Jargon buster: What is amortisation?

 

Amortisation is effectively the depreciation of intangible assets – any assets that don’t have a physical form and don’t give the owner specific financial rights. Among intangible assets are deferred tax assets, patents, copyrights and capitalised research & development. They differ from tangible assets which include securities, financial instruments, bank deposits and debt – and, of course, plant and machinery. Accounting techniques for amortising intangible assets are more complex than for calculating the depreciation of tangible assets. Correspondingly, the value of ‘intangibles’ is reflected less straightforwardly on the balance sheet than the value of ‘tangibles’.

 

Accounting rules (IAS 38) say that an intangible asset must be: recognisable; owned or controlled by the company; and generate revenue. Although goodwill is an intangible asset, it is treated under a separate accounting standard (IFRS 3). New or purchased intangible assets can be used to reduce your corporation tax bill, but they must meet specific conditions. Businesses that obtain or create an intangible asset are allowed a tax deduction for write-offs (such as amortisation) that appear in the accounts. Conversely, income generated by selling intangible assets will be treated as income. Instead of a deduction for amortisation, a business can opt permanently to write off the intangible asset at a fixed annual rate of 4 per cent.