Trade-marks must be valued at cost. Cost to develop, cost of purchase, cost to defend—all are legitimate charges to the asset. At times even some portion of the advertising expense may be capitalized under the caption “Trade-Marks.” This question and that of periodic revaluation follow so closely the principles of revaluation of good-will and the treatment of depreciation in relation thereto, that its consideration is deferred for combined treatment in later pages of this chapter.
Franchises—Definition and Kinds
A franchise is an intangible asset of considerable value in most cases. Its appearance on a balance sheet is usually limited to those of public, or quasi-public, utility companies. There it is included as an asset of value from the standpoint of rate-making rather than for ordinary commercial purposes. Such companies are usually under the close supervision and regulation of public service commissions. The latter prescribe the manner of showing the utility company’s accounts and the basis for the valuation of its assets, chiefly from the point of view of an adequate protection of the interests of the public. It is neither the purpose nor within the scope of the present volume to raise the question of the valuation of public utility companies, part of which problem would be concerned with the valuation of franchises. An attempt will be made, however, to lay down some principles of valuation from the commercial standpoint as distinguished from the rate-making standpoint, applicable to a very limited number of concerns which are not subject to state regulation, and to indicate briefly the tendency of the rulings of the best public service commissions with regard to franchises.
A franchise is defined by H. A. Foster[45] as “a privilege given by the community to a private person—or corporation—for use of the public property for the benefit of the public, and only incidentally is it the intention of the community in granting such a right, to allow the person accepting the same enough profit to insure his willingness to take advantage of it by investing in plant to make use of the grant.” To the same effect is the statement of the Federal Court in the case of the Consolidated Gas Co. of New York, 157 Fed. 373: “The franchise is but a part of the power or privilege of sovereignty allotted to a private person for the benefit of all, and only incidentally given for private emoluments.”
Franchises may be perpetual, where the grant is without time limit; limited, where the term is definitely stated; and indeterminate where the privilege granted is good “during good behavior and may be terminated by the authorities at any time by paying the fair value of the property exclusive of the franchise.” It may be noted that in Massachusetts no provision is made for buying the property of the utility company in case of revocation of the franchise. Manifestly the contract entered into with the state will influence very largely the manner of handling and the valuation of all the assets. Without regard to such contract and on the general principles of valuation as laid down for fixed assets, a franchise should be taken onto the books at full cost to acquire. Proper charges to the account would cover:
1. Lump sum payments to the state or some division thereof, applicable to the life of the franchise as distinguished from regular annual payments which are in the nature of a license or rental charge and are therefore an operating expense.
2. The full purchase price paid another company for the assignment of its rights and privileges under a franchise owned by it.
3. Legal and other fees in connection with securing the grant.
4. Any other legitimate expenses, such as the cost of securing the consent of affected property owners or of the whole community where such cost is to be borne by the petitioning company.
All of these are costs which from the standpoint of good business practice may be capitalized under the caption “Franchises.”