Amortization (accounting)

Inaccounting,amortizationis a method of obtaining the expenses incurred by anintangible assetarising from a decline in value as a result of use or the passage of time. Amortization is the acquisition cost minus the residual value of an asset, calculated in a systematic manner over an asset's useful economic life.Depreciationis a corresponding concept fortangible assets.

Methodologies for allocating amortization to each accounting period are generally the same as those for depreciation. However, many intangible assets such asgoodwillor certainbrandsmay 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).

While theoretically amortization is used to account for the decreasing value of anintangible assetover its useful life, in practice many companies will amortize what would otherwise be one-time expenses through listing them as acapital expenseon thecash flow statementand paying off the cost through amortization, having the effect of improving the company'snet incomein the fiscal year or quarter of the expense.

Amortization is recorded in thefinancial statementsof an entity as a reduction in thecarrying valueof the intangible asset in thebalance sheetand as an expense in theincome statement.

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

See also

• Annuity
• Earnings before interest, taxes, depreciation and amortization(EBITDA)
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