Please ensure Javascript is enabled for purposes of website accessibility

How to Calculate the Annual Amortization of Copyrights

By Motley Fool Staff – Mar 13, 2016 at 12:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The value of intellectual property on a business balance sheet has to adjust to reflect the passage of time. Here's how.

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.

Calculating amortization
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 [email protected]. Thanks -- and Fool on!

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.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

HOW THE MOTLEY FOOL CAN HELP YOU

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
376%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.