What is amortisation?
Definition of amortisation
Amortisation is the act of spreading the value of an intangible capital asset over a period of time.
Amortisation for intangible capital assets
An intangible capital asset is an asset that cannot be physically seen or touched, for example:
- patents or copyrights
- a high-value domain name for a website
- rights to a film or television show
Most intangible capital assets have to be amortised by law. This is because they’re deemed to have a finite useful life to whatever business owns them (for example, the lifetime of a patent) and the value of the asset has to be spread over the term of that useful life.
For example, if a business has a patent worth £1 million that it deems to be useful for 10 years, the business would post one-tenth of the patent’s value as amortisation each year. At the end of the first year of its life, the patent would show on the business’s balance sheet as being worth £900,000, and £100,000 worth of amortisation would form part of the business’s running costs in its profit and loss report.
Amortisation vs. depreciation
Depreciation and amortisation are similar concepts in accounting and both describe the act of spreading the value of a capital asset out over time. Depreciation is used for tangible capital assets, such as a computer or piece of machinery, whereas amortisation is used for intangible capital assets.