Among the enterprise assets, an important role is played by the so called intangibles, which represent every good without physical consistence, but able to be evaluated and create value for the company.
According to the Italian law, we can divide intangibles in three groups: the first is composed by those intangibles that the Civil Code calls “entrepreneur’s distinguishing marks (“segni distintivi dell’impreditore“), including trademark (“marchio“), enterprise name (“ditta”) and sign (“insegna”).
The second group consists in the wide and complex regulation of patents; the last one, finally, is a catch-all group including, for example, the goodwill payed in enterprise transactions.
In this article I will write about the Italian regulation of trademarks, according to the civil and tax law.
First of all, trademarks are regulated in the civil code by articles 2569-2574 and in a dedicated law, D.Lgs. February 10th 2005 n. 30, also called (“Codice della proprietà industriale”) industrial property code.
The evaluation of trademarks should be a very careful operation because of its character of intangibility which makes them uncertain.
Many authors have treated this argument writing about different evaluation methods based on cost, market, income option pricing approach.
Most costs methods are related to several analytical techniques like creation, historical, prospective, reproduction, replacement costs and of course they are important for their evaluation.
The reproduction cost and the replacement cost provide a reasonable measure of the value of intangibles with two essential conditions; the first one includes all the costs of the trademark; on the other way the second one reduces it for all forms of obsolescence.
The main step in this approach is putting together these costs because they are resulting from multiple and accumulated expenses and are often closely amalgamated to tangible assets.
The common way includes also the owner’s profit and an entrepreneurial incentive which are difficult to appreciate for intangible assets regarding their more often indistinct nature and their associated uncertainty.
Historical costs may be objective, consistent and reliable, but have some special limitations, because there is often a lack of information for older intangibles.
The historical cost reflects an old situation of prices on a market and adjustments don’t reflect current prices.
To overtake this problem replacement and recreation costs is the best way; therefore, they do not fix the problem of the present required costs of recreating the intangible.
The other face of the coin is that costs in a special aspect should always create value. This depends on the fact that the evaluation of Intangible Assets might also use market or income approaches.
Market methods estimate the market value of an Intangible Asset by comparing it to similar intangibles, that have been licensed or sold in recent times.
Market approaches include sales transaction method, relief from royalty method, comparative Income differential method, and market replacement cost method.
Even if their approach depends on available information and reliable transactional data, those methods represent the best way to approach the valuation of Intangibles.
Most intangibles are not traded enough to have a comparable market value; they are more frequently traded with a business, including tangible assets and are difficult to dissociate from, and they may be unique and similar transactions don’t exist.
Then, market cycles, or customer’s special interests, such as strategic or competitive premiums, may introduce distortions, which make essential adjustments on those factors to give importance to the market approach.
One of the most relevant standard of value in market approaches is the “fair” market value, that is usually given by the application of a multiple to the price of the guideline transaction; another essential application of some relevant variable coming from the guideline transaction’s financial statements are the projections of future revenues.
Their choice may be a little subjective because of the different ten elements above, often difficult to collect for trademarks, due to their unique character and their possible lack of marketability.
Income methods consist in two categories, that are the yield capitalization method and the direct capitalization method.
The first one considers the present value of a non constant stream of projected economic income flows over a discrete time period; the second one, otherwise, capitalizes a constant stream of economic income flows, over a specific time period.
These methods, virtually good for any kind of intangible, require however to consider all the critical economic variables associated with intangibles including the income generating capacity, the expected remaining life of the intangible, and the appropriate cost of capital for an investment in the intangible asset, and finally the risk associated with it.
The gain allocation between the intangible and the related tangible asset is necessary for calculating the income generating capacity, but first of all it’s very important to identify clearly the origin and the income production mechanism. Infact the potential sources of incomes of an intangible asset are the same than tangible ones and you may need through the use, ownership or forbearance of use of the intangible.
License agreements typically illustrate the different incomes coming from their respective use or ownership, and are quiet easy to appraise. Forbearance of use, on the other side, generates indirect incomes but it’s much more problematic to evaluate.
The correct appreciation of the expected useful life of the intangible is a second tricky issue.
The number of periodic income flows to be projected depends on the length of the time period of the evaluation, which depends on the duration of the life period. For instance, the conclusion of the income method is very sensitive to variations in remaining useful life when the life estimate is under ten years, and has no effect when the life estimate is above twenty years.
The choice of appropriate capitalization rates is a third important issue in the application of income methods; the two kinds of capitalization rates are yield capitalization rates and direct capitalization rates.
The multiplicity of the variables involved in income approaches may make them hard to process, particularly when the income is indirect.
The most serious limitations that are shared by the cost, market or income approaches lie in the static way they consider Intangibles. They fundamentally consider them as given.
Traditional asset by asset methods do not evaluate intangibles through the risks or opportunities that are embedded in them. Those correspond very often to the most important part of their value, if not to their whole or sole value.
Trademark Civil Regulation
As in every Roman law based country, if your rights on your trademarks have to be recognized in Italy, they have to be registered as soon as possible.
Registration gives you all the rights related to the mark for ten years from the presentation to the office, with the possibility of renovation every ten years.
As well known, there are many ways to get a trademark:
- Purchase, with or without separation of the intangible from the related enterprise;
- Self creation, spending money and other resources from the enterprise and capitalizing these costs. Of course you cannot include costs for R&D or advertising, but only the direct expenses due to the trademark production.
- Licence, after paying a royalty;
- Free licence.
According to the national accounting standard (principio contabile CNDCR) n. 24, marks have to be put in the balance sheet if acquired before paying. Once accounted, mark can be subject to amortization as every perishable asset.
The amortization follows the rule of “useful life” of the intangible, generally related, for trademarks, to the exclusive trading of the product; for the so called “institutional marks”, as enterprise names, the amortization period is not superior to twenty years.
Every year the trademark owner has to check his intangible value and compare it with the accounting value. According to article 2427, n.3-bis, of the Civil code, devaluation is compulsory if market value goes down the accounting value; in this case the owner must change the amortization rates and explain this operation in the integrative note following the balance sheet.
Trademark Tax Regulation
The Italian tax law for trademark amortization is different than civil regulation on the same subject.
According to article 103 of TUIR (direct taxation law), amortization period for trademarks must not be inferior to 18 years; this means that every year the amortization rate has not to exceed 1/18 of the historical cost of the trademark.
The civil law impose the choice of the amortization rate according to the useful life of the mark and this period is often different than the 18 years indicated by the tax law.
Instead of what happens in the Anglo-Saxon countries, in Italy entrepreneurs have to present every year only one balance sheet, showing both civil and tax gains.
When useful life is inferior than 18 years, in the balance sheet will be indicated an amortization rate accorded to the useful life, but the difference with the fiscal rate must be added (ripreso) to the taxable revenue; this operation will be done till the end of the useful life of the trademark, when the sum of the anticipated taxes payed because of the difference added, will be deducted every year until the 18th year after the trademark registration.
A simple example makes easier to understand. A company got a trademark with a useful life of 10 years and payed € 1,800; the first year the amortization rate in the balance sheet amount € 180, but the maximum fiscal deduction is € 100. The difference of € 80 is not deductable, so has to be added to the taxable revenue.
At the 11th year, when civil amortization is over, a sum of € 100 will be deducted from the taxable revenue every year till the 18th year.
Of course, the opposite situation is possible. When useful life is superior than 18 years, the fiscal deduction amounts to the civil one, until the 18th year, when the difference become lost.
The former Economics and Treasure Mr. Giulio Tremonti introduced in 2005 the principle for which it is possible to clean up the balance sheet (“disinquinamento fiscale” from the fiscal distortions.
This mechanism is applied in trademarks through a complex accounting tool called extra accounting amortization in the Tax form “Unico”.
This tool is used to show in the EC part of the annual tax form the difference between the civil amortization and the fiscal amortization.