Definition of Trademark
In the U.S. a trademark could be a word, phrase, logo, etc. registered with the U.S. Patent and Trademark Office. If a company purchases a trademark from another company, the amount paid for the trademark is recorded in a general ledger intangible asset account. If a company designs and registers its trademark, the amount recorded is limited to its cost. Costs incurred to defend a trademark are also recorded in the trademark account.
The cost of a trademark may have been very small, but over time has become very valuable. (Think Apple, Coke, Nike, etc.) Due to the cost principle, the balance sheet may be reporting trademarks at close to $0.
Examples of Trademarks on the Balance Sheet
Assume that Company X, a consumer products company, introduced a new product in 2005. It registered the trademark in 2005 for a small fee that was immediately expensed. Since then Company X has been very effective in promoting this trademarked brand. Consumers now pay a premium price for this recognized and superior product. A competitor offers to purchase the trademark from Company X for $100 million in cash. If Company X does not sell the trademark, Company X will not list the trademark as an asset. (Recall that the trademark’s cost was $0.)
If Company X were to sell the trademark to Company Y for $100 million, Company Y will report the trademark on its next balance sheet at $100 million. The reason is there was a transaction for $100 million and Company Y’s cost of the trademark was $100 million.
