Understanding Intellectual Property

Intellectual Property is an explicit term used to describe a set of non-physical assets that belongs to a company. These assets are owned by the business and it is illegal for public use without permission. It gives some companies a competitive advantage in the industry and it can also give a company an edge while seeking investors. Intellectual property is created only when there is a legal right or a contract.

This intellectual property consists of; Patents, Trademark, copyrights, licenses, etc.

Trademark

This is a distinctive sign, symbol, or logo that differentiates a product, making it easy for customers to identify a product. A business can protect its trademark through an application with the government providing sufficient details of its mark.

Copyright

A copyright protects original works of authorship e.g. art, music, software programs, writings. This gives the owner the right to control the reproduction or publishing of work created by the author. A copyright can be registered by the author with the government copyright office.

Patent

This provides protection for innovation ideas preventing its duplication or usage without approval. When an application has been filed and approved, the patent holders are to pay renewal fees regularly. After a while, the patent holder can decide to sell or license it.

Trade Secrets

These include confidential information of a business that helps it gain a competitive advantage. The holder must make reasonable efforts to keep it secret. Examples are designs, recipes, formulas, etc.

Accounting for Intellectual Property

They can either be recognized as an intangible asset on the Statement of Financial Position or on the Income statement as an expense. Intellectual property will be recognized as an asset only when the cost can be reliably measured and it is probable that there will be an inflow of future economic benefits from the assets. The cost of an intangible asset is the total expenditure incurred on its development and creation.

On the statement, it is valued at cost and subject to periodical amortization if it has a useful life span. Amortization is the reduction in the value of intangible assets over its useful life.

Intellectual property without a measurable useful life cannot be amortized but it is tested regularly for impairment and when it is eventually disposed of, the gain or loss is recognized in the income statement.