Trademarks represent a crucial category of intangible assets on corporate balance sheets. While physical assets are straightforward to value, the accounting treatment of trademarks requires specialized expertise and adherence to established reporting standards.
Trademark accounting has evolved significantly since the introduction of major standards like FASB ASC 350 (Intangibles — Goodwill and Others). These guidelines define how companies must record and report trademark-related costs in their financial statements, whether developed internally or purchased from another entity.
The proper classification of trademark expenses directly impacts financial reporting and company valuations. Understanding how to capitalize both new and purchased trademarks is essential. Mastering these fundamentals, along with the criteria for asset recognition, forms the foundation of effective trademark accounting.
What is an Intangible Asset
When discussing business assets, not everything fits in a warehouse or sits in a parking lot. Intangible assets carry significant financial weight without taking up physical space. Patents, trademarks, copyrights, and brands all fall into this category — they’re valuable, but you can’t touch them.
A well-known logo or brand name might not sit on a shelf, but it could be worth millions, or even billions, as demonstrated by the brand value of the biggest companies in America. These non-physical assets drive significant value, even though putting an exact dollar figure on them can be tricky.
Companies can build their own intangible assets from scratch or buy them from others. These unique elements give businesses competitive advantages and often become central to their operations and identity, despite their invisible nature.
How to Capitalize a Trademark for Accounting
Recording a trademark as a business asset follows a reasonably straightforward process, but it’s strongly recommended that you leave this process to a trained accountant.
That said, here’s how it works: Instead of treating the costs as immediate expenses, you’ll need to list them as an intangible asset on your balance sheet. This approach makes sense since trademarks usually provide value for many years.
Calculate total costs
- Add up legal fees
- Include registration charges
- Count trademark creation or acquisition costs
Determine the useful lifespan
- Assess if the trademark has a limited or indefinite useful life
- Consider renewal options
- Evaluate the expected period of economic benefit
Record on balance sheet
- List the total cost as an intangible asset
- Include all direct costs
- Document the date of acquisition\
Handle amortization (if applicable)
- Calculate the yearly expense for limited-life trademarks
- Spread the cost over the useful life
- Record amortization on your income statement
For trademarks with indefinite lives, you’ll skip the amortization step but will need to test for value drops each year. This helps ensure your books accurately reflect the trademark’s worth over time.
Criteria for Capitalizing a Trademark
Not every trademark qualifies for capitalization on your books. To record a trademark as an asset, it needs to meet several specific requirements.
- Identifiability: Your trademark must stand on its own as a distinct asset, even if it’s connected to your broader brand identity.
- Legal Ownership and Control: This means having the right to decide how the trademark is used and who can use it.
- Future Economic Benefits: Whether through increased sales, premium pricing opportunities, or cost savings.
- Clear Documented Costs: All expenses related to buying or developing the trademark must be properly and reliably documented.
These requirements help maintain accurate financial records and ensure your trademark qualifies as a valuable business asset worth capitalizing.
Capitalizing a New Trademark
When you’re getting ready to capitalize a new trademark, start by gathering all your costs. This includes application fees, attorney charges, design costs, and direct expenses tied to creating and registering your trademark.
Make a detailed record of each expense:
- Legal consultation fees
- USPTO filing fees
- Design and artwork costs
- Search fees for trademark availability
- Registration costs
On your balance sheet, list these combined costs as an intangible asset. You’ll find this category right after your fixed assets. The entry might look like this:
Debit: Trademark (Asset) $X,XXX
Credit: Cash $X,XXX
If you plan to use the trademark for a specific time, you’ll need to amortize the cost. For example, if you spent $10,000 on a trademark you’ll use for 10 years, you’d record $1,000 in amortization expenses each year.
Keep all your receipts and documentation as they support your capitalization decisions and come in handy during audits. Remember to review your trademark’s value periodically and record any significant changes.
Capitalizing a Purchased Trademark
Capitalizing a purchased trademark starts with the purchase price — that’s your baseline value. Add up related costs like legal fees, transfer charges, and other expenses directly tied to acquiring the trademark.
Record the total cost as an intangible asset on your balance sheet:
- Purchase price
- Legal fees
- Transfer costs
- Due diligence expenses
- Registration transfer fees
Decide if your purchased trademark has a finite or indefinite life. This affects your amortization approach. For trademarks with a set lifespan, divide the total cost by the expected years of use.
Keep solid records of the purchase agreement and related documents as they prove the trademark’s value and ownership transfer.
Wrapping Up
For almost every business, a professional trademark accountant will be an invaluable (but not intangible) asset in your trademark accounting. These experts know how to make your assets work for you, as well as file an accurate return.
Proper trademark accounting helps you maintain accurate financial records and make informed business decisions. From initial registration to ongoing maintenance, each trademark-related expense needs careful tracking and appropriate categorization. While some costs get expensed immediately, others become valuable assets on your balance sheet.
Before you start the trademark application process, use our premium Trademark Research service to check for potential conflicts and assess your registration chances. Run your trademark search today.
