Amortization expense

Amortization Expense

The systematic allocation of an intangible asset’s cost over its estimated useful life, representing the consumption of economic benefits provided by patents, copyrights, software, and other non-physical assets.

For example, a pharmaceutical company that acquires a drug patent for $10 million with 10 years of legal protection remaining would typically record $1 million in annual amortization expense, gradually reducing the patent’s carrying value on the balance sheet.

Amortization is to intangible assets what depreciation is to tangible assets, providing a way to match costs with the periods they benefit. While some intangible assets (like goodwill) have indefinite useful lives and aren’t amortized but tested for impairment, most intangibles with finite useful lives are amortized using the straight-line method, though other systematic patterns may be appropriate if they better reflect the consumption pattern.