Amortization of Intangible Assets

For assets with indefinite lives, there is no amortization. Instead a test of impairment is conducted at least once a year to check if the assets are impaired. If there is impairment, then the value of the asset is reduced and the reduction is recognized as a loss in income statement. An example of an unidentifiable intangible asset with indefinite life is goodwill created as a result of business combination.

Example

A company acquired another company and as a result of the business combination, it acquired the following intangible assets:

Copyright = $200,000

Trademark = $500,000

Franchise = $200,000

Goodwill = $300,000

Total intangible assets = $1,200,000

The company expects to sell the copyright after 5 years for $50,000

The trademark will expire in 10 years.

The franchise agreement will expire in 5 years which the company can renew at a small fee.

We can use any depreciation method to calculate the depreciation. Using the straight-line method, the depreciation of each intangible asset will be calculated as follows:

Copyright = (200,000 – 50,000)/5 = $30,000

Trademark = 500,000/10 = $50,000

Franchise is an indefinite asset as it can be renewed for a small fee. So, it will not be amortized. Goodwill also is an indefinite asset and will not be amortized.

Total amortization expense = $30,000 + $50,000 = $80,000

At the end of the first year, the carrying value (book value) of intangible assets will be:

Intangible assets: $1,200,000

Less Accumulated amortization: -80,000

Net intangible assets: 1,120,000