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Intangible assets subject to amortization
Intangible assets subject to amortization
Amortization is the name given to the process of recording expense related to intangible assets that have been capitalized.
It is the intangible asset version of depreciation.
Like depreciation, we need to know (1) the useful life and (2) the estimated residual value of an intangible asset to calculate amortization. We also need to choose (3) an allocation method.
Useful life
Useful life
The useful life (i.e., how long the company will derive benefits from the asset) is often based on legal, regulatory, and contractual provisions. For example, patents are granted for periods of time (e.g., 20 years).
Residual value
Residual value
The residual value of an intangible asset is almost always assumed to be zero. There are some cases, however, where an intangible asset might have a positive residual value. For example, patents can be sold. If a plan to sell the patent exists, than the planned date of sale would establish the end of the patent's useful life.
Allocation method
Allocation method
The allocation method is almost always a time-based, straight-line method. Unlike property, plant, and equipment, an "accumulated amortization" account is hardly ever used. Doing so, however, is allowed under GAAP.
Example
Example
Amortization costs can be included in inventory
Amortization costs can be included in inventory
If an intangible asset is used in the manufacture of a product, amortization is included in the cost of inventory.
Amortization of internally developed intangible assets: Software development costs
Amortization of internally developed intangible assets: Software development costs
Recall: The costs incurred to develop software can be capitalized between technological feasibility and the date of product release.
If these costs are capitalized, they also need to be amortized. But, amortization is a little different than other intangible assets.
Software development costs are amortized based on whichever of the following is greater:
(Current revenue ÷ current and anticipated, future revenues) × Capitalized amount
Capitalized amount ÷ useful life (i.e., straight-line method)
Intangible assets not subject to amortization
Intangible assets not subject to amortization
The cost of an intangible asset with an indefinite useful life is not amortized.
Trademarks and tradenames are often considered to have indefinite useful lives.
Goodwill
Goodwill
Goodwill is an intangible asset whose cost is not expense through periodic amortization.
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