Amortization Expense
IntermediateAmortization expense is the portion of an intangible asset's cost, such as a patent, software licence or customer contract, that is charged to the income statement in a period as the asset is used up.
Amortization works like depreciation, but for intangible assets, which have no physical form. When a company buys an intangible asset with a limited useful life, it spreads the cost over that life rather than recording it all at once.
For example, a company buys a patent for 300,000 that has ten years of legal protection remaining. Using the straight-line method, it records amortization expense of 30,000 a year for ten years.
Not all intangible assets are amortised. Goodwill and some brand names with no foreseeable end to their useful life are not amortised under IFRS and US GAAP for public companies. Instead, they are tested regularly for impairment, a reduction in value.
Like depreciation, amortization is a non-cash expense, so it is added back when calculating operating cash flow. It is also one of the items removed when calculating EBITDA. The word amortization is also used for repaying a loan in regular instalments, which is a separate meaning covered under Foundations & Personal Finance.
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