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Accounting term for the spreading of payments over multiple periods
In
accounting
,
amortization
is a method of obtaining the expenses incurred by an
intangible asset
arising from a decline in value as a result of use or the passage of time. Amortisation is the acquisition cost minus the residual value of an asset, calculated in a systematic manner over an asset's useful economic life.
Depreciation
is a corresponding concept for
tangible assets
.
Methodologies for allocating amortization to each accounting period are generally the same as these 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).
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 through listing them as a
capital expense
on the
cash flow statement
and paying off the cost through amortization, having the effect of improving the company's
net income
in the fiscal year or quarter of the expense.
[1]
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.
[2]
Under
United States generally accepted accounting principles (GAAP)
, the primary guidance is contained in FAS 142.
[3]
See also
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References
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