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Is intellectual property considered a form of capital asset within a company?

Modified on: 2018/07/16
A:

Some kinds 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. While some of these assets are recorded on a company's balance sheet, the true market value of this type of property is often difficult to determine reasonably.

Accounting for Intellectual Property in Financial Statements

Accounting principles require that intangible assets such as the aforementioned forms of intellectual property be recorded in financial statements at cost or less. Internally developed intellectual property such as trade secrets or ideas most likely are 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 usually 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 business, it is recorded on the balance sheet at cost and amortized 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.

Valuing Intellectual Property

Since accounting standards dictate that cost or less be used to record intellectual property in a company's financial statements, a realistic market price for certain forms of intellectual property is hard to determine. Often, an industry expert must perform an in-depth valuation study to determine a reasonable market price for intellectual property when one company is considering buying this kind of property from another.


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