Amortization
Amortization refers to the process of spreading out the cost of an intangible asset over its useful life. In the context of business, this is commonly applied to expenses such as patents, copyrights, and trademarks. By amortizing these costs, businesses can accurately reflect the asset's declining value over time and allocate the expense accordingly in their financial statements.
6 Key excerpts on "Amortization"
eBook - ePubBusiness
The Ultimate Resource
- Bloomsbury Publishing(Author)
- 2011(Publication Date)
...Calculating Amortization WHAT IT MEASURES Amortization is a method of recovering (deducting or writing off) the capital costs of intangible assets over a fixed period of time. Its calculation is virtually identical to the straight-line method of depreciation. Amortization also refers to the establishment of a schedule for repaying the principal and interest on a loan in equal amounts over a period of time. Because computers have made this a simple calculation, business references to Amortization tend to focus more on the term’s first definition. WHY IT IS IMPORTANT Amortization enables a company to identify its true costs, and thus its net income, more precisely. In the course of their business, most enterprises acquire intangible assets such as a patent for an invention, or a well-known brand or trademark. Since these assets can contribute to the revenue growth of the business, they can be—and are allowed to be—deducted against those future revenues over a period of years, provided the procedure conforms to accepted accounting practices. For tax purposes, the distinction is not always made between Amortization and depreciation, yet Amortization remains a viable financial accounting concept in its own right. HOW IT WORKS IN PRACTICE Amortization is computed using the straight-line method of depreciation: divide the initial cost of the intangible asset by the estimated useful life of that asset. For example, if it costs $10,000 to acquire a patent and it has an estimated useful life of 10 years, the amortized amount per year is $1,000. $10,000 / 10 = $1,000 per year The amount of Amortization accumulated since the asset was acquired appears on the organization’s balance sheet as a deduction under the amortized asset. While that formula is straightforward, Amortization can also incorporate a variety of noncash charges to net earnings and/or asset values, such as depletion, write-offs, prepaid expenses, and deferred charges...
- Thomas Herold(Author)
- 2020(Publication Date)
- THOMAS HEROLD(Publisher)
...What is Amortization? The word Amortization is one that is commonly utilized by financial officers of corporations and accountants. They utilize it when they are working with time concepts and how they relate to financial statements of accounts. You typically hear this word employed when you are figuring up loan calculations, or when you are determining interest payments. The concept of Amortization possesses a lengthy history and it is currently employed in numerous different segments of finance. The word itself descends from Middle English. Here amortisen meant to “alienate” or “kill” something. This derivation itself comes from the Latin admortire that signified “plus death.” It is loosely related to the derivation of the word mortgage, as well. This accounting principle is much like depreciation that diminishes a liability or asset’s value over a given period of time through payments. It covers the practical life span of a tangible asset. With liabilities, it includes a pre-set amount of time over which money is paid back. Like this, a certain amount of money is set aside for the loan repayment over its lifetime. Even though depreciation is similar to Amortization, they are not the same concepts. The main difference between them lies in what they cover. While depreciation is most commonly employed to describe physical assets like property, vehicles, or buildings, Amortization instead covers intangibles such as product development, copyrights, or patents. Where liabilities are concerned, it relates to income in the future that will be paid out over a given amount of time. Depreciation is instead a lost income over a time period. Several different kinds of Amortization are presently in use. This varies with the accounting method that is practiced. Business Amortization deals with borrowed funds and loans and the paying of particular amounts in different time frames...
eBook - ePub- Bob Cinnamon, Brian Helweg-Larsen(Authors)
- 2010(Publication Date)
- Kogan Page(Publisher)
...10 The hidden costs – depreciation, amortisation and tax Depreciation and amortisation are financial conventions used to take account of the fact that assets reduce in value over time. In some cases, such as vehicles, they simply wear out, even if they are well maintained. In other cases, such as software, they may become obsolete, and need to be replaced even though they work perfectly. This can happen simply because there is now a better product available, and the cost of using the old one is much higher than the cost of using the new one. So, accountants have to estimate the useful life of an asset when it is bought, using their best judgement. If they overestimate this, the asset may be worthless while it still shows as an asset on the books. On the other hand, some assets outlive their expected working life, and still have real value many years later, but don’t appear on the balance sheet any more. The depreciation and amortisation is the amount by which the assets are reduced in value during each accounting period. This is taken as a charge in the P&L, as a fixed cost or expense. We have already established that assets are normally valued by accountants at what they cost, and this is known as the book value of the asset. This book value then reduces by the amount that the asset is depreciated or amortised over time. Land and buildings are not normally depreciated in the United Kingdom, as they are not ‘worn out’ in use...
eBook - ePubFair Value Measurement
Practical Guidance and Implementation
- Mark L. Zyla(Author)
- 2019(Publication Date)
- Wiley(Publisher)
...The significant accounting policies footnote may describe the Amortization policy for different types of intangible assets, including the amortizable life. The intangible asset footnote may provide a table showing the dollar amount and remaining useful life for each type of asset. It may also be possible to calculate the Amortization period based on the gross amount of the intangible and the change in the accumulated Amortization for the year. The acquisition footnote may provide information about recently acquired companies, including the dollar amount recognized for each category of intangible asset and the estimated remaining useful life. Each public company discloses slightly different information in their financial statement footnotes; therefore, information may be inconsistent from one company to the next. An example of guideline information for intangible asset's useful lives can be found in a recent AT&T's annual report. Footnote 7—Goodwill and Intangible Assets—describes the Amortization of certain intangible assets based on the asset's useful lives. Amortized intangible assets are definite‐life assets, and, as such, we record Amortization expense based on a method that most appropriately reflects our expected cash flows from these assets, over a weighted‐average life of 8.5 years (9.2 years for customer lists and relationships and 4.2 years for trade names and other). Amortization expense for definite‐life intangible assets was $5,186 for the year ended December 31, 2016, $2,728 for the year ended December 31, 2015, and $500 for the year ended December 31, 2014. Amortization expense is estimated to be $4,612 in 2017, $3,573 in 2018, $2,516 in 2019, $2,038 in 2020, and $1,563 in 2021. 11 The information contained in this footnote and in the footnotes of other market participants provides a source of information about the useful life of similar assets...
eBook - ePubFair Value Measurements
Practical Guidance and Implementation
- Mark L. Zyla(Author)
- 2009(Publication Date)
- Wiley(Publisher)
...An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized. The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. In a footnote, the FASB further clarifies the description of useful life, saying: The useful life of an intangible asset shall reflect the period over which it will contribute to the cash flows of the reporting entity, not the period of time that it would take that entity to internally develop an intangible asset that would provide similar benefits. However, a reacquired right recognized as an intangible asset is amortized over the remaining contractual period of the contract in which the right was granted. If an entity subsequently reissues (sells) a reacquired right to a third party, the entity includes the related unamortized asset, if any, in determining the gain or loss on the reissuance. 28 The useful life of the asset is a component of each of the three valuation techniques that are used to measure fair value under SFAS 157, Fair Value Measurement. Under the income approach, the useful life of the intangible asset is directly related to the forecast of future cash flows that the asset is expected to generate. Under the market approach, the useful life of the intangible asset is inherently factored into the market prices for comparable guideline assets...
eBook - ePubInternational Financial Reporting Standards (IFRS) Workbook and Guide
Practical insights, Case studies, Multiple-choice questions, Illustrations
- Abbas A. Mirza, Graham Holt, Magnus Orrell(Authors)
- 2010(Publication Date)
- Wiley(Publisher)
...Amortization 11.1 The depreciable amount of tangible assets with finite useful lives is to be allocated over its useful life. The depreciable amount is the cost of the asset (or other amount substituted for cost, e.g., in a revaluation model) less its residual value. Amortization shall commence when the asset is ready for use and shall cease when it is derecognized or is reclassified as held for sale under IFRS 5. 11.2 The residual value is to be assumed to be zero unless there is a commitment by a third party to acquire the asset at the end of its useful life or there is an active market for the asset and the residual value can be determined by reference to that market, and it is probable that an active market will continue to exist at the end of the asset’s useful life. 11.3 Therefore, an asset with a residual value at anything other than zero assumes that the entity will dispose of the asset prior to the end of the asset’s economic life. 11.4 The Standard requires that the residual value be reassessed at each balance sheet date. Any changes are to be treated as changes in accounting estimates. In practice, this is unlikely to have any impact in view of the basic presumption of a zero residual value. 11.5 Similarly, the useful life is to be reassessed annually. Any changes are also to be treated as changes in accounting estimates. 11.6 Intangible assets with indefinite useful lives are not to be amortized. However, the asset must be tested for impairment annually and whenever there is an indication that it may be impaired. IAS 36 provides guidance on impairment. Additionally, the determination of an indefinite useful life must be reassessed at each balance sheet date. If the assessment changes, it is to be treated as a change in accounting estimate. 12. IMPAIRMENT Entities are to apply the provisions of IAS 36 in assessing the recoverable amount of intangible assets and when and how to determine whether an asset is impaired. 13...
