Amortization Expense Recognition

Amortization refers to the periodic allocation of the cost of capital assets over the useful life of the assets. This involves intangible assets such as franchise agreements.

The amortization expense is calculated in such a way that it matches the economic benefit from the asset in that period. The most commonly used method is the straight line method. Just like the straight line method to calculate the depreciation expense, the straight line method is used to calculate the amortization expense.

Note that some assets such as goodwill have infinite life. Such assets are not amortized. Instead goodwill is impaired under US GAAP. The companies are required to determine the fair value of the reporting units, using present value of future cash flow, and compare it to their carrying value (book value of assets plus goodwill minus liabilities.) If the fair value is less than carrying value (impaired), the goodwill value needs to be reduced so the fair value is equal to carrying value. The impairment loss is reported as a separate line item on the income statement as an expense, and new adjusted value of goodwill is reported in the balance sheet. This is done atleast annually.

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Understanding Income Statements