Intellectual Property

Accounting for intellectual property under Generally Accepted Accounting Principles (GAAP) can be tricky. Different types of intellectual property have different treatments. A trademark is not accounted for in the same way as a patent. Here are some important reminders for how intellectual property is recorded under GAAP, when to capitalize or expense the related costs, and how to amortize capitalized costs.

Copyrights

Copyrights are capitalized if they are purchased (purchase price) or internally developed and specifically identifiable to a single copyright (costs involved in securing the copyright). If the copyright is internally developed, capitalizable costs include expenses such as legal and application fees. Once the copyright is granted, it should be amortized over its useful life. The useful life is not necessarily the same as the total life (life of the creator plus 70 years). The useful life of a copyright is only the period for which the copyright is expected to provide value to the owner. A copyright should be amortized on a straight-line basis over its useful life. It is also important to recognize impairment if the copyright no longer provides value or decreases in value.

Patents

Patents can also be capitalized if they are purchased or internally developed and specifically identifiable to a single patent. Costs to capitalize when patents are internally developed include registration, documentation, and legal expenses related to a patent application. Research and development expenses incurred to develop the idea behind the patent should not be capitalized*. Amortization will begin once the patent is granted. The amortization period is the lesser of the legal life or the useful life of the patent. As with other intangible assets, the useful life of a patent is the period for which the patent is expected to provide value to the owner. Patents should be amortized on a straight-line basis. Once granted, any additional expense related to the patent should be expensed rather than capitalized.  It is also important to recognize impairment if the patent no longer provides value or decreases in value.

*However, under tax law, beginning in the 2022 tax year, all research and development expenses must be capitalized, including those related to developing intellectual property. Therefore, such expenses will create differences between book income and taxable income.

Trademarks

Like copyrights and patents, trademarks should also be capitalized whether they are purchased or internally developed and specifically identifiable. Costs to capitalize when trademarks are internally developed include costs directly related to creating, applying for and registering the trademark (design, legal, etc.). Research and development expenses incurred to develop the idea behind the trademark should not be capitalized. Once granted, trademarks are amortized over their estimated useful life only if they are expected to have a definite life. Since a trademark can be renewed every 10 years, trademarks are often considered to have an indefinite life. When a trademark has an indefinite life, no amortization is recorded. Only once a definitive life is determined (a definite date the trademark will no longer provide value) should amortization be recorded on a straight-line basis.  It is also important to recognize impairment if the trademark no longer provides value or decreases in value.

No matter what type of intellectual property you are accounting for, it is important to remember to keep in mind the value and life of the asset. When developing intellectual property internally, it is critical to track and categorize expenses carefully so that you can determine which costs to capitalize or expense, and how much to allocate to each intangible asset so that amortization can be calculated properly. If you have questions about what expenses to capitalize, how to determine a useful life, when amortization should begin, what to do in the case of impairment, or other intellectual property accounting questions, please feel free to contact us.