Trademarks are federal grants that allow businesses to exclusively use specific words, names, symbols and logos. Since exclusive use of the trademark benefits the company, trademarks are counted as an asset, known as an "intangible" asset. How the costs associated with a trademark are treated in a company's financial reports is governed by FASB rules -- part of the US Generally Accepted Accounting Principles -- and will depend on how the trademark was developed, its useful life and whether the fair market value of the trademark fluctuates.
Internally Developed Trademarks
If the trademark was developed internally, the value of the asset is limited to fees directly related to securing the legal registration of the trademark -- such as all registration expenses -- and all legal fees related to defending against claims by other businesses claiming the trademark as theirs. Expenses associated with growing the value of the trademark would be excluded from the trademark asset value calculation. Advertising and other assorted marketing expenses are examples of outlays that would not be included in a trademark asset.
Read More: How to Trademark an Abandoned Trademark
For trademarks acquired through the purchase of a product-line or business, the intangible asset is recorded at its fair value. Fair value is how much something would cost if someone sold the asset to an unrelated party, and neither party was under any compulsion to enter into the transaction. Since the trademark was acquired through a purchase, the owner can normally just record the trademark asset at the price paid to acquire it.
An intangible asset's useful life is how long it takes for its value to deplete. In terms of a trademark, the useful life is defined in terms of how many years the business has the legal right to its exclusive use. Trademarks grant a business exclusive use for an initial term of ten years, but a business can continuously renew the grant for additional ten-year terms. Until a business definitively decides to let the trademark lapse, the asset will not have a useful life because the business can protect the item indefinitely.
If a trademark has a definitive useful life, it will need to be amortized. Amortization is the conversion of the trademark asset’s value into an annual expense, which reflects the asset's loss of value over time. To determine how much to amortize the trademark by every year, take the original value of the copyright and divide by the remaining years of the trademark’s term. The result is the annual amortization expense. To amortize the trademark, decrease the trademark's asset value by the annual amortization expense. So if you have a new trademark you are only going to keep for one term, and it is worth $1000, the value of the asset would decrease $100 every year over 10 years.
If the value of a trademark on the owner’s books is greater than the current market value of that trademark -- for example, if the current value is less than what the owner paid to acquire the trademark -- the owner must decrease the intangible asset's book value to match its current value. This process is called impairment. FASB requires that a business test every year to determine if any of its intangible assets need to be impaired. The test is to simply compare the value of each trademark, as it is listed in the company's financial records, to the current market value of the trademark. Once a trademark is impaired, its value cannot be increased, regardless of market conditions.
- Accounting for Management: Generally Accepted Accounting Principles Definition and Explanation
- Financial Accounting Standards Board: Facts About FASB
- Businessdictionary.com: Definition of Intangible Asset
- USlegal.com: Trademarks Law & Legal Definition
- Financial Accounting Standards Board: Statement of Financial Accounting Standards No. 142 – Goodwill and Other Intangible Assets
- Businesstown.com: Amortization Definition
- CliffsNotes: Accounting Principles I – Intangible Assets
- Financial Accounting Standards Board: Statement of Financial Accounting Standards No. 141 – Business Combinations
- Business Dictionary: Fair Market Value Definition
- Business Dictionary: Asset Definition
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.