What is Amortization of Intangibles?

Amortization of intangibles is the ongoing, structured expensing of the carrying amount of an intangible asset over its estimated useful life. The resulting amortization expense is charged against revenues in the calculation of an entity’s profit or loss. Amortization only applies to intangible assets, such as patents, trademarks, and copyrights. Intangible assets are non-physical assets that possess economic value. Tangible assets, such as buildings and vehicles, are charged to expense through a similar process known as depreciation.

Amortization of Goodwill

When an acquirer buys another entity, the excess of the amount paid over the fair market value of the acquired assets and liabilities is recorded as a goodwill asset. Privately-held organizations and nonprofits are allowed to amortize this goodwill asset to expense over a period not to exceed 10 years. Publicly-held companies are not allowed to amortize goodwill; instead, they must test it for impairment at regular intervals, which may result in an impairment charge.

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Amortization vs. Depreciation

The key difference between amortization and depreciation is that amortization is used to charge the carrying amount of intangible assets to expense, while depreciation is used to charge the carrying amount of tangible assets to expense. In addition, the amortization process rarely assumes that there will be any salvage value at the end of an asset’s useful life, while this is a distinct possibility for a tangible asset. A third difference is that amortization is usually calculated on the straight-line basis, while accelerated depreciation is commonly applied to tangible assets.

How to Compute Amortization of Intangibles

Intangible assets are most commonly amortized using the straight-line method. Under this approach, the carrying amount of the asset is divided by the number of months of its expected useful life to arrive at a monthly amortization charge.

Example of Amortization of Intangibles

A business acquires a broadcast license for $500,000, which it expects will be terminated in five years. Using the straight-line method, the firm should charge $100,000 of the carrying amount of this asset to expense in each of the next five years. At the end of five years, the carrying amount of the asset will have been reduced to zero. The five-year duration of the amortization period is appropriate, since it matches the period of time over which the company expects to generate revenue from the broadcast license. Thus, revenues and expenses are matched.

Presentation of Amortization of Intangibles

Amortization expense appears in the reporting entity’s income statement, usually within the selling, general and administrative cluster of expenses. The amount of accumulated amortization appears in the balance sheet as a contra account that offsets the intangible assets line item. The intangible assets line item is located within the fixed assets block of line items in the balance sheet. An example of how amortization expense is presented in an income statement appears in the following exhibit.