What it means
Copyright is the property right in creative expression. It does not protect ideas, facts or methods (patents and trade secrets do that) but the particular form in which they are expressed: this novel, this song, this photograph, this program's code, this database's selection and arrangement.
The owner may stop others copying the work and may license them to do so for a fee, and those two powers, exclusion and licensing, are the source of the right's economic value. The right arises when the work is created and fixed in some form.
In most jurisdictions no registration is needed, although registration (where available, as in the United States) is a precondition for suing for statutory damages and provides a public record of ownership. The first owner is the author, except that works created by employees in the course of employment belong to the employer, and works commissioned from contractors belong to the contractor unless the contract assigns them, a point that catches many businesses that assume they own what they paid for.
The right lasts long: life plus 70 years for works by individuals in most developed countries, and for corporate and anonymous works a fixed term from publication or creation, commonly 70 years in Europe and 95 from publication in the United States. Businesses hold copyrights in more things than they usually realise: software, whether written in-house or by contractors; website content, images and video; product documentation, training materials and manuals; marketing copy, brand imagery and advertising; reports, research and publications; databases; music and film for media businesses.
The value ranges from negligible (a brochure) to the entire business (a software company, a publisher, a games studio). Exploitation takes several forms.
Direct sale or licensing of the work (software licences, book sales, music streaming). Royalty income from licensing to others (a publisher licensing translation rights, a photographer licensing images, a software company licensing its code).
Assignment (outright sale of the copyright). And the defensive value of exclusion: a competitor cannot copy the software, the content or the designs.
Royalty rates and licence terms are negotiated on the value of the work and the scope of the rights granted (territory, duration, exclusivity, media), and they are the subject of contract negotiation and, in acquisitions, of valuation. Accounting follows the general rules for intangibles.
A purchased copyright (or one acquired in a business combination) is recognised at cost or fair value and amortised over its useful economic life, which is the period over which it is expected to generate revenue, usually far shorter than the legal term (a software product may have a five-year life; a film's value may be largely realised in three years; a textbook edition in four), with impairment testing if the revenue falls away. An internally created copyright is generally not capitalised: the costs of writing content, producing marketing materials or building a brand are expensed; but software development costs that meet the criteria (technical feasibility, intention and ability to complete, probable benefits, reliable measurement) are capitalised under IFRS, and certain software costs under US GAAP.
The result is that a business's own copyrights are often absent from its balance sheet while acquired ones appear, a source of the gap between book value and market value in creative and technology businesses. The liability side matters too.
Using copyrighted material without a licence (images on a website, music in a video, code copied into a product, content republished) is infringement, and damages can be substantial; businesses need licences, assignments from contractors, and processes for clearing rights. Open source software, which is copyrighted and licensed on terms that may require disclosure of derivative code, is a particular risk in software businesses and a standard due diligence item.
In practice
Real-world examples.
Example
A games studio capitalises $6 million of development cost for a title once it passes technical feasibility and amortises it over the first two years of sales, when 80% of revenue is expected.
Example
A magazine publisher licenses its archive to an online database for a $150,000 annual fee, income from copyrights that are otherwise fully amortised.
Example
A retailer settles an infringement claim for $90,000 after using a photographer's images from a stock site without the correct licence tier.
Think of it
“A copyright protects creative works-books, music, software-giving you exclusive rights to use them.
Formula
Calculation
Amortisation of an acquired copyright = Cost / Useful economic life (straight-line, or in proportion to expected revenue where that pattern is reliable)
Royalty income = Licensee's sales (or units) x Royalty rate
Value of a copyright (income approach) = Present value of expected net royalties or contribution over the useful life
Relief-from-royalty valuation = Present value of (Revenue attributable to the work x Royalty rate a licensee would pay x (1 minus Tax rate))
Worked example. A publisher acquires the copyrights to a series of professional reference books from a retiring author for $600,000. Expected revenue: $250,000 in year 1, declining 15% a year as the content ages, with a new edition planned in year 4 at a further cost.
- Useful economic life assessed at 6 years (after which the content will need rewriting, which will be a new work)
- Straight-line amortisation = $600,000 / 6 = $100,000 a year; or, in proportion to expected revenue (year 1 $250,000, year 2 $212,500, year 3 $180,600, year 4 $153,500, year 5 $130,500, year 6 $110,900; total $1,038,000): year 1 amortisation = $600,000 x $250,000 / $1,038,000 = $144,500, declining thereafter. The publisher uses the revenue pattern, since it is reliable and matches the consumption of the asset
- Contribution: the books earn a 45% contribution margin: year 1 $112,500 against $144,500 of amortisation. The asset is impairment-tested in year 2 when a competitor's title launches: revised revenue forecast $180,000 in year 2 falling 25% a year; present value of the remaining contribution at 10% about $260,000 against a carrying amount of $455,500. Impairment of $195,500
Royalty example: a software company licenses its image-processing library to a device manufacturer at 3% of the manufacturer's net sales of devices incorporating it, with a minimum annual royalty of $200,000. Year 1 device sales $12,000,000: royalty $360,000. Year 2 sales $5,000,000: royalty $150,000, but the minimum applies: $200,000. The software company recognises the royalty as the sales occur (or the minimum accrues), and the licensee expenses it.
Contractor ownership: a company pays a freelance developer $80,000 to write a customer portal, with no written assignment. The developer owns the copyright; the company has, at best, an implied licence to use the code for the purpose it was commissioned, and cannot sell it, modify it freely or stop the developer reusing it. The company negotiates an assignment for a further $15,000. In a subsequent sale of the company, the buyer's due diligence checks assignments from every contractor who wrote code, and the $15,000 was the cheapest item on the list.
Acquisition valuation: a buyer acquiring a media company values its content library by relief from royalty. Library revenue $8,000,000 a year, expected to decline 10% a year over an 8-year life; a licensee would pay 20% of revenue for the rights; tax 25%; discount rate 12%. Year 1 after-tax royalty saving = $8,000,000 x 20% x 0.75 = $1,200,000; present value of the declining stream over 8 years about $4,500,000. The buyer records a $4,500,000 copyright intangible, amortised over 8 years in proportion to revenue.Case study
Seen in the real world.
A marketing agency built its business on content: campaigns, video, copy and design produced for clients over fifteen years, and a large library of its own templates, stock footage and code that it reused across projects. When its founders sought a buyer, the buyer's due diligence asked three questions the agency had never considered. Who owned the work produced for clients?
The agency's client contracts assigned copyright to the client on payment, so the agency's portfolio was its clients' property and its right to display it was a licence, not an asset. Who owned the reusable library? Much of it had been created by freelancers under purchase orders with no assignment clause, so the agency's title was doubtful.
And what licences did the agency hold for the third-party fonts, music and images embedded in its templates? Several had lapsed or had never covered commercial reuse.
The buyer reduced its offer by 20% and required the agency to obtain retrospective assignments from 30 freelancers (which cost $110,000 and took four months) and to clear or replace the third-party material before completion. The founders' comment afterwards was that they had spent fifteen years building an intellectual property business without ever checking whose property it was.
Watch out
Common mistakes.
- Assuming that paying a contractor for work transfers the copyright. It does not without a written assignment; the contractor owns what they create unless the contract says otherwise.
- Amortising an acquired copyright over its legal term. The useful economic life, usually a few years, is the right period, and impairment applies when revenue falls away.
- Using third-party images, music, fonts, code or content without checking the licence covers the use, which creates infringement liability that surfaces in due diligence or in a claim.
Questions
People also ask.
Does copyright need to be registered?
In most countries it arises automatically on creation. Registration, where available, gives evidential and remedial advantages (in the United States it is required before suing) and is worth doing for valuable works.
Are a company's own copyrights on its balance sheet?
Generally not, unless they were purchased or acquired in a business combination, or are software development costs meeting the capitalisation criteria. Internally created content and brands are expensed.
What is the difference between copyright, a patent and a trademark?
Copyright protects the expression of a creative work; a patent protects an invention (a method, process or product); a trademark protects a brand identifier (name, logo). A software product may involve all three.
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