Summary
Amortisation is the gradual allocation of the cost of an intangible asset over its useful life. Intangible assets may include software, licences, patents, or other non-physical assets.
Like depreciation, amortisation reduces accounting profit but does not usually involve a cash outflow in the period recorded.
Why it matters
Amortisation helps investors understand how intangible asset costs affect profitability. It is also added back in certain cash flow and EBITDA-related measures.
Companies with significant intangible assets may report meaningful amortisation expenses.
How to Calculate it
Amortisation Expense = (Asset Cost – Residual Value) ÷ Useful Life
Where:
- Asset Cost= Original cost of the intangible asset
- Residual Value= Expected value at the end of its useful life (often zero for intangible assets)
- Useful Life= Number of years the asset provides economic benefit
How to read it
Higher amortisation may indicate a business with significant intangible assets. Investors should review whether those assets continue to support revenue and earnings.
Amortisation should be considered together with intangible assets, profitability, and cash flow.