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amortization


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1 The process of treating as an expense the annual amount deemed to waste away from a fixed asset. The concept is particularly applied to leases, which are acquired for a given sum for a specified term at the end of which the lease will have no value. It is customary to divide the cost of the lease by the number of years of its term and treat the result as an annual charge against profit. While this method does not necessarily reflect the value of the lease at any given time, it is an equitable way of allocating the original cost between periods. Compare depreciation.

Goodwill may also be amortized. Financial Reporting Standard 10, Goodwill and Intangible Assets, requires the writing-off of goodwill to the profit and loss account in regular instalments over the period of its economic life. However, non-amortization is an option in exceptional circumstances.

2 The repayment of debt by a borrower in a series of instalments over a period. Each payment includes interest and part repayment of the capital.

3 The spreading of the front-end fee charged on taking out a loan over the life of a loan for accounting purposes.

4 A contribution to a sinking fund to repay a debt.

5 In the USA, another word for depreciation.

Subjects: Financial Institutions and Services.


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