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The amortization of intangible assets is closely related to the accounting concept of depreciation, except it applies to intangible assets instead of tangible assets such as PP&E. Depreciation Expense: What is the Difference? IRS Section 197 (Source: IRS) Amortization vs.

But there are numerous exceptions to the 15-year rule, and private companies can opt to amortize goodwill. Intangible Assets Amortization: IRS Section 197 Tax Policyįor tax reporting purposes in an asset sale/338(h)(10), most intangible assets are required to be amortized across a 15-year time horizon. Since the purchase price can be confirmed, a portion of the excess amount paid could be allotted to the rights to owning the acquired intangible assets and recorded on the closing balance sheet (i.e. an acquisition where the price paid can be verified. Hence, internally developed intangible assets like branding, trademarks, and IP will not even appear on the balance sheet since they cannot be quantified and recorded in an unbiased way.Ĭompanies are permitted to designate values to their intangible assets once the value is readily observable in the market – e.g. Under accrual accounting, the “objectivity principle” requires financial reports to contain only factual data that can be verified, with no room for subjective interpretation. Note that the value of internally developed intangible assets is NOT recorded on the balance sheet. Under the process of amortization, the carrying value of the intangible assets on the balance sheet is incrementally reduced until the end of the expected useful life is reached. Similar to depreciation, amortization is effectively the “spreading” of the initial cost of acquiring intangible assets over the corresponding useful life of the assets. Intangible assets are defined as non-physical assets with useful life assumptions that exceed one year. How to Calculate Amortization of Intangible Assets

The Amortization of Intangible Assets is the process in which purchases of non-physical intangibles are incrementally expensed across their appropriate useful life assumptions.Ĭonceptually, the amortization of intangible assets is identical to the depreciation of fixed assets like PP&E, with the non-physical nature of intangible assets being the main distinction. What is Amortization of Intangible Assets?