On just about any company’s balance sheet, somewhere between the ‘Current Assets’ and ‘Current Liabilities’ sections is a collection of long-lived, revenue-producing assets broken up into two categories – ‘Property, Plant, and Equipment’ (PP;E) and ‘Intangible Assets’. PP;E often contains such non-current assets as land and buildings, motor vehicles, office equipment, computers, and plant and machinery. Intangible Assets is a much broader category including anything from copyrights and patents to trade secrets, customer lists/leads, noncompetition agreements, franchises, and goodwill.
The accounting methods for PP;E is very similar to those of Current Assets, though there are significant differences in the costs to be capitalized according to GAAP (the “generally accepted accounting princiapals” as determined by the Financial Accounting Standards Board, or FASB). Accounting for Intangible assets can be much more difficult, though – often, there are different rules for amortization, valuation, and estimation. For instance, there is much more uncertainty associated with intangible assets, so it’s much more difficult to account for the projected future benefits.
According to the Spiceland text, “it’s often very difficult to anticipate the timing, and even the existence, of future benefits attributable to many intangible assets…in fact, this uncertainty is a discrimintating characteristic of intangible assets that perhaps better distinguishes them from tangible assets than their lack of physical subtance,” (Spiceland, Sepe ; Nelson, 2011). Intangible assets with lives that have a foreseeable end are amortized, whereas ones with indefinite useful lives are not (Spiceland).
Determining whether or not an intangible asset has a limited life or not can be tricky; companies must consider the fact that there may be a similar product or object already in existence, and, if so, base their projections on that. Innovators who develop an idea that is completely revolutionary have a much more difficult time valuing an intangible asset (although, that risk is counterbalanced by the greater chance for a hefty reward).
A company that purchases intangible assets records them at its original cost, which, according to the text, “includes its purchase price and all other costs necessary to bring it to condition and location for intended use,” (Spiceland). That can include legal, regulatory, and filing fees. The most common intangible assets are patents, trademarks, and copyrights. Patents A patent is an exclusive right to manufacture a product or to use a process, granted by the U. S. Patent Office, for a period of twenty years (Spiceland).
The point of patents (and all intellectual property) is to promote creativity and innovation – companies want to develop new products or procedures in-house because it could lead to future growth, independent inventors aim to come up with new ideas to sell to other users. There are four primary reasons that patents play such an integral role in the economy, and why they are so well protected – to invent in the first place, to disclose the invention once made, to invest the sums necessary to experiment, produce and market the invention, and to improve on earlier patents.
Because of the precedence patents are given (as they can make or break a company) protecting patents can be a costly endeavor. According to the Spiceland text, “when a patent is developed internally, the research and development cost of doing so are expensed as incurred,” and, “any attorney fees and other costs of successfully defending a patent are added to the patent account. ” The ‘Patent’ account is amortized over the known life of twenty years. Patents grant the holder a right to exclude others from manufacturing and distributing an invention, not exclusive practicing rights for the invention.
After the life of the patent, the product is fair game for competitors. Trademarks Trademarks grant the holder exclusivity to the use and display of a word, slogan, or an emblem that “distinctively identifies a company, a product, or a service,” (Spiceland). What sets trademarks apart from some of the other intangible assets is that, unlike the defined twenty-year period for patents, trademarks can be renewed at the end of its ten-year period (meaning it has an almost-indefinite useful life. ) Trademarks ensure that a company remains synonymous with whatever people know them for.
Accounting for trademarks can be tricky; because they can potentially have a perpetual lifespan, trademarks are not amortized. Although some trademarks have an exorbitant sticker price, they do not necessarily represent a huge section of a company’s balance sheet. For instance, “Interbrand Sampson, the world’s leading branding consulting company, estimated the value of the Coca-Cola trademark to be $69 billion,” but, “the cost of the trademark reported in the balance sheet is far less than the estimate of its worth to the company. The Coca-Cola Company’s 2008 balance sheet disclosed trademarks at a cost of only $6 billion,” (Spiceland).
The ‘Trademarks’ section on the Balance Sheet is generally increased (or decreased) in one of two ways – a company creates a new trademark (or doesn’t renew at the end of the useful life) or, through a merger or acquisition, a company obtains an existing trademark. Copyrights A copyright is similar to a patent in that it provides “exclusive right of protection,” but, where a patent is primarily for a product or process, a copyright protects the, “creator of a published work, such as a song, film, painting, photograph, or book,” (Spiceland).
Another difference is the expected life – a patent is generally useable for twenty years and a copyright is for seventy years. The accounting methods for copyrights are “virtually identical to that of patents,” (Spiceland). Collectively, the ‘Property, Plant, and Equipment’ and ‘Intangible Assets’ sections represent a large portion of a Balance Sheet. But, where PP;E is composed of physical and often-sizeable objects, ‘Intangible Assets’ is literally nothing. Innovation, design, and forward thinking can benefit individuals and companies in much the same ways.
Risk can be met with unbridled reward; peril with profit. In the global economy that exists today, companies are often stepping on each other to stand out. Intangible assets and (in a broader sense) intellectual property are often the only things that breed success and failure. In accounting, their importance is publicized in every single Balance Sheet, right between ‘Current Assets’ and ‘Current Liabilities’.
Spiceland, J. D. , Sepe, J. F. , ; Nelson, M. (2011). Intermediate accounting. (6th ed ed. ). New York: McGraw-Hill/Irwin.