Don’t Miss the First Part of Intangible Assets tutorial series.
Trademarks and Trade Names:
A trademark or trade name is termed or considered as a word, or phrase or a symbol. A particular entity or product is recognized by its trademark or trade name. Some famous and well known Trade names like Kleenex, Windows, Coca-Cola, Nike and Jeep create immediate product recognition. Trademark or trade name also increases the sale of the product. The creator or original user of any product or company may obtain exclusive legal right to the trademark or trade name by registering it with the U.S. Patent Office. This registration will provide 20 years of protection. The registration may be renewed indefinitely till the trademark or trade name is in use. When a company purchases the trademark or trade name then costs will be referred as the purchase price. But if a company pay costs for developing and maintaining the trademark or trade name, then the incurred costs are referred as expended. As trademarks and trade names have indefinite lives, they are not amortized by the company.
Franchises and Licenses:
Franchising is a contractual deal between a franchiser and a franchisee. The franchiser grants the franchisee to have the right to sell definite products, provide specific services, or use definite trademarks or trade names. But this right is typically applicable within a designated geographical area. There is another type of franchise who entered into between a governmental body and a company. This franchise authorizes the company to use public property in performing its services.
For example, using the public land for connecting telephone and electric lines, or using the airwaves for broadcasting radio or TV. These operating rights are termed as licenses. If a company can identify costs with the purchase of a franchise or license, then the company should identify an intangible asset. Companies should amortize the cost of a limited-life franchise (or license) over its useful life. If the life of the franchise is indefinite, then cost will not amortize. Annual payments that are made under a franchise agreement are recorded as in the period in which the costs are incurred.
Goodwill:
The largest intangible asset which is reported in the balance sheet of a company is goodwill. Goodwill basically represents the value of all favorable aspects that relate to company. For example, exceptional management section, desirable location, good customer relations, skilled employees, high-quality products and so on. Goodwill is unique regarding some criterion like other assets could be sold individually in the marketplace, but goodwill can be identified only with the business as a whole. But this outcome would be very subjective, and such subjective valuations will not contribute to the reliability of financial statements. Generally companies record goodwill only if an entire business is purchased. As a result goodwill is the excess of cost over the fair market value of the net assets acquired. In recording the purchase of a business, the company debits (increases) the net assets at their fair market values, and credits (decreases) cash for the purchase price, and debits goodwill for the difference. Goodwill is not amortized as it is have an indefinite life. Companies usually record goodwill in the balance sheet under intangible assets.
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