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).
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).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
See Tim Bennett's video tutorial:Beginner's guide to investing: the EV/EBITDA ratio.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
Christmas at Chatsworth: review of The Cavendish Hotel at Baslow
MoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
By Dr Matthew Partridge Published
-
Tycoon Truong My Lan on death row over world’s biggest bank fraud
Property tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
By Jane Lewis Published