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 life–"useful life"–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
- EBITDA: The Good, the Bad, and the Ugly
- EBITDA is one of those terms that is increasingly used, but usually for the wrong reason. This paper will define it and discuss how it can be useful, but also misleading. EBITDA is an acronym for "Earnings before interest, taxes, depreciation and amortization". It is calculated by taking operating income...
- White papers 2002-02-06
- Amortization Calculator: What If I Pay It Off Early?
- Amortization or amortisation is the process of decreasing or accounting for an amount over a period of time. This tool will help to understand whether paying off your mortgage early then the specified time is advantageous or not.
- Tools & templates 2008-01-01
- 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
- Amortization Schedule
- This tool will build an amortization table for any mortgage or loan. The table will show you a running tabulation of the amount of principal left to pay, the total principal paid and the interest paid.
- Tools & templates 2008-01-01
- Loan Amortization Table Calculator
- You can use this tool to tell you how much money you still owe on a personal loan. This calculator accommodates amortization tables of up to ten years and will show you the remaining principal on the loan based on the amount borrowed and the term of the loan.
- Tools & templates 2008-01-01
- 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
- Sage Software Exceeds $1 Billion in 2007 North America Revenue
- Sage Software, the North American business of the Sage Group plc (LSE: SGE), announced today that total revenue for the fiscal year ended September 30, 2007 was $1.01 billion, and EBITA (earnings before interest, tax and amortization, which excludes the effects of amortization of acquired intangible assets and the net...
- Research articles 2007-11-28
- FASB Proposal Would Boost US Chemical Industry Earnings.(Financial Accounting Standards Board)(Brief Article)
- Elimination of goodwill amortization could spark M&As. Elimination of goodwill amortization could spark M&As.
- Research articles 2001-01-22
- Sage Software Reports Record Year Exceeding $652 Million in 2006 North America Revenue
- Sage Software, the North American business of the Sage Group plc (LSE: SGE), announced today that total revenue for the fiscal year ended September 30, 2006 was $652.2 million, and EBITA (earnings before interest, tax and amortization, which includes the effects of amortization of acquired intangible assets and the net...
- Research articles 2006-11-29
- 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
- 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
- Bond Amortization
- This template is for Bond amortization.
- Tools & templates 1997-03-01
- Interest Only Mortgage Calculator
- Use this tool to generate an amortization schedule for an interest only mortgage. Quickly see how much interest you will pay and your principal balances. You can even determine the impact of any principal prepayments! This tool determines full yearly or monthly amortization schedule.
- Tools & templates 2008-01-01
- AMVESCAP PLC Reports RECORD Results for Year Ended December 31, 2000
- Business Editors LONDON--BUSINESS WIRE--Feb. 6, 2001--AMVESCAP (NYSE:AVZ) (TSE:AVZ.)(LSE:AVZ.) reported that profit before tax, exceptional item and goodwill amortization increased 73% to pound554.5 million ($826.2 million) from pound319.8 million ($518.1 million) in 1999. Diluted earnings per share before exceptional item and goodwill amortization increased...
- Research articles 2001-02-06
- Mortgage And Loan Amortization Scheduler
- The tool calculates the payment schedule for a mortgage or loan based on the mortgage or loan amount, payment type, payment frequency, interest rate and amortization period information provided. This tool is intended to help illustrate the affordability of various mortgage payment options. By changing the various inputs, you can...
- Tools & templates 2008-01-01
- 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
- 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
- Interest Only Payment Calculator
- When only interest is being paid, the loan will never be paid off. There is no such thing as an interest only Amortization Table because with an interest only loan no amortization takes place. The same amount is owed at the end of the loan as was owed at the...
- Tools & templates 2008-01-01
- Biweekly Mortgage Payment Amortization
- This template is for Biweekly mortgage payment amortization.
- Tools & templates 1997-03-01
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