What is amortization and which assets use it?

• A. Amortization is the depreciation of physical assets
• B. Amortization is the systematic allocation of the cost of intangible assets over their estimated useful life; examples patents, licenses, copyrights
• C. Amortization is the recognition of cash inflows from intangibles
• D. Amortization is a method to defer taxes

Answer: (B)

Amortization is the systematic allocation of the cost of intangible assets over their estimated useful life. It applies to intangible assets with a finite life, such as patents, licenses, copyrights, and trademarks. The expense is recognized over time to match the asset’s contribution to revenue, typically using a straight-line method, and it reduces the asset’s carrying value through accumulated amortization on the balance sheet and an amortization expense on the income statement. If an intangible has an indefinite life, it isn’t amortized but tested for impairment instead. This concept is distinct from depreciation (for physical assets), from recognizing cash inflows, or from deferring taxes.