Amortization of Intangible Assets: Calculation and Disclosure
- Graziano Stefanelli
- Jun 17
- 3 min read
Intangible assets are assets like patents, copyrights, franchises, and licenses. The systematic amortization of these assets is required to match their cost with the periods they benefit, ensuring financial statements reflect both the ongoing consumption of economic value and the remaining benefit held on the balance sheet. Amortization policies are governed by precise rules under US GAAP and IFRS, affecting profit measurement, asset presentation, and disclosure requirements.
1. What Are Intangible Assets?
Intangible assets are identifiable non-monetary resources without physical substance, acquired either externally or developed internally. Common examples include:
Patents
Trademarks
Copyrights
Customer lists
Licenses and franchises
Software
Intangibles are recognized when it is probable that future economic benefits will flow to the entity and the cost can be measured reliably. Indefinite-lived intangibles (e.g., goodwill, some trademarks) are not amortized but are subject to annual impairment tests.
2. Amortization Basics
Amortization allocates the cost of a finite-lived intangible asset over its useful economic life, similar to depreciation of tangible assets. The pattern of amortization should reflect the manner in which the asset’s economic benefits are consumed. If that pattern cannot be determined reliably, the straight-line method is used by default.
Key factors:
Useful life: Period over which the asset is expected to generate economic benefits.
Residual value: Typically assumed to be zero unless a third party commits to purchase at the end of the useful life.
Amortization method: Chosen to best reflect consumption of benefits.
3. Calculation of Amortization
Straight-Line Method: The most common approach, allocating equal expense each period.
Formula: (Cost − Residual Value) ÷ Useful Life
Example: A company acquires a patent for $50,000 with a useful life of 10 years and no residual value.Annual amortization = $50,000 ÷ 10 = $5,000 per year.
Other Methods: If economic benefits are expected to be consumed unevenly, alternative methods (such as units-of-production or declining balance) may be used if justified and consistently applied.
4. Accounting Treatment and Journal Entries
Initial Recognition:
Dr. Intangible Asset
Cr. Cash or Payable
Annual Amortization:
Dr. Amortization Expense (Income Statement)
Cr. Accumulated Amortization (Contra-asset, Balance Sheet)
Example:
Dr. Amortization Expense $5,000
Cr. Accumulated Amortization $5,000
Disposal or Derecognition:
When an intangible asset is sold or scrapped before the end of its useful life, remove the carrying amount and any related accumulated amortization, recognizing a gain or loss as appropriate.
5. Financial Statement Presentation
Balance Sheet: Intangible assets are presented at cost less accumulated amortization and impairment.
Income Statement: Amortization expense is classified within operating expenses.
Cash Flow Statement: Amortization is added back to net income under the indirect method, as it is a non-cash charge.
6. Disclosure Requirements
Both US GAAP and IFRS require comprehensive disclosures for intangible assets, including:
Useful lives or amortization rates
Amortization method(s) used
Gross carrying amount and accumulated amortization at the beginning and end of the period
Total amortization expense for the period
Impairment losses recognized or reversed
IFRS (IAS 38) requires separate disclosure for each class of intangible asset.
US GAAP (ASC 350) mandates disclosure of major classes and related amortization details.
7. Practical Issues
Estimating Useful Life: Requires judgment; reassess if there is a change in expected use or legal rights.
Revaluation: IFRS permits the revaluation model for intangibles with active markets; US GAAP does not.
Impairment: Regularly test for impairment, especially when there is evidence of diminished utility or economic benefits.
8. Example Table: Amortization Schedule for a Patent
9. Common Errors and Best Practices
Overlooking useful life reviews: Update estimates if there are changes in economic use or legal rights.
Failing to recognize impairment losses: Promptly write down assets if recoverable value drops below carrying amount.
Inconsistent methods: Apply the chosen amortization method consistently unless a justified change occurs.
Incomplete disclosures: Ensure all required information is presented in the notes.
10. References
US GAAP: ASC 350 “Intangibles—Goodwill and Other”
IFRS: IAS 38 “Intangible Assets”
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