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What Is Amortization Of Intangible Assets

So PPE usually undergoes wear, tear or obsolescence. Hence the amount that we spend on assets usually leaves the asset. So we recognize this by recording it as depreciation expense for a cost over long period of time. Capitalization of long term asset does not in any way mean you never expense the cost of an asset. It just means you don’t do it at once but instead use spread out the expense over to the assets full life. Keeping this principle in mind, land can never be capitalized simply because it has an indefinite life span.

Properties like buildings, machinery, equipment, vehicles, furniture and fixtures, equipments, computers and all tangible assets other than land and gold can be capitalized. Intangible assets such as copyrights, trademarks, bonds, stocks, long term pension schemes cannot be capitalized.

In fact they are expensed with a special form of capitalization called as amortization. US accounting guidelines popularly known as GAAP (Generally Accepted Accounting Principles) permit businesses to capitalize intangible assets through a process known as amortization. The costs of intangible assets that are purchased from independent party are usually recorded as assets. Goodwill for instance is capitalized for the excess of the purchase price of a business’s asset or stock over their fair value.

Certain costs too can be capitalized in case of intangible assets. Costs such as legal fees, costs related to successful defense of patents, trademarks or copyrights incurred to obtain the asset.
The value of intangible assets reduces over time; this decrease is known as amortization. For intangible assets with definite life, the amortization can be calculated dividing the capitalized cost by the assets economic life. Assets with indefinite lives are not amortized but are checked for impairment.

There is a huge chance of businesses committing fraud by placing regular business expenses as capital investment. Showing these costs as assets instead of expenses makes them show higher profit. This amounts to fraud.

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