Amortization (business) - Amortization of Intangible Assets

Amortization of Intangible Assets

In accounting, amortization refers to expensing the acquisition cost minus the residual value of intangible assets (often intellectual property such as patents and trademarks or copyrights) in a systematic manner over their estimated useful economic lives so as to reflect their consumption, expiry, obsolescence or other decline in value as a result of use or the passage of time.

A corresponding concept for tangible assets is depreciation. Methodologies for allocating amortization to each accounting period are generally the same as for depreciation. However, many intangible assets such as goodwill or certain brands may be deemed to have an indefinite useful life and are therefore not subject to amortization (although goodwill is subjected to an impairment test every year).

Amortization is recorded in the financial statements of an entity as a reduction in the carrying value of the intangible asset in the balance sheet and as an expense in the income statement.

Under International Financial Reporting Standards, guidance on accounting for the amortization of intangible assets is contained in IAS 38. Under United States generally accepted accounting principles (GAAP), the primary guidance is contained in FAS 142.

While theoretically amortization is used to account for the decreasing value of an intangible asset over its useful life, in practice, many companies will "amortize" what would otherwise be one-time expenses by listing them as a capital expense on the cash flow statement and paying off the cost through amortization, thereby improving the company's net income in the fiscal year or quarter of the expense.