BNET Business Dictionary
Business Definition for: Amortization
- a method of recovering (deducting or writing off) the capital costs of intangible assets over a fixed period of time.
Example: For tax purposes, the distinction is not always made between amortization and depreciation, yet amortization remains a viable financial accounting concept in its own right.
It is computed using the straight-line method of depreciation: divide the initial cost of the intangible asset by the estimated useful life of that asset.Initial cost / Useful life = Amortization per year For example, if it costs $10,000 to acquire a patent and it has an estimated useful life of 10 years, the amortized amount per year is $1,000.
The amount of amortization accumulated since the asset was acquired appears on the organization's balance sheet as a deduction under the amortized asset.
While that formula is straightforward, amortization can also incorporate a variety of noncash charges to net earnings and/or asset values, such as depletion, write-offs, prepaid expenses, and deferred charges. Accordingly, there are many rules to regulate how these charges appear on financial statements. The rules are different in each country, and are occasionally changed, so it is necessary to stay abreast of them and rely on expert advice.
For financial reporting purposes, an intangible asset is amortized over a period of years. The amortizable lifeâ€""useful life"â€"of an intangible asset is the period over which it gives economic benefit.
Intangibles that can be amortized can include
Copyrights, based on the amount paid either to purchase them or to develop them internally, plus the costs incurred in producing the work (wages or materials, for example). At present, a copyright is granted to a corporation for 75 years, and to an individual for the life of the author plus 50 years. However, the estimated useful life of a copyright is usually far less than its legal life, and it is generally amortized over a fairly short period;
Cost of a franchise, including any fees paid to the franchiser, as well legal costs or expenses incurred in the acquisition. A franchise granted for a limited period should be amortized over its life. If the franchise has an indefinite life, it should be amortized over a reasonable period not to exceed 40 years;
Covenants not to compete: an agreement by the seller of a business not to engage in a competing business in a certain area for a specific period of time. The cost of the not-to-compete covenant should be amortized over the period covered by the covenant unless its estimated economic life is expected to be less;
Easement costs that grant a right of way may be amortized if there is a limited and specified life;
Organization costs incurred when forming a corporation or a partnership, including legal fees, accounting services, incorporation fees, and other related services. Organization costs are usually amortized over 60 months;
Patents, both those developed internally and those purchased. If developed internally, a patent's "amortizable basis" includes legal fees incurred during the application process. A patent should be amortized over its legal life or its economic life, whichever is the shorter;
Trademarks, brands, and trade names, which should be written off over a period not to exceed 40 years;
Other types of property that may be amortized include certain intangible drilling costs, circulation costs, mine development costs, pollution control facilities, and reforestation expenditures;
Certain intangibles cannot be amortized, but may be depreciated using a straight-line approach if they have "determinable" useful life. Because the rules are different in each country and are subject to change, it is essential to rely on specialist advice.
- the payment of the principal and interest on a loan in equal amounts over a period of time
Wiktionary Definition for: Amortization
- In accounting, the process by which the cost of an intangible asset (such as an intellectual property right) is distributed over the projected useful life of the asset.
- Such a projection with respect to a particular asset.
Additional Resources
- Agents encouraged by GAO amortization report. (General Accounting Office)
- Agents Encouraged By GAO Amortization Report WASHINGTON - Agent and broker groups were encouraged by a General Accounting Office report recommending that Congress consider revising current tax law to allow amortization of intangible assets, includingAgents Encouraged By GAO Amortization Report WASHINGTON -...
- Research articles 1991-08-26
- Efficient Gain and Loss Amortization and Optimal Funding in Pension Plans
- The paper considers efficient methods of amortizing actuarial gains and losses in defined-benefit pension plans. In the context of a simple model where asset gains and losses emerge as a consequence of random independent and identically distributed rates of investment return, it has been shown that direct amortization of such...
- White papers 2004-02-24
- Loan Payment Calculator With Amortization Schedule
- This tool will compute a loan's monthly payment amount based on the principal amount borrowed the length of the loan and the annual interest rate. Then, once you have computed the monthly payment, click on the "Create Amortization Schedule" button to create a report you can print out. Note that...
- Tools & templates 2008-01-01
- IRS stands firm on intangible offer. (Internal Revenue Service, amortization of intangible assets)
- WASHINGTON--The Internal Revenue Service is standing firmly behind its settlement offer on disputes over amortization of intangible assets despite a strong protest by insurance agents and brokers. In a letter to Kenneth J. Kies, counsel to the Amor WASHINGTON--The Internal Revenue Service is standing...
- Research articles 1994-04-11
- Intangibles amortization bill has agent/broker vote.
- Intangibles Amortization Bill Has Agent/Broker Vote WASHINGTON - Insurance agents and brokers are making an all-out effort to support legislation clarifying that intangible assets, including expirations, can be amortized by taxpayers. The legislatIntangibles Amortization Bill Has Agent/Broker Vote WASHINGTON...
- Research articles 1991-04-08
- U.S. tax court says amortization of cable franchise costs OK.
- U.S. Tax Court Says Amortization of Cable Franchise Costs OK Washington -- In a victory for TeleCommunications Inc. and the cable industry as a whole, the United States Tax Court ruled last week that MSOs can continue to amortize the cost of...
- Research articles 1990-11-12
- Following Sen. defeat, agents resume amortization battle. (insurance agents)
- WASHINGTON -- Insurance agents are re-forming their battle lines as the war to secure legislation permitting 100 percent amortization of intangible assets over a 14-year period enters a new phase. Still angry over the decision of the Senate to pres WASHINGTON -- Insurance agents...
- Research articles 1993-07-05
- Agents win decision on intangibles. (Supreme Court decision on amortization of intangible assets)
- WASHINGTON--In a major victory for producers, the U.S. Supreme Court has barred the Internal Revenue Service from automatically denying amortization of intangible assets just because the asset may be related to goodwill. In a five-to-four decision WASHINGTON--In a major victory for producers, the...
- Research articles 1993-04-26
- The DIRECTV Group Announces Third Quarter 2005 Results; DIRECTV U.S. Revenues Increase 22% to over $3.0 Billion; DIRECTV U.S. Operating Profit before Depreciation and Amortization Increases 133% to $338 Million
- EL SEGUNDO, Calif. -- The DIRECTV Group, Inc. (NYSE:DTV) today reported third quarter net income of $95 million compared with a net loss of $1.01 billion last year and operating profit of $156 million compared with an operating loss of $1.55 billion in the same period of 2004. In addition,...
- Research articles 2005-11-03
- Amortization of intangible assets. (opinions and impending legislation) (Column)
- Historically, amortization of a retail fuel oil customer list has been permitted since the U.S. Circuit Court decision Holden Fuel Oil Co. v. Commissioner (1973). It permitted amortization of 75% of the consideration paid (the other 25% was considered nonamortizable goodwill) over a 15-year period....
- Research articles 1991-11-01
- Shaw Improves Bank Facility by Extending Term and Eliminating Amortization.
- CALGARY, ALBERTA, May 6, 2004 CCNMatthews via COMTEX Shaw Communications today announced that it had amended several key conditions of its existing bank facility. Effective April 30, 2004, facility A, which is a revolving facility, will have an availability of $910 million through to...
- Research articles 2004-05-06
- Amortization issue is laid to rest - amortization of intangible assets such as magazine's customer lists and databases - Brief Article
- A major bone of contention between publishers and the Internal Revenue Service--haggling over the amortization of intangible assets like customer lists and databases--is no more, thanks to the Clinton Administration's budget. The new legislation fixes the depreciation period of all intangible assets at 15 years. That length of time is...
- Research articles 1993-09-15
- Macy's EBITDA above projections. (R.H. Macy and Co. Inc.; March 1993 earnings before interest, taxes, depreciation and amortization )
- R.H. Macy and Company Inc has reported that its Mar 1993 earnings before interest, taxes, depreciation and amortization were a little over what it had expected. The company said that the $148.5 million it lost during March was the result of the 11 stores it closed. The stores included six...
- Research articles 1993-05-04
- Using The Loan Amortization And Loan Analysis Templates
- You're about to sign on the dotted line for a home mortgage or car loan. You're thinking whether this is the best interest rate or term for this loan or what will the payment schedule look like. Before you ink the deal, take a look at the templates in this...
- White papers
- 7 Year Balloon Loan Amortization
- This template calculates monthly loan payments and prepares an amortization schedule for a 7 year balloon loan. A balloon loan requires a large final payment at some future date.
- Tools & templates 2000-01-02
- Biweekly Mortgage Payment Amortization
- This template is for Biweekly mortgage payment amortization.
- Tools & templates 1997-03-01
- Bond Amortization
- This template is for Bond amortization.
- Tools & templates 1997-03-01
- Mortgage Amortization Schedule
- This template is for Mortgage amortization schedule.
- Tools & templates 1997-03-01
- Loan Amortization Schedule
- This template is for Loan amortization schedule.
- Tools & templates 2000-08-25
- Loan Amortization Template
- This is a template for loan amortization.
- Tools & templates 2005-08-01
