Definitions
• Amortization matches the cost of a property, plant & equipment to the period of economic benefit
– Term depreciation still used in practice to refer to the amortization of Property Plant
& Equipment (PPE)
– Depletion refers to the amortization of costs associated with natural resources
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Definitions
• Accumulated amortization
– Contra account to capital assets
– Cost Model: Represents the total amortization taken by the company on the associated capital assets(s) since acquisition
– Revaluation Model: may only represent the amortization since the last revaluation
• Net Book Value
– Recorded amount less accumulated amortization – Aka carrying value; book value
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Nature of Amortization
• Amortization is still a matching process
• Amortization may have nothing to do with valuation
• Accumulated amortization has nothing to do with providing for the replacement of capital assets
Nature of Amortization
• Issue is how best to match the cost of capital assets to the period benefited
– Straight line – appropriate where time is primary cause of the decline in utility
– Declining balance – tends to smooth out the overall cost of owning a capital asset over its useful life
• In early years, R & M is small, amortization is larger • Situation reverses as assets age.
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Nature of Amortization
• GAAP makes a distinction between
– Tangible (Property Plant & Equipment) and
Intangible assets
– Within Intangible Assets a g b e sse s
• Those with an indefinite life – Goodwill
• Those with a definite / ascertainable /estimable life 8
Nature of Amortization
– Amortization must be taken on property plant and equipment and on intangible assets (other than goodwill) • If the asset is not being used in production or the delivery of services is it a capital asset?
• No longer an arbitrary maximum amortization period specified in the Handbook (i.e. no longer a
40 year maximum amortization period)
Nature of Amortization
– Effectively the amortization period will be the least of two amounts
• Legal life (in the case of intangibles)
• Estimated useful life
– Its useful life is normally the shortest of
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its physical, technological, commercial and legal life.
Nature of Amortization
• Intangible Assets
– An intangible asset is not written down or written off in the period of acquisition, unless it becomes impaired during this period – A recognized intangible asset should be amortized over its useful life to an enterprise, unless the life is determined to be indefinite.
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Nature of Amortization
• Goodwill
– An asset of indefinite life
• Note that indefinite ≠ infinite
– Only purchased goodwill is recorded
• No amortization is taken on goodwill
• Once the future benefit of goodwill becomes impaired goodwill must be written down
Measurement Models
• Cost model
– After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated
