Trademarks and Franchises

Definition

The accounting subcategory of intangible assets contains several types of assets, including trademarks and franchises.  A franchise is a legally or company-protected and exclusive right to conduct a specific type of business in a pre-defined geography.  A trademark can be a design, symbol or a word that identifies a product or group of products.

Explanation

Perhaps the most common examples of franchise territories are those granted to utilities.  This includes electric, natural gas, cable television and water companies.  Franchise territories were granted to prevent the installation of redundant infrastructure such as utility poles and natural gas mains.

Trademarks are granted by the United States Patent and Trademark Office.   Once granted, the owner has the permanent right to the use of that trademarked word, symbol or design.

When a company purchases a trademark or franchise from its owner, it has the option to expense or capitalize the purchase price.  A trademark or franchise is often capitalized if the price paid is deemed to be materially significant to the company.

If capitalized, the trademark or franchise would be classified as an intangible asset and appear on the company's balance sheet.  As is the case with all intangible assets, the purchase price of this balance sheet item is moved to the income statement over time through an amortization expense.

Companies can capitalize not only the purchase price of a franchise or trademark, but also legal costs such as attorney fees.  While ownership may be for an indefinite period of time, the amortization period of the asset cannot be longer than the time remaining on the protection granted the holder or 40 years.

Related Terms

intangible assets, copyrights and patents, balance sheet, amortization, goodwill