Businesses have to follow accounting rules in valuing the assets on their balance sheets. With intangible assets like copyrights, amortizing the value of the asset over time is intended to reflect accurately the steady decay in its value over time. Although the method of calculation for copyright amortization is straightforward, there are some tricky aspects you should understand fully.
Copyrights, legal life, and useful life
Copyrights offer legal protection to authors for a period of time. In general, the copyright lasts for the duration of the author's life plus 70 years. If the work is done anonymously or under a pseudonym, the period extends for 95 years beyond the publication of the work or 120 years from the creation of the work, whichever is shorter.
However, for accounting purposes, a copyright won't necessarily have value for the entire period of legal protection. Only rare works become classics and retain long-term value, and most works see their value diminish quickly after just a few years. In essence, determining what's known as the useful life involves figuring out how long a given copyright will produce substantial revenue for its owner.
Once you've decided how long the copyright's useful life is, the only other thing you need to know in order to amortize it is its value. For copyrights that a business purchased, the book value will typically be its acquisition cost. If the business developed the work that's copyrighted, then it will assess the costs involved in producing the work.
Most amortization of copyrights is done using the straight-line method, and so to determine the amount of amortization in a given year, divide the copyright's value by the length of its useful life. For instance, if a copyright is worth $100,000 and has a useful life of 10 years, you'll amortize $10,000 of its value every year. By the end of the term, the book value will be zero, reflecting the expectation that the copyright will have no further ability to generate revenue.
Accounting for intangible assets like copyrights and other intellectual property can seem confusing. By applying typical accounting standards, however, you can determine the appropriate way to handle copyrights in your financial statements.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at firstname.lastname@example.org. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.