its legal operations.

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