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Is Amortisation

Is Amortisation

Income statement amortization is the periodic expense for intangible assets. It spreads the cost of patents, licenses, and similar assets over their useful life.

Amortisation as reported on the income statement represents the systematic allocation of intangible asset costs over their useful lives. Similar to depreciation for physical assets, amortisation recognises that intangible assets like patents, trademarks, customer relationships, and acquired technology lose value over time. This non-cash expense reduces reported earnings without consuming current-period cash.

Intangible assets subject to amortisation:

  • Patents: Legal protection for inventions (typically 15-20 years)
  • Trademarks: Brand names and logos (if finite life)
  • Customer relationships: Acquired customer bases (5-15 years)
  • Technology: Acquired software and developed technology
  • Non-compete agreements: Contractual restrictions
  • Licensing agreements: Rights to use intellectual property

What is NOT amortised:

  • Goodwill: Tested for impairment, not amortised under US GAAP/IFRS
  • Indefinite-life intangibles: Trademarks with unlimited legal protection

Why amortisation matters:

  • Acquisition impact: Acquiring companies creates intangibles requiring ongoing amortisation
  • Earnings reduction: Reduces reported income, potentially significantly for serial acquirers
  • EBITDA calculation: Added back along with depreciation
  • Cash flow neutral: Non-cash expense added back in operating cash flow

Acquisition-related amortisation:

Company A acquires Company B for $500 million
Identifiable intangibles: $150 million
Useful life: 10 years
Annual amortisation: $15 million

Analytical considerations:

  • Adjusted earnings: Some analysts exclude acquisition-related amortisation
  • Serial acquirers: May have persistently high amortisation expense
  • Cash vs. non-cash: Amortisation doesn't affect cash flow directly
  • Real economic cost: Intangibles do lose value; amortisation reflects this reality

GAAP vs. Adjusted earnings debate:

  • GAAP view: Amortisation is a real cost of acquisitions
  • Adjusted view: Non-cash charge distorts ongoing operational performance
  • Best practice: Consider both views; understand what drives the difference

Track amortisation alongside acquisition history. Companies with heavy M&A activity will have significant amortisation that affects reported earnings but not cash generation.