Amortization

4 Key excerpts on "Amortization"

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  eBook - ePub

  Relevant Accounting Concepts and Applications (RLE Accounting)

  The Writings and Contributions of C. Rufus Rorem

  • Harvey S. Hendrickson(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  It is a term applied to bond discount and premium, as well as to debts and capital values generally. Literally, to amortize means to extinguish; hence, Amortization is any process of extinguishing a value by payment or consumption. In practice the term “amortisation” is also applied to the writing down of capital assets because of obsolescence or inadequacy; it was used by the Internal Revenue Office to refer to the amortisation of manufacturing facilities used in the production of materials for the prosecution of the war. Chapter VIII Original Cost in Accounting Valuation The discussion now turns from the problem of applying a capitalization formula directly in business valuation to a consideration of certain types of objective evidence which suggest or might serve as business-value. The first type of evidence to be considered is “original cost”, the total economic outlay involved in procuring certain assets or periodic income. 1 Cost calculation involves the “accumulation” of a series of outlays in the procurement of an asset; value calculation involves the “discounting” of a series of incomes arising from the asset. The cost incurred in procuring an asset may be one single outlay, as in the purchase of a stock of goods; similarly the income may be realized in one single transaction, a sale of merchandise. On the other hand the total cost of an asset may be the composite of a series of outlays, accumulated to the point of time at which the cost estimate is being made. An illustration is the cost of a building constructed by the enterprise, or the product of the manufacturing processes. 2 In one sense of the term, cost and value may be regarded as merely different aspects of the same thing. Cost is the total exchange-power which has “gone into” an asset; value is the total exchange power which will “come out” of it

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  eBook - ePub

  Practical Guide to Mergers, Acquisitions and Business Sales, 2nd Edition

  • Joseph B. Darby(Author)
  • 2017(Publication Date)
  • The National Underwriter Company

    (Publisher)

  Amortization OF INTANGIBLES—CODE SECTION 197

  CHAPTER 11

  OVERVIEW

  Intangible property is the driving engine of the U.S. economy and much of the international economy. Studies have shown that whereas thirty or forty years ago, intangible property represented approximately 30 percent of the total value on the balance sheet of a typical corporation, today it represents on average an estimated 70 percent of the total value. This reflects the fact that the modern economy no longer creates wealth with large amounts of expensive tangible property, but rather relies on intangible assets. In effect, steel mills and shoe factories have been replaced with patents, trademarks, know-how, goodwill, and other similar “assets.” Given recent trends in history, it seems likely that this evolution and direction will continue well into the future.

  The tax treatment of intangibles has developed, rather belatedly, as intangibles have surged in importance. Before the Revenue Reconciliation Act of 1993 (P.L. 103-66), Amortization of intangibles was a major source of litigation between taxpayers and the IRS. Under prior law, “goodwill” was not considered amortizable for income tax purposes based on the IRS’s position, asserted in regulations, that goodwill does not have a useful life that can be estimated with reasonable certainty. Therefore, the regulations mandated that no deduction was allowable with respect to goodwill.1 However, because taxpayers are loath to pay good money for a non-amortizable or non-depreciable asset, various efforts—often highly creative—were made to identify specific assets, within the category of goodwill, which had a reasonably determinable useful life. See, e.g., the Supreme Court case of Newark Morning Ledger Co.,2

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  International Financial Reporting Standards (IFRS) Workbook and Guide

  Practical insights, Case studies, Multiple-choice questions, Illustrations

  • Abbas A. Mirza, Graham Holt, Magnus Orrell(Authors)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  11. Amortization

  11.1 The depreciable amount of tangible assets with finite useful lives is to be allocated over its useful life. The depreciable amount is the cost of the asset (or other amount substituted for cost, e.g., in a revaluation model) less its residual value. Amortization shall commence when the asset is ready for use and shall cease when it is derecognized or is reclassified as held for sale under IFRS 5.

  11.2 The residual value is to be assumed to be zero unless there is a commitment by a third party to acquire the asset at the end of its useful life or there is an active market for the asset and the residual value can be determined by reference to that market, and it is probable that an active market will continue to exist at the end of the asset’s useful life.

  11.3 Therefore, an asset with a residual value at anything other than zero assumes that the entity will dispose of the asset prior to the end of the asset’s economic life.

  11.4 The Standard requires that the residual value be reassessed at each balance sheet date. Any changes are to be treated as changes in accounting estimates. In practice, this is unlikely to have any impact in view of the basic presumption of a zero residual value.

  11.5 Similarly, the useful life is to be reassessed annually. Any changes are also to be treated as changes in accounting estimates.

  11.6 Intangible assets with indefinite useful lives are not to be amortized. However, the asset must be tested for impairment annually and whenever there is an indication that it may be impaired. IAS 36 provides guidance on impairment. Additionally, the determination of an indefinite useful life must be reassessed at each balance sheet date. If the assessment changes, it is to be treated as a change in accounting estimate.

  12. IMPAIRMENT

  Entities are to apply the provisions of IAS 36 in assessing the recoverable amount of intangible assets and when and how to determine whether an asset is impaired.

  13. RETIREMENTS AND DISPOSALS

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  International GAAP 2021

  • (Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)
• the amortisation method should reflect the pattern of consumption of the economic benefits that the intangible asset provides. If that pattern cannot be reliably determined, a straight-line basis should be used.
Amortisation of an intangible asset with a finite useful life continues until the asset has been fully depreciated or is classified as held for sale, as noted above, or derecognised. Amortisation does not cease simply because an asset is not being used, [IAS 38.117], although this fact might give rise to an indicator of impairment.
The standard allows a variety of amortisation methods to be used to depreciate the asset on a systematic basis over its useful life, such as the straight-line method, the diminishing balance method and the unit of production method. [IAS 38.98]. The factors to consider in determining the most appropriate amortisation method are similar to those that are relevant for the depreciation of property, plant and equipment in accordance with IAS 16 (see Chapter 18 ). For example, entities can adopt a ‘sum of the digits’ methodology, where amortisation reflects higher consumption of benefits in the earlier part of the asset's useful life, as this is a variant of the diminishing balance method (see Chapter 18 ).
In selecting an appropriate amortisation method for intangible assets acquired in a business combination, entities should ensure consistency with any assumptions that were used in determining the fair value of the asset. For example, a customer relationship asset may be valued by taking into account an assumed churn-rate that implies a higher level of customer relationships ending in the earlier periods following the business combination. These factors may indicate that a straight-line method of amortisation is not the most appropriate method to reflect the pattern of consumption of the economic benefits that the intangible asset provides, as the valuation assumed that benefit to be frontloaded.