Several forms of intellectual property may be shown as intangible assets on a company's balance sheet to the extent that they qualify as capital assets. There is a wide range of definitions for intellectual property.

Patents, trademarks, copyrights, trade secrets, and original ideas are all types of intellectual property. Although some intangible assets may be shown on a company's balance sheet, it may be challenging to assign an accurate value to them.

What Exactly Is Intellectual Property?

The term "intellectual property" refers to a wide range of intangible assets that may be used to describe things held by a firm or an individual but cannot be used by others without permission. Intangible assets are those owned by a firm or an individual that cannot be touched.

The idea of intellectual property stems from recognizing that specific mental creations need the same legal protections as actual possessions. Both types of property are protected by law in most modern economies.

The Basics of Intellectual Property

A capital asset can be anything of substantial value, from a home or automobile to a portfolio of stocks, bonds, or even rare antiques. Because of their physical nature, assigning a dollar amount to each of these assets is straightforward.

As businesses constantly improve their technology capabilities, digital alternatives replace traditional warehouses and factories. Therefore, organizations throughout the world are increasingly able to rely on new ideas and R&D spending as a means of generating profit.

Competition for ideas and access to information in the quest for innovation highlights the growing importance of intangible assets and the necessity to assign a monetary value to them.

Types of Intellectual Property

The list below includes some of the most frequent forms of intangible property that make up intellectual property.

Patents

A patent is property ownership awarded by governments or agencies to private companies or individuals. The patent grants the creator of a new design, procedure, improvement, or physical innovation like a machine the right to exclude others from using or selling their creation.

Patents are commonplace in the technology and software industries. For instance, in 1980, Steve Jobs and three other Apple Inc. employees filed a patent for the personal computer.

Copyrights

Under copyright laws, all rights to use reproduce, or replicate an original work are reserved for the work's authors and creators. Authors of books have their works copyrighted, as do musical performers. Additionally, under copyright terms, the original inventors can enter into a license arrangement with anybody they choose.

Trademarks

A trademark is any distinctive sign, slogan, or emblem used to identify and distinguish one product from another in the marketplace. The trademark of a firm is synonymous with its brand. The Coca-Cola Company, for instance, is the legal owner of the "Coca-Cola" trademark and logo.

Franchises

A franchise is a business arrangement in which one entity pays another entity for the right to utilize the franchisor's brand, trademark, confidential information, and methods.

Intellectual Property and Financial Statements

Accounting standards demand that intangible assets be reported in financial statements at cost or less. Trade secrets and other forms of intellectual property generated in-house are unlikely to be reflected in the balance sheet since they do not have direct expenses or an exact value.

These costs must be spread out across the asset's expected lifespan. Any intangible assets acquired through purchase are recorded at cost and depreciated over the asset's remaining useful life. Intellectual property must be classified as an intangible asset on the balance sheet, distinct from goodwill.

Methods for Estimating the Worth of Ideas

Since intellectual property must be recorded in a company's financial statements at cost or less following generally accepted accounting principles, an accurate market price for specific intellectual property is difficult to calculate.

When one business thinks about purchasing an intellectual property from another, it usually hires an expert in the field to conduct a thorough valuation study to establish a fair market price for the property.

Special Considerations

Because there are no universally accepted accounting standards for determining the worth of various types of intellectual property, it is impossible to include such assets in a company's balance sheet.

Stock prices often reflect the value of the intellectual property since market participants are aware of its existence and potential. An intangible asset, like a patent, has a finite life span and is treated as property and recorded. The process of amortization assigns a monetary value to these assets over time.