• Compute amortization expense on amortizable assets

 

Amortization is the systematic write-off of the cost of an intangible asset to expense. A portion of an intangible asset’s cost is allocated to each accounting period in the economic (useful) life of the asset. All intangible assets are not subject to amortization. Only recognized intangible assets with finite useful lives are amortized. The finite useful life of such an asset is considered to be the length of time it is expected to contribute to the cash flows of the reporting entity. Pertinent factors that should be considered in estimating useful life include legal, regulatory, or contractual provisions that may limit the useful life. The method of amortization should be based upon the pattern in which the economic benefits are used up or consumed. If no pattern is apparent, the straight-line method of amortization should be used by the reporting entity.

Recognized intangible assets deemed to have indefinite useful lives are not to be amortized. Amortization will, however, begin when it is determined that the useful life is no longer indefinite. The method of amortization would follow the same rules as intangible assets with finite useful lives.

Straight-line amortization is calculated the same was as straight-line depreciation for plant assets. Generally, we record amortization by debiting Amortization Expense and crediting the intangible asset account. An accumulated amortization account could be used to record amortization. However, the information gained from such accounting might not be significant because normally intangibles do not account for as many total asset dollars as do plant assets.

Straight-line amortization is not the only option. ASC 350-30-35-6 states that, “[the] method of amortization shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method shall be used.” When an income approach method is used to value an intangible asset, it is appropriate to amortize that asset in a manner that reflects the cash flows utilized in the valuation (often called the “pattern of benefits” method). That being said, many companies still use a straight-line approach.

Watch this video to see a demonstration of basic amortization using the straight-line method:You can view the transcript for “How to account for intangible assets, including amortization (3 of 5)” here (opens in new window).

 

Next, we’ll learn how to record amortization of intangible assets.