Business, Legal & Accounting Glossary
Process similar to depreciation, usually applied to intangible fixed assets. An annual charge made in a company’s profit and loss account to reduce the value of an intangible asset to zero over a period of years. A common example has been goodwill amortisation, but that has been abolished under international accounting standards. The goodwill, acquired through a takeover, is instead subjected to an annual impairment test.
Spreading the cost of an intangible asset, such as a lease, over the years in which it is used. It is usual to divide the cost of the lease by the number of years that the lease is held for, and then use that figure as the annual charge.
This is similar to depreciation except that depreciation deals with tangible or fixed assets such as motor vehicles or plant and equipment.
The building up over a period of a fund to replace a productive asset at the end of its useful life, or to repay a loan.
In the case of a loan, the amount required for amortisation depends on the interest rate that can be earned on the accumulated fund.
In the case of replacement of physical assets, the amount needed depends not only on the interest rate but also on the expected lifetime of the asset and on the rate of inflation, which affects the expected cost of replacement.
The practice of reducing the value of assets to reflect their reduced worth over time. The term means the same as depreciation, though in practice amortisation tends to be used for the write-off of intangible assets, such as goodwill, while either term is used for the write-off of fixed capital.
Amortising an asset effectively transfers its value or the part that is being written off, from the balance sheet to the profit and loss account, where it reduces taxable income. Depending on the relevant accounting standards, an intangible asset can be written off over time or all at once. Amortisation can also refer to the reduction of debt, either through periodic payments of principal and interest or through use of a sinking fund.
Mortgage lenders who set up their clients with amortization of payments are now losing money as the homeowner’s default on their loans.
Takeovers may be more on the rise now that goodwill amortization has been done away with and smaller companies are required to pay for their large purchases upfront.
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This glossary post was last updated: 26th April, 2020 | 105 Views.