Advertisement

Amortisation

Amortisation has two slightly different meanings, depending on whether you’re in America or Britain...

Amortisation has two slightly different meanings, depending on whether you're in America or Britain. In the States it refers to the process of spreading the cost of any asset intangible or tangible over its useful economic life as estimated by the directors. In Britain, amortisation specifically refers to this process in relation to intangible fixed assets (such as goodwill).

Advertisement - Article continues below

Tangible fixed assets, such as buildings, are depreciated a similar process with a different name. Either way, the principle is that a firm's long-term assets will be used to generate income over many accounting periods and not just one.

So it would be misleading to dump the cost of the asset in the profit and loss account in the year of acquisition. Instead, it is better to spread it and charge it bit by bit as the asset is used up. This involves judgement, which is why some analysts prefer to replace the earnings figure with earnings before interest, tax, depreciation and amortisation (EBITDA).

See Tim Bennett's video tutorial:Beginner's guide to investing: the EV/EBITDA ratio.

Advertisement
Advertisement

Recommended

Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
14 Jul 2020
Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern Monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
14 Jul 2020
Barbell strategy
Glossary

Barbell strategy

A “barbell… investment strategy means weighting a portfolio towards the two extreme ends of an asset class with nothing in the middle.
8 Jul 2020
Real exchange rate
Glossary

Real exchange rate

The real exchange rate between two currencies combines the nominal exchange rate with the ratio of the price of goods or services in two different cou…
26 Jun 2020

Most Popular

An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Three ideas for Lloyds Bank's new boss
UK stockmarkets

Three ideas for Lloyds Bank's new boss

The Black Horse needs whipping into shape. A change at the top provides a great opportunity, says Matthew Lynn.
12 Jul 2020
Why the moving average is my favourite charting tool
Sponsored

Why the moving average is my favourite charting tool

Traders and technical analysts use "moving averages" to iron out daily fluctuations and give a much clearer picture of a market's direction. Dominic …
13 Jul 2020