tejas.gaikwad.1044
Tejas Gaikwad
The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright.
Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and that the patent on the equipment lasts 15 years, this would mean that $2 million would be recorded each year as an amortization expense.
While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets.
Amortization can be calculated easily using most modern financial calculators, spreadsheet software packages such as Microsoft Excel, or amortization charts and tables.
In accounting, amortization refers to expensing the acquisition cost minus the residual value of intangible assets (often intellectual property such as patents and trademarks or copyrights) in a systematic manner over their estimated useful economic lives so as to reflect their consumption, expiry, obsolescence or other decline in value as a result of use or the passage of time.
A corresponding concept for tangible assets is depreciation. Methodologies for allocating amortization to each accounting period are generally the same as 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).
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. Under United States generally accepted accounting principles (GAAP), the primary guidance is contained in FAS 142.
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 by listing them as a capital expense on the cash flow statement and paying off the cost through amortization, thereby improving the company's net income in the fiscal year or quarter of the expense.
How to Amortize Assets:-
Steps:-
1. Make sure you know the difference between amortization and depreciation:
a) Amortization refers to spreading the cost of an intangible asset over its useful life. Intangible assets include patents, copyrights, and intellectual property.
b) Depreciation refers to prorating the cost of a tangible asset over its estimated life. Tangible assets include land, building, equipment, and vehicles.
2. Identify an asset as an intangible asset if it meets the following criteria:
a) It is a non-physical asset that has value to the company.
b) It is an intangible asset that has measurable effect, such as cost (e.g. purchase price, taxes), that can benefit the company.
c) The cost of preparing intangible asset is attributed for the asset's intended use. For instance, an acquired patent is purchased for its intended use of protecting patent rights for an invention.
d)Assets resulting from development are recognized as an intangible asset if the completion of the intangible asset will be used or sold, it can generate future benefits, the expenses attributed to the intangible asset can be measured, and there are available resources to complete the development.
3. Include intangible assets that can be amortized. Common types of these intangible assets include the following:
a) Patents.
b) Copyrights.
c) Trademarks.
d) Intellectual Property.
e) Franchise rights.
f) Business licenses.
4. Do not include intangible assets that cannot be amortized due to its indefinite useful life such as the following:
a) Goodwill.
b) Brands.
c) Mastheads or Logos.
d) Publishing titles.
e) Customer lists.
Amortization of Intangible Assets:-
1. Begin amortization of intangible assets when the asset is acquired or when it is available for use.
2. Determine the initial cost of intangible asset:
As an example, assume that you bought a patent for your invention. It cost you $50,000 to buy the patent. This will be your initial cost.
3. Figure out your asset's estimated useful life:
In the same example, find out the duration of your patent. Let's pretend that your patent has a life of 20 years. This will be the useful life.
4. Calculate the amortization per year using the formula:
a) Initial cost / useful life = amortization per year.
b) Therefore, $50,000 / 20 = $2,500.
Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and that the patent on the equipment lasts 15 years, this would mean that $2 million would be recorded each year as an amortization expense.
While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets.
Amortization can be calculated easily using most modern financial calculators, spreadsheet software packages such as Microsoft Excel, or amortization charts and tables.
In accounting, amortization refers to expensing the acquisition cost minus the residual value of intangible assets (often intellectual property such as patents and trademarks or copyrights) in a systematic manner over their estimated useful economic lives so as to reflect their consumption, expiry, obsolescence or other decline in value as a result of use or the passage of time.
A corresponding concept for tangible assets is depreciation. Methodologies for allocating amortization to each accounting period are generally the same as 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).
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. Under United States generally accepted accounting principles (GAAP), the primary guidance is contained in FAS 142.
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 by listing them as a capital expense on the cash flow statement and paying off the cost through amortization, thereby improving the company's net income in the fiscal year or quarter of the expense.
How to Amortize Assets:-
Steps:-
1. Make sure you know the difference between amortization and depreciation:
a) Amortization refers to spreading the cost of an intangible asset over its useful life. Intangible assets include patents, copyrights, and intellectual property.
b) Depreciation refers to prorating the cost of a tangible asset over its estimated life. Tangible assets include land, building, equipment, and vehicles.
2. Identify an asset as an intangible asset if it meets the following criteria:
a) It is a non-physical asset that has value to the company.
b) It is an intangible asset that has measurable effect, such as cost (e.g. purchase price, taxes), that can benefit the company.
c) The cost of preparing intangible asset is attributed for the asset's intended use. For instance, an acquired patent is purchased for its intended use of protecting patent rights for an invention.
d)Assets resulting from development are recognized as an intangible asset if the completion of the intangible asset will be used or sold, it can generate future benefits, the expenses attributed to the intangible asset can be measured, and there are available resources to complete the development.
3. Include intangible assets that can be amortized. Common types of these intangible assets include the following:
a) Patents.
b) Copyrights.
c) Trademarks.
d) Intellectual Property.
e) Franchise rights.
f) Business licenses.
4. Do not include intangible assets that cannot be amortized due to its indefinite useful life such as the following:
a) Goodwill.
b) Brands.
c) Mastheads or Logos.
d) Publishing titles.
e) Customer lists.
Amortization of Intangible Assets:-
1. Begin amortization of intangible assets when the asset is acquired or when it is available for use.
2. Determine the initial cost of intangible asset:
As an example, assume that you bought a patent for your invention. It cost you $50,000 to buy the patent. This will be your initial cost.
3. Figure out your asset's estimated useful life:
In the same example, find out the duration of your patent. Let's pretend that your patent has a life of 20 years. This will be the useful life.
4. Calculate the amortization per year using the formula:
a) Initial cost / useful life = amortization per year.
b) Therefore, $50,000 / 20 = $2,500.