Amortization Of Intangibles
Amortization of Intangibles refers to the process of gradually writing off the cost of intangible assets over their expected useful life. Intangible assets include patents, trademarks, copyrights, franchises, and goodwill. This process is similar to depreciation for tangible assets but applies to intangible assets. Amortization of intangibles ensures that financial statements accurately reflect the value of these assets and match the economic benefits they generate.
Key characteristics include:
Intangible Assets: Include patents, trademarks, copyrights, franchises, goodwill, etc.
Expected Useful Life: Amortization is based on the expected useful life of the intangible asset, typically measured in years.
Amortization Methods: Common methods include the straight-line method, where the cost of the intangible asset is evenly spread over each accounting period.
Financial Statement Reflection: Amortization expense is reported on the income statement, and the book value of intangible assets is reduced on the balance sheet.
Example of Amortization of Intangibles application:
Suppose a company purchases a patent for $1 million with an expected useful life of 10 years. The company will amortize the cost of the patent annually, meaning $100,000 will be amortized each year. In the company's financial statements, an amortization expense of $100,000 will be recorded annually, and the book value of the intangible asset on the balance sheet will decrease by $100,000 each year.
Amortization of Intangibles
Definition: Amortization of intangibles refers to the process of spreading the cost of intangible assets over their expected useful life. Intangible assets include patents, trademarks, copyrights, franchises, goodwill, etc. This process is similar to the depreciation of tangible assets, but the subject of amortization is intangible assets. The purpose of amortization is to reasonably reflect the value of these assets in financial statements and match the economic benefits they generate.
Origin
The concept of amortization of intangibles originated from the development of accounting, particularly in the early 20th century, as companies began to place more importance on intangible assets. Key events include the regulation of financial statements by the U.S. Securities and Exchange Commission (SEC) in the 1930s and the subsequent establishment of international accounting standards.
Categories and Characteristics
Amortization of intangibles mainly includes the following categories:
- Patent Amortization: Based on the legal protection period of the patent, usually 20 years.
- Trademark Amortization: Based on the registration validity period of the trademark, usually 10 years, but can be renewed.
- Copyright Amortization: Based on the protection period of the copyright, usually the author's lifetime plus 70 years.
- Franchise Amortization: Based on the contract term of the franchise.
- Goodwill Amortization: Goodwill is usually not amortized but is subject to annual impairment tests.
The main characteristics of amortization of intangibles include:
- Expected Useful Life: Amortization of intangible assets is based on their expected useful life, usually measured in years.
- Amortization Method: Common methods include the straight-line method, which evenly spreads the cost of the intangible asset over each accounting period.
- Financial Statement Reflection: Amortization expenses are listed in the income statement and reduce the book value of intangible assets in the balance sheet.
Specific Cases
Case 1: Suppose a company purchases a patent for $1 million with an expected useful life of 10 years. The company will amortize the cost of the patent annually, i.e., $100,000 per year. In each year's financial statements, the company will record $100,000 as amortization expense and reduce the book value of the intangible asset by $100,000 in the balance sheet.
Case 2: Another company acquires a franchise for $500,000 with a contract term of 5 years. The company will amortize the cost of the franchise annually, i.e., $100,000 per year. In each year's financial statements, the company will record $100,000 as amortization expense and reduce the book value of the intangible asset by $100,000 in the balance sheet.
Common Questions
Q: What is the difference between amortization of intangibles and depreciation of tangible assets?
A: Amortization of intangibles applies to intangible assets such as patents and trademarks, while depreciation applies to tangible assets such as machinery and buildings. The calculation methods are similar, but the subjects are different.
Q: Why is goodwill not amortized?
A: Goodwill is usually not amortized but is subject to annual impairment tests because its value is difficult to determine with a specific useful life.
