How to Capitalize a Trademark for Accounting Purposes
The trademark is an intangible asset that can be capitalized on your balance sheet. Capitalizing a trademark happens through the purchase of an existing trademark or through the registration of a new trademark. An existing trademark acts as an asset with perceived value. Registering a new trademark is only valued at the registration costs themselves.
Intangible assets do not have any physical attributes but they still have value for a business. A trademark is a major intangible asset, in some cases. The brand association with trademarks is powerful, when the trademark has been promoted, marketed and advertised en mass. The value of the efforts remains attached to the trademark itself, as it delivers immediate market value for the purchasing party. Other common intangible assets include patents and copyright. All three asset types hold legal value that is capitalized through accounting processes. Owning a trademark, patent or copyright grants the power to decide how the property is used, while collecting off each transaction associated with the property.
Only the fees directly associated with the new registration are capitalized, as the Trademark does not yet hold market value. The registration fees and legal fees associated with registration are all capitalized. If the trademark registration is challenged in court, those legal fees are also applicable to capitalization. You cannot capitalize the fees associated with marketing and promoting the trademark. While those expenses stand to increase the overall value of the trademark, they are operational business expenses that do not translate to a balance sheet. The value of the trademark is determined separately for a sale.
Purchasing a business with a trademark comes with the fair market value of the trademark itself. Determining the value is typically done through a third party valuation that asses market value to determine what the trademark would sell for as a stand alone in the market. The value is also influenced by the life of a trademark. The trademark has a 10-year lifespan from the initial registration. The business can renew this trademark every 10-years to retain the exclusive use. If the trademark filing lapses, it enters the open market and the value is diminished. Determining value based on the life-cycle or intended length of use works on an Amortization model. The trademark value is reduced each year based on the life. If you purchase a 10,000 dollar trademark with a fresh 10-year period, it is amortized at 1,000 dollars per year.