The amortization of intangibles is the accounting treatment that a company grants to its intangible assets throughout their useful life.
In the field of accounting, the amortization of intangibles makes it possible to formally record the benefits that this type of asset generates for a company throughout the period of time in which they are owned.
As occurs in accounting with other types of existing assets, an intangible asset allows its owner to generate income.
In other words, intangible assets allow all types of companies to generate different economic benefits.
At the same time, its possession entails a cost to be taken into account derived from its exploitation or use.
Characteristics of amortization of intangibles
Compared to the modality aimed at the accounting control of tangible assets, this practice is distinguished by complying with some points to highlight:
- Estimated useful life: Companies calculate schedules or amortization schedules depending on the estimated useful life of the asset. An example of this is the payment of an industrial patent to be exploited for ten years.
- Period indeterminacy: Following the previous point, there are times when there are assets that are associated with an indefinite useful life.
- Cost generated: Amortization must offset the cost of having this type of asset in a balance sheet.
- Communicability: As intangible assets are commercially transferable, their amortization must have guidelines aimed at accounting for their role in the balance sheet of a company.
- Regulatory limit: There are cases in which amortization cannot be adjusted to a defined useful life and a number of years is established by law (ten years is the most common modality).
Amortization of intangibles based on useful life
The differentiation between intangible useful life and the depreciation modality of a tangible asset is formally different.
The first requires the detailed calculation of the period of time that the asset will be amortized, while the second moves in certain standards (qualities of the asset, materials, technology)
In that sense, this calculation must be coherent and formed based on different elements. As indicated, intangible assets such as patents or rights of use regularly have fixed-term contracts, in turn.
Accounting application of the amortization of intangibles
In formal and numerical terms, the calculation of these amortization schedules is carried out in a similar way to depreciation of tangible assets.
So much so that most companies use the well-known linear calculation method.
However, each tax regulation in each territory establishes a series of applicable guidelines in this regard. In this way, the companies of each country undertake the accounting of this type of assets adapting to a certain regulatory framework.
An example of this is the application of useful life according to criteria of the nature of the asset or of the company itself that accounts for it.