Trademark

A trademark is a distinctive word, phrase, name, symbol, logo, design or combination of these that identifies the goods of a particular business and distinguishes them from those of competitors. A mark used for services is technically a service mark, but the term trademark is commonly used for both. Trademarks are a form of intellectual property that protects brand identity and customer goodwill.

In accounting, a trademark is an intangible asset, an asset without physical substance that gives its owner legal rights and future economic benefits. How it appears on the balance sheet depends on whether it was developed internally or acquired, and whether its useful life is finite or indefinite.

In the United States, trademark rights arise from actual use of a mark in commerce, but federal registration with the United States Patent and Trademark Office (USPTO) under the Lanham Act gives important advantages. These include nationwide notice of ownership, a legal presumption of ownership and validity, the right to use the circled R registration symbol, and the ability to sue in federal court. A federal registration lasts ten years and can be renewed for further ten-year periods indefinitely, provided the owner keeps using the mark and files the required maintenance documents, including a declaration of use between the fifth and sixth years. A trademark can therefore last far longer than a patent or copyright.

• Internally developed trademarks: the costs of designing a logo, advertising and building a brand are generally expensed as incurred. Only direct costs of securing the legal right, such as registration fees, legal fees and the cost of successfully defending the mark in court, may be capitalized. As a result, many of the world's most valuable brands appear on their owners' balance sheets at little or no value.
• Purchased trademarks: a trademark bought separately is recorded at its purchase price plus directly attributable costs.
• Trademarks acquired in a business combination: they are recognized separately from goodwill at fair value, often estimated using a relief-from-royalty method that values the royalties the buyer avoids by owning the mark.

Under US GAAP (ASC 350) and IFRS (IAS 38), a trademark with a finite useful life is amortized over that life, usually on a straight-line basis, through amortization of intangible assets. Because trademarks can be renewed indefinitely, many are judged to have an indefinite useful life, meaning there is no foreseeable limit to the period over which they will generate cash flows. Indefinite-lived trademarks are not amortized. Instead, they are tested for impairment at least annually, and more often if events suggest their value has fallen.

A food company acquires a regional snack brand in one of many mergers and acquisitions in the sector. Of the $80 million purchase price, $22 million is allocated to the brand's trademark, based on a relief-from-royalty valuation, and the rest to other assets and goodwill. Management expects to support the brand indefinitely, so the trademark is not amortized.

Three years later, sales of the brand decline sharply. The annual impairment test estimates the trademark's fair value at $15 million. Under US GAAP, the company records an impairment charge of $7 million, debiting impairment loss and crediting the trademark, reducing its carrying amount to $15 million. If management then decides to phase out the brand over five years, the trademark becomes finite-lived and the remaining $15 million is amortized at $3 million a year.

For US federal income tax, trademarks acquired as part of buying a business are generally Section 197 intangibles and are amortized over 15 years, even when they are not amortized for financial reporting, which creates deferred income taxes. Analysts often adjust for the fact that internally built brands are missing from balance sheets when comparing companies that grew organically with those that grew by acquisition, since the latter carry large recorded trademarks and goodwill.

• United States Patent and Trademark Office