Is a Trademark an Intangible Asset? Understanding Trademark Valuations

Intangible assets are assets without physical substance that can provide future economic benefit to a business. This class of assets includes a wide range of intangibles, among them patents, goodwill, copyrights, and trademarks. In this article, AVGI experts discuss the valuation and accounting treatment for trademarks and how that can impact the overall value of the company.

What is a Trademark?

A trademark is a symbol, logo, name, or phrase that identifies a business, product, or service, differentiating it from other similar businesses in that field. Trademarks are a type of intangible asset that contribute to the business’ brand perception and can add significant value to the business. The reason for this is that customers come to associate a brand’s logo or trademark with the brand’s reputation, loyalty, and reliability, increasing the brand’s popularity and revenue.

Using a particular logo, name, phrase, or symbol to refer to your business is enough to make you a trademark owner. However, your legal rights and protections for your trademark are very limited unless you register your trademark with the USPTO (US patent and trademark office). A non-registered trademark owner can enforce their trademark exclusivity in their direct geographic location; a registered trademark has nationwide trademark protection, affording the trademark more exclusivity and a potentially higher value.

Many people mistakenly believe that owning or registering a trademark gives the business the exclusive legal rights to that word, phrase, or logo across the board. However, the trademark only protects the use of that particular word, phrase, or logo in connection to that business sector. For example, a nail salon that owns or registers the trademark phrase “nailed it!” can only legally prevent other nail salons or similar beauty services from using the same phrase for their business. They cannot, however, prevent a carpenter’s service from using the same phrase based on trademark infringement, as carpentry is a distinct business sector from beauty.

The value of a trademark is generally based on its ability to generate future economic benefits. This is impacted by its uniqueness, exclusivity, and brand perception. A business with an original, exclusive, and recognizable trademarked logo or phrase will find that the trademark can add significantly to the business’s overall value. Intangible assets are recognized and measured based on their ability to generate economic benefits. The value of intangible assets is often significant and can impact a company’s balance sheet and financial statements.

Trademarks vs Other Intellectual Property

Trademarks are a distinct category of intellectual property with unique legal treatment, protections, and registration process. Trademarks are different than patents and copyrights, which are other types of intellectual property. There are several differences between these often-confused IP categories. Trademarks are specific symbols, words, phrases, or logos associated with a particular business in a specific industry. Patents afford legal protection to technical inventions such as machinery, chemical formulas, and the like. Copyrights legally protect creative works such as literature, motion pictures, art or poetry from being copied.

Sometimes categorizing a type of intellectual property can be complicated. Therefore, the USPTO has an IP identifier to help IP owners determine what type of IP they have and what steps to take to protect the IP. It’s important to correctly identify what type of IP you have in order to protect it properly from a legal perspective and value it accurately for financial reporting, tax, and internal business purposes.

Accounting for Trademarks

The accounting treatment for intangible assets differs from that of tangible assets. In trademark accounting, trademarks are accounted for as intangible assets with a finite useful life. Trademark costs, like legal fees and registration costs, are capitalized and amortized over the trademark’s useful life, which spreads the cost of having and upkeeping the trademark registration. Trademark amortization is typically done using the straight-line method, however, in some special cases, another amortization method may more accurately represent the decrease in trademark value.

Role of Accounting Standards

Accounting standards, such as IFRS and GAAP, guide companies on how to treat trademarks and other intangible assets in accounting. Conforming to accounting standards help ensure consistency and transparency in financial reporting across companies. This uniformity is particularly important when one company wishes to acquire another company’s intangible assets, such as in a sale of assets. When both companies adhere to the same accounting guidelines, it facilitates a smoother sale and transition of assets, as the accounting is simple, straightforward, and easily transferable.

Accounting standards require companies to recognize and measure intangible assets based on their ability to generate economic benefit to the company, which can in many cases be a significant contribution. This can have a large impact on the company’s financial statements and tax liability, which is why it is crucial to accurately assess the value of intangible assets like trademarks.

Trademarks in Financial Reporting

All of a company’s intangible assets, including trademarks, are reported on a company’s balance sheet at their carrying amount. The carrying amount is the cost of the asset minus accumulated amortization. In addition, trademarks are reported on the company’s income statement as an expense. Accurately reporting the value of the trademark on financial statements provides stakeholders and potential investors with information about how a company’s intangible assets impact the business’s value.

Conclusion

Trademarks are a type of intangible asset that can provide significant value to a business. Accurately assessing the value of a trademark is essential to precise financial reporting, calculating the company’s tax liability, and preparing for a sale of assets, among other purposes. Abrams Valuation Group, Inc. has over 30 years of experience in accurately valuing businesses and intangible assets. Get in touch today to ensure a precise and empirical valuation for your company’s trademark.