What is intellectual property in terms of fixed assets?
Certain types of intellectual property are considered capital assets and may be recorded on a company’s balance sheet as intangible assets. Intellectual property is a fairly broad term and can take many different forms. Examples of intellectual property include patents, trademarks, copyrights, trade secrets, or unique ideas. Although some of these assets are shown on a company’s balance sheet, the true market value of this type of property is often difficult to determine.
Key points to remember:
- Certain types of intellectual property, such as patents, copyrights, industry knowledge and trade secrets are considered capital assets and can be recorded on a company’s balance sheet.
- Since these assets are often intangible, their market value is often difficult to determine.
- Certain intangible assets are legally protected and benefit from intellectual property protection rights.
Understanding intellectual property
A fixed asset is usually significant real estate, such as a house, car, or investment in the form of stocks, bonds, and even collectibles. These assets are all physical, or tangible, which makes them relatively easy to value. Intellectual property considered as an asset can include human capital, know-how and industry knowledge, which are intangible and difficult to value as an asset.
Warehouses and factories are increasingly being replaced by digital solutions as companies rapidly advance in terms of technological capability. Thus, innovative ideas and investments in R&D are a growing source of income for companies around the world. The race for ideas and the search for knowledge for creativity accentuate the growing role of intangible assets and the need to quantify them.
Certain intangible assets are legally protected when they meet the criteria for protection and intellectual property rights. Intellectual property rights are often granted for innovative products and processes (through patents); cultural, literary or computer works (copyright); designs, trademarks, microchips and trade secrets.
Accounting for intellectual property in financial statements
Accounting principles require that intangible assets be recorded in the financial statements at cost or less. Intellectual properties developed in-house, such as trade secrets or ideas, are most likely not recorded on the balance sheet because they have no directly associated costs or clear value.
Patents, trademarks and copyrights generally have associated costs and are capitalized as assets on the balance sheet. These must be amortized over the useful life of the asset. When intellectual property is purchased from another company, it is recorded on the balance sheet at cost and depreciated over the remaining useful life of the asset.
Accounting standards require that intellectual property be recorded separately on the balance sheet from goodwill, which is another type of intangible asset.
Promote intellectual property
Since accounting standards require that cost or less be used to record intellectual property in a company’s financial statements, it is difficult to determine a realistic market price for certain forms of intellectual property. Often times, an industry expert must perform a thorough valuation study to determine a reasonable market price for intellectual property when one company is considering buying this type of property from another.