Amortization is the reduction of a debt or asset over a specific period of time.
When referring to debt, amortization is simply the debt payment schedule. Amortization is found on the Income Statement and Cash Flow Statement and is used for loss of value on intangible assets.
For assets the concept is similar to depreciation, except amortization is only applied to intangible assets (patents, contracts, trademarks) whereas depreciation is used for tangible assets (property, plants, equipment etc).
An example of amortization of an intangible is if a company owns a patent for 10 years worth $20 million, it would be assumed that each year the value of the patent would decrease by $2 million so as to be worthless after expiry.
Amortization is found both on the Income Statement and the Cash Flow Statement.
- Cash Flow Statement (CFS)
- Earnings Before Interest, Taxation, Depreciation & Amortization (EBITDA)
- Earnings Before Interest, Taxation, Depreciation, Amortization & Rent (EBITDAR)
- Intangible Assets
- Income Statement (IS)