Accounting for trademarks

June 14, 2015

Trademarks may be important for businesses nowadays. Customers are often ready to pay more for the recognized quality of branded goods that in turn stimulates companies to invest more in acquisition and development of trademarks. This article discusses the initial recognition, measurement and accounting for trademarks.

1. Internally generated trademarks

A trademark is the result of intellectual work that provides the creator the exclusive right to enjoy its use.

A trademark may be a sign capable of distinguishing goods of one company from those of another, such as a word, logo, design, symbol, or sound. Even though the same differentiator for services is called a service mark, a trademark can refer to both goods and services. If a trademark is well-known among customers, it may be referred to as a brand.

Trademarks surely bring economic benefits to an entity in the form of increased revenues or customer loyalty. Therefore, trademarks are classified as assets.

If a trademark is generated internally, a company should officially register it through the United States Patent and Trademark Office (USPTO), which can take from almost a year to several years. Importantly, not all expenses for the trademark creation are allowed to be capitalized. The initial value of an internally created trademark is limited to the direct registration and legal fees only (or some other fees directly attributable to securing the trademark from competitors).

Let us assume that Company ABC (fictitious entity) has created a trademark for one of its new products. The registration and legal fees amounted to $325 and $1,000, respectively. The following entries should be posted in accounting records:

1) The documents for the trademark registration were filed and respective fees were charged:

Account Titles

Debit

Credit

Construction in Progress

$1,325

 

     Accounts Payable

 

$1,325

2) The legal fees were paid:

Account Titles

Debit

Credit

Accounts Payable

$1,325

 

      Cash

 

$1,325

3) The company successfully registered the new trademark:

Account Titles

Debit

Credit

Intangible Assets

$1,325

 

      Construction in Progress

 

$1,325

All other expenses related to the trademark creation, such as design, advertising, promotions, payroll and others are not permitted to be capitalized; they are expensed in the period when incurred. The approach is reasonable, as it is difficult to distinguish between the current activities of any company and efforts made to create or enhance brand awareness. For instance, if Company ABC launched a specialized promo campaign costing $775 by providing free samples, the cost would be reflected in the accounting records as follows:

 Account Titles

Debit

Credit

Marketing and Sales Expenses

$775

 

     Inventory - Finished Goods

 

$775

A trademark owner can franchise its rights for a brand to a franchisee. For instance, Company ABC may franchise its brand name to overseas markets with further control of its proper usage and adherence to the company quality standards. A franchise agreement can stipulate that the rights for the trademark remain with the owner and accounting for the generated income is much alike the lease agreement. Generally, the trademark owner gets the fixed fee, royalty, or both from the franchisee.

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