Definition
Amortisation
Amortisation is the systematic write-off of the cost of an intangible asset, such as software, patents or goodwill, over its useful life.
Amortisation does for intangibles what depreciation does for physical assets: it spreads their cost across the periods that benefit. Finite-life intangibles like licences and software are amortised, while indefinite-life assets such as goodwill are tested for impairment rather than amortised under Ind AS.
Like depreciation, amortisation is a non-cash charge, so it depresses reported profit but is added back in operating cash flow. Heavy amortisation of acquired intangibles can make a company's accounting profit look weaker than its cash generation.
Related terms
- DepreciationDepreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life, reflecting wear and obsolescence as an expense.
- GoodwillGoodwill is the premium a company pays to acquire another over the fair value of its identifiable net assets, recorded as an intangible asset.
- Intangible AssetsIntangible assets are non-physical assets with economic value, such as patents, trademarks, software, licences and goodwill.
- ImpairmentImpairment is the write-down of an asset's carrying value when its recoverable amount falls below what is recorded on the balance sheet.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.