Amortization is the periodic allocation of the cost of an intangible asset over its useful life. Amortization expense for intangible assets is based on the same concepts as depreciation. However, the process for determining useful lives and selecting allocation methods is more difficult compared to the case of depreciation. This is due to the inability to observe physical deterioration or obtain reliable market value estimates. The service life of an asset should not exceed its legal life (if any). A shorter life should be applied if the asset will not be used for the entire period. When a legal life does not exist, as for goodwill, the selection of service life is potentially more flexible. Three approaches are used to amortize goodwill: The first approach is required for all intangible assets, even though some can be expected not to lose value while others will lose value only irregularly. GAAP adopts specific rules to produce a systematic pattern for the charges. In particular, the service life of any intangible should not exceed 40 years. The selection of an allocation method for computing annual amortization charges is theoretically subject to the same considerations that apply to depreciation. GAAP specifies that the straight-line approach should be applied unless a company demonstrates that another systematic method is more appropriate. Commonly, the amortization expense entry records a credit to the asset account instead of a contra asset account. While this practice is inconsistent with the one used for depreciation, it is justifiable on the basis that little useful information would be provided by disclosing the proportion of the original cost that remains to be consumed.Amortization of Intangible Assets: Definition
Amortization of Intangible Assets: Explanation
Selecting an Allocation Method for Amortization
Amortization of Intangible Assets FAQs
Amortization refers to the allocation of the cost of an intangible asset over its useful life.
Intangible assets are non financial items that provide future economic benefit for a company . Examples include patents, trademarks, copyrights ,brand names, and customer lists.
Amortization is a non cash expense that reduces the book value of intangible assets and is therefore, reflected on a company's Financial Statements as a reduction to equity or net income.
The formula for amortizing an intangible asset is as follows: Amortization = Useful life x Cost of the intangible asset
Intangible assets are often amortized over time rather than all at once depending on the life of the asset. Amortization is a non cash expense that reduces the book value of intangible assets and is therefore, reflected on a company's Financial Statements as a reduction to equity or net income.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
