How To Calculate Amortization

Hi, my name is Grant Hobson. I've been a finance analyst for the last six years. Today I'm going to run you through some financial performance methods as well as some investment appraisal techniques.

To calculate amortization, while depreciation focuses on tangible assets, amortization is the same calculation, but just focuses on intangible assets and how the value of these decreases over time and over the asset's life. Typically, it is used to devalue intellectual property, patents, copyrights, where the value of these have a limited lifespan. So you might have a patent for five years or ten years if you work in pharmaceuticals, you have developed a new medicine, and you have a patent for a certain time.

And the amortization is how we expense that into the accounts. So we can use a straight line method to do that as we do with depreciation. So, for example, if we have a patent that cost us 12,000 pounds but we know that patent lasts for six years, and using a straight line method, you have 12,000 divided by six years, gives you 2,000 pounds a year which we expense into the accounts for amortization.

So to recap, the calculation for amortization would be as follows. If we change the example, from a patent to intellectual property, replace a value on this with 60,000 pounds, and that property is going to remain in the company for the next 15 years, until retirement, using the straight line method gives us 4,000 pounds per year to be expensed into the income statement.