Trademark registration: accounting and tax treatment

Publication date/update: 10.10.2024

A trademark is a verbal, graphic, or other designation that distinguishes goods, services, or a company from competitors. The exclusive right can be registered by a legal entity or an individual entrepreneur, with the primary condition being that the entity must bring its own product to market.

A trademark can be developed independently or with the assistance of specialists. In the latter case, it is essential to sign a copyright agreement that transfers all rights from the developer to the company. This allows the firm not only to use the trademark but also to hold all associated rights.

In accounting, a trademark is reflected through entries that record transactions involving the chosen asset. Numerous entries can be applied in accounting to reflect various types of transactions.

In this article, we will delve into the specifics of accounting for trademark-related transactions.

First and foremost, it is important to recognize that the right to a trademark is classified as an intangible asset (IA). Therefore, a trademark meets the following criteria:

To recognize a trademark as an IA, it is only necessary to meet the aforementioned requirements.

Like any other IA, it is recorded in the accounting books at its initial cost. This rule can be found in paragraph 6 of PBU 14/2000. The initial cost is determined by the actual expenses incurred when purchasing the trademark or other associated costs, such as fees, registration duties, and others. VAT and other taxes are not included in the initial cost unless required by law.

The initial cost may also include expenses for development, material purchases, developer salaries, and other costs.

Accounting and tax regulations establish different rules for determining the cost of a trademark. For instance, accounting includes interest on borrowed funds and foreign exchange differences in the initial price. The Tax Code, however, treats the initial cost as non-operating expenses. The initial cost will also vary depending on whether the trademark was contributed as part of the authorized capital, received free of charge, or acquired under an obligation fulfillment agreement.

It is crucial to note that neither PBU 14/2000 nor the Tax Code contain provisions allowing for changes in the initial cost of an IA for either accounting or tax purposes.

When considering the accounting treatment of a trademark as an IA, it is important to highlight its usage in the production of goods and services. What does this mean? The Law of 23.09.1992 No. 3520-1 provides a clear answer: its application on goods (or packaging) for which the mark is registered, its use in advertising the goods, and its display to consumers in various forms.

A trademark can also be transferred for a fee for temporary use. In this case, it remains an intangible asset. However, PBU on IAs does not provide specific guidelines for such cases, nor does it establish special rules for reflecting intangible assets not used by the rights holder. The accounting treatment of assets created for use by other parties is not regulated, which can lead to difficulties. Similar issues arise with tax accounting. However, from the perspective of the Tax Code, granting a trademark for use is considered a service. The resale of a trademark may, in fact, generate income for the owner.

As for the standard use of a trademark by the rights holder, if it does not bring any benefits to the owner, it cannot be recognized as an IA. For such trademarks, no amortization is calculated, nor are acquisition or creation costs accounted for, meaning taxable income is not reduced.

In accounting, the cost of intangible assets (IA) is written off through depreciation using one of the methods defined by management in the accounting policy. These methods may include straight-line depreciation, proportional to production volume, or the declining balance method.

Throughout the year, IA depreciation is calculated monthly as 1/12 of the annual amount. This rule applies to all depreciation methods. The useful life of the trademark is typically determined by the validity period of the trademark certificate or the estimated duration of use. The useful life is usually reduced by the period during which the company receives the certificate, as trademark registration is valid for 10 years from the date of issuance.

In accounting, IA depreciation is recorded in the credit of account 05 “Depreciation of intangible assets” or the credit of account 04. If the trademark is transferred to a third party for a fee, the accounting process changes.

Typically, trademark depreciation is included in the expenses for ordinary activities when the trademark is used by the rights holder. When the rights are transferred, the trademark no longer constitutes part of the company's primary activities, and depreciation is accounted for as part of operating expenses.

In tax accounting, a trademark is recognized as depreciable property. Depreciation amounts are included in expenses related to production and sales. If rights are granted to a third party, the depreciation amounts are included in production and sales expenses if this is the company’s core business. In other cases, expenses related to the transferred IA are classified as non-operating expenses.

The value of intangible assets (IA) that are no longer used for production purposes must be written off. This is reflected in account 05 "Depreciation of intangible assets," where the asset and the accumulated depreciation are simultaneously derecognized. The income and expenses from the derecognition of IA are recorded in the accounting period to which they pertain.

The proceeds from the sale of trademark rights should be included in operating income, while the costs incurred for the sale are recorded as operating expenses. If rights are ceded, tax accounting will reflect the disposal and recognize income from the sale. The Tax Code does not contain specific provisions regarding the sale of IA. However, if there are proceeds, they are recognized as taxable income.

The profit or loss from the disposal of a depreciable trademark is determined based on the analytical accounting of each asset as of the date the income or expense is recognized. When goods and property rights are sold, the taxpayer can reduce sales income by the cost of the goods sold, and for depreciable assets, by their residual value. Since IA are depreciable assets, this rule can be applied to trademarks as well.

Taking all the provisions into account, the optimal accounting procedure for disposal is as follows:

We have already noted that exclusive rights can be transferred. This is done through a licensing agreement concerning all or some of the goods. Such an agreement typically includes provisions regarding product quality, ensuring it will not be inferior to the original. The brand owner must maintain oversight.

There may also be a transfer of the brand under a commercial concession agreement. In this case, one party grants the other the right to use the brand for a fee. The compensation generally takes the following forms:

The accounting treatment of income from the transfer of rights to use a logo or other mark depends on the type of payments and the organization's activities. Typically, revenue is recognized as income. If generating income is not the primary focus of the company's operations, income from the licensing agreement is classified as operational. In this case, licensing fees are recorded in the accounting based on the temporal certainty of business facts and the terms of the agreement.

If the provision of rights is included in the contract, a lump-sum payment must be made, which is allocated over the entire duration of the agreement. Any income received during the reporting period is reflected in the balance sheet as a separate line item under deferred income if it pertains to a different period.

Licensing payments can also be periodic. However, the agreement must specify the payment schedule. This schedule is contingent upon the use of the trademark in tax accounting and whether this activity constitutes the primary business of the company. If the transfer of rights is the main line of work for the company, licensing payments are recognized as part of revenue from sales; otherwise, they are classified as non-operating income.

When royalties are received, the income is accounted for in the reporting period during which the payments are received. The date of income recognition for intangible assets is the date when settlements are made according to the terms of the signed agreement. It is also crucial for the taxpayer to present documents that serve as the basis for these settlements, which usually occurs on the last day of the reporting period, month, or quarter.

A lump-sum payment is recorded on the last day of the month or quarter. In the case of combined payments, the lump-sum payment is recognized as income simultaneously with its receipt, while royalties are recognized as they accrue.

If the cash method is employed, funds are recognized on the day they are received in the bank or the company's cash register.

A company typically records the right to use a brand on an account at the valuation established in the contract. Periodic payments made strictly according to the terms of the agreement are included by the licensee as expenses for the reporting period. Lump-sum payments must be recorded as prepaid expenses. These should be expensed over the duration of the agreement. The procedure should be outlined in the company's internal documents. Expenses related to payments for the use of intellectual property fall under standard operating costs associated with the production of goods and the provision of services. Such costs should be included in the cost of goods sold or sales expenses, which are determined for the purposes of assessing the financial results of the firm's traditional activities.

For tax purposes, royalty payments should be recognized as other expenses related to production and sales. These expenses need to be accounted for when calculating the taxable income. Such expenditures can be classified as indirect costs, fully attributed to the current reporting period.

Lump-sum payments must be recognized in the reporting period to which they pertain. It is essential to consider the terms of the agreements and the principles of uniformity and proportionality in recognizing income and expenses. Consequently, lump-sum payments, when calculating income tax, should be recognized in equal portions over the duration of the licensing agreement. These expenses are included in those associated with production and sales.

The cash method allows for these payments to be recorded as other expenses in the reporting period in which payment is made. It is crucial to ensure that the expenses are justified and documented. It is also important to note that a licensing agreement for the transfer of exclusive rights takes effect only after its registration with the governmental authority overseeing intellectual property. Therefore, until the registration date, licensing payments do not constitute the basis for income tax accounting.

When claiming VAT deductions, it's important to note that the Tax Code of the Russian Federation does not regulate the partial deduction of VAT. However, the Federal Tax Service (FTS) has provided recommendations regarding the distribution of VAT in parts.

VAT arises in the transfer of rights only if the rights are transferred to residents of the Russian Federation. For VAT accounting, you should consider the earliest of the following dates:

It is essential to understand that granting rights to a brand in exchange for royalties may be considered a service, which can be provided as a one-time event or on a daily basis. In this case, VAT should be calculated at the end of each month or quarter, depending on the tax period during which the services were rendered.