Trademark Accounting: Everything You Need to Know
Trademark accounting refers to the accounting treatment of costs associated with the development of a trademark in the company's books of account.3 min read
2. New Trademark Registration
3. Purchasing a Trademark
4. Types of Intangible Intellectual Assets
Trademark accounting refers to the accounting treatment of costs associated with the development of a trademark in the company's books of account. It also includes the process of determining the financial value of a trademark for presenting it in the balance sheet and other financial reports of the company.
How to Capitalize a Trademark for Accounting
Trademarks refer to registered logos, designs, and symbols used by a business to differentiate its products or its own identity from the products or identity of others in the market. A similar mark for services is called a service mark. However, a trademark can cover goods as well as services. A popular trademark among customers is often called a brand.
Trademarks are assets of a business. They are included under intangible assets in the balance sheet. For the purpose of accounting, a trademark is capitalized, meaning that it is recorded in the books of accounts as an asset through a journal entry.
The Financial Accounting Standards Board (FASB) rules, which are a part of the generally accepted accounting principles in the United States, govern the accounting treatment of trademark costs. The actual treatment of trademark costs in the financial reports of the company depends upon several factors like the method used for developing the trademark, useful life of the trademark, and fluctuations in its fair market value.
New Trademark Registration
- You should capitalize only those fees that are directly associated with the registration of a new trademark.
- You can capitalize both registration fees and the legal fees.
- If your trademark registration is contested in a court of law, you can also capitalize the legal fees associated with the case.
- You cannot capitalize the cost related to the marketing or promoting of your trademark. Even though these expenses increase the value of your trademark, they are considered operational expenses and therefore kept out of the balance sheet.
- For the purpose of sale, you should carry out a separate valuation of your trademark instead of relying on the book value.
Purchasing a Trademark
- When you purchase a trademark, whether standalone or along with a business, it comes at a fair market value.
- Valuation is usually done through a third party, which determines the market price of the trademark.
- The remaining life of a trademark also influences its market value. A trademark has a lifespan of 10 years from the date of registration.
- You must renew a trademark every 10 years in order to keep the registration active. Failure to file renewal within the stipulated deadline cancels the trademark and diminishes its value.
Types of Intangible Intellectual Assets
Despite the absence of any physical attributes, intangible assets hold a certain financial value for a business.
Trademarks prevent others from using a name, logo, or branding of your business. When promoted or advertised en masse, trademarks create a powerful brand association.
A trademark can be in the form of a logo, image, word, or phrase used to distinguish products or services of a business from those of others. It creates an instant identity among customers and establishes certain expectations regarding the quality and price of the product.
Trademarks often have a much higher financial value attached to them than what's shown in the financial reports of the company. This disparity comes from the fact that a business can only include the development cost of a trademark in its books of account. Moreover, all costs of development do not qualify for capitalization of a trademark. For example, the cost of creating a logo and the cost of advertising it are not eligible to be capitalized.
Usually, intangible assets are amortized over a period of their expected useful life. However, trademarks are not amortized since they retain their value forever. Nonetheless, you should reassess your trademarks annually. If the value of your trademark has impaired, compared to its value a year ago, you should readjust the market value of the trademark and record the difference as a financial loss.
A copyright protects you from unauthorized publishing or reproducing of your creative work like poetry, plays, lyrics, and drawings. It is an amortizable asset and included in the balance sheet of a business.
A patent is also an amortizable asset. It grants an exclusive right to commercialize an invention. Typically, a U.S. patent has a life of 20 years.
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