What Is Intellectual Property?
Intellectual property is a broad categorical description of a set of intangible assets that are owned by a
company or individual. It's legally protected from outside use or implementation without consent. An
intangible asset is a non-physical asset.
The concept of intellectual property relates to the fact that certain products of human intellect should be
afforded the same protective rights that apply to physical property, called tangible assets. Most
developed economies have legal measures in place to protect both forms of property.
Understanding Intellectual Property
Intellectual property is a category of intangible assets. They can't be held and don't necessarily have a
physical presence. These assets are created using human intellect. Such property can take many forms
and can include artwork, symbols, logos, brand names, and designs.
Companies are diligent when it comes to identifying and protecting intellectual property because it holds
such high value in an increasingly knowledge-based economy. Producing intellectual property requires
heavy investments in brainpower and time of skilled labor. This translates into heavy investments by
organizations and individuals that shouldn't be accessed by others with no rights.
Extracting value from intellectual property and preventing others from deriving value from it is an
important responsibility of any company. It's an intangible asset but intellectual property can be far more
valuable than a company's physical assets. It can represent a competitive advantage and is fiercely
guarded and protected by the companies that own the property as a result.
Special Considerations
Many forms of intellectual property can't be listed on the balance sheet as assets because it's hard to
objectively value each asset. However, the value of the property tends to be reflected in the price of the
stock because market participants are aware of the existence of the intellectual property.
Some intangible assets such as patents are recorded as property when they meet certain accounting
criteria such as having an objective measure of their value and probable economic benefits. They're
listed as assets and then expensed against profits during their useful economic lives. This expense is
called amortization.
Amortization is an accounting method that decreases the value of an intangible asset over time. This
process helps the company to reduce its income by expensing a set amount each year for tax purposes
as the useful life of the intangible asset winds down.
A patent might only have 20 years remaining before it's registered as public domain. A company would
assign a total value to the patent. The patent would be expensed or amortized by the same amount each
year for 20 years by dividing the total value by 20 years. The amortized asset amount would reduce the
company's net income or profit for tax purposes each year.
Intellectual property that is considered to have a perpetual life, such as a trademark, isn't amortized
because it doesn't expire.
Types of Intellectual Property
Intellectual property can consist of many types of intangibles.
PATENTS
A patent is a property right for an investor that's typically granted by a government agency such as the
U.S. Patent and Trademark Office.2 The patent allows the inventor exclusive rights to the invention,
which could be a design, process, improvement, or physical invention such as a machine.
Technology and software companies often have patents for their designs. The patent for the personal
computer was filed in 1980 by Steve Jobs and three other colleagues at Apple
COPYRIGHTS
Copyrights provide authors and creators of original material the exclusive right to use, copy, or duplicate
their material. Authors of books have their works copyrighted as do musical artists. A copyright also
states that the original creators can grant anyone authorization through a licensing agreement to use the
work.
TRADEMARKS
A trademark is a symbol, phrase, or insignia that's recognizable and represents a product that legally
separates it from other products. A trademark is exclusively assigned to a company. It owns the
trademark so no others may use or copy it.
A trademark is often associated with a company's brand. The logo and brand name of Coca-Cola is
owned by the Coca-Cola Company (KO).5
TRADE SECRETS
A trade secret is a company's process or practice that isn't public information and provides an economic
benefit or advantage to the company or holder of the trade secret. Trade secrets must be actively
protected by the company and are typically the result of a company's research and development (R&D).
This is why some employers require the signing of non-disclosure agreements (NDAs).
Examples of trade secrets could be a design, pattern, recipe, formula, or proprietary process. Trade
secrets are used to create a business model that differentiates the company's offerings to its customers
by providing a competitive advantage.
Digital Assets
Digital assets are also increasingly recognized as intellectual property. These would include proprietary
software code or algorithms and online digital content.
