Trademark Accounting: Everything You Need to Know

Trademarks are symbols, logos and designs representing the goods or services associated with them. Trademarks are used by a company or business to identify its brand or entity. Trademark accounting means the accounting treatment of costs or expenses related to trademark development in a company’s books of account. It includes determining the trademark’s financial value for presenting it in the company’s balance sheet and other financial reports.

Trademarks are included in the balance sheet as intangible assets of a company or business. The trademark cost is capitalised or recorded as an asset on a company’s books of accounts using a standard journal entry. There are doubts that a trademark account is which type of account in India. A trademark is a fictitious asset; thus, it is a real account.

Trademark as an Intangible Intellectual Asset

All intellectual property rights (trademark, patent and copyright) are a company’s intangible assets. Intangible assets have a financial value for a business despite the absence of physical attributes of tangible assets, such as machinery, land, etc.

Trademarks have a higher financial value attached to them than reflected in a company’s financial reports. The differences in the actual value and the value shown on the financial reports are because businesses can only include the trademark development cost in the books of accounts.

Generally, intangible assets are amortised over a period of their expected life. However, trademarks are not amortised as they retain their value forever. But a business should reassess its trademarks annually. When the value of its trademark has impaired compared to its value in the prior year, the business should readjust the trademark’s market value and record the difference as a financial loss.

How to Capitalize a Trademark for Accounting?

Trademark registration prevents other entities from using the business’s name, brand or logo. They create an identity amongst customers and build impactful brand associations when advertised or promoted by the company. They establish certain expectations about the price and quality of the product or service of a business and distinguish them from its competitors. 

A similar mark used for the services of a company is called a service mark. The accounting treatment of a service mark is the same as a trademark. Famous trademarks amongst customers are often known in the market as brands.

Trademarks are intangible assets of a business. A trademark is capitalised for the purpose of accounting. Capitalisation of trademarks or service marks means a business or company records them as assets in their books of accounts through a journal entry.

However, all development costs will not qualify for capitalisation of a trademark, such as a cost of creating the logo, and costs for advertising, are not eligible for capitalisation. Plus, a trademark which is internally generated cannot be capitalised. In India, the Accounting Standards (AS), generally accepted as accounting principles, govern the accounting treatment of intangible assets. AS 26 (Accounting for Intangibles) governs a company’s accounting treatment of trademark costs.

Criteria for Recognition of Trademarks

Acquired trademarks can be capitalised when it fulfils below criteria:

• Identifiability: The trademark should be identifiable and distinguishable. Even when an asset generates economic benefits only in combination with another asset, it is identifiable if the company can identify its future economic benefits flowing from the asset. The trademark must be distinguished from goodwill for it to be identifiable.
• Control: An entity controls an asset when it has the power to get the future economic benefits flowing from the trademark. The capacity of a business to control the future economic benefits from an intangible asset comes from the legal rights enforceable in a court of law. In the absence of any legal rights, it is tough to demonstrate control over the trademark.
• Future economic benefits: An entity should recognise an intangible asset only if there is a probability of attributing future economic benefits to the entity from the trademark. The future economic benefits flowing from a trademark can include cost savings, revenue from selling services or products or other benefits resulting from their use.
• Measurement of cost: The entity must be able to reliably measure the cost of trademarks. The cost of a trademark can be generally measured reliably when the trademarks are acquired separately. It is possible if the consideration is in cash or another monetary way. The cost comprises import duties, purchase price and other expenses directly attributable to trademarks. Directly attributable expenses are expenses incurred for making the asset ready to use.

New Trademark Registration

• A business should capitalise only those fees directly associated with trademark registration.
• A business can capitalise registration and legal fees.
• When a trademark registration is contested in a court of law, the business can also capitalise the legal fees associated with the case.
• A business cannot capitalise on the cost related to the promotion or marketing of the trademark. These expenses are considered operational expenses even though they help increase a trademark’s value. Thus, they are kept out of the balance sheet.
• The business should carry out a separate valuation of a trademark for the purpose of sale instead of relying on the book value.

Purchasing a Trademark

• When an entity purchases a trademark, either along with a business or on its own, it comes at a fair market value.
• When a trademark is acquired in exchange for securities or shares, it is recorded at the fair value of the securities issued or at the trademark fair value, whichever is more evident.
• Usually, a third party does valuation, which determines the trademark’s market price.
• The remaining life or validity period of a trademark influences its market value. A trademark has ten years of validity from the date of its registration.
• The trademark must be renewed every ten years to keep the registration active. Failure to renew the trademark registration within the deadline cancels the registration and diminishes its value.
• The cost of a separately acquired trademark comprises its purchase price paid, including taxes, duties paid and any other expenses incurred directly to put it in usable condition.

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