What Is Amortisation?

Amortisation works identically to depreciation but applies to intangible assets rather than tangible ones. As businesses increasingly invest in software, intellectual property, and acquisitions, amortisation has become a significant P&L item that FP&A teams must forecast accurately.

Key intangible assets subject to amortisation include capitalised software development costs (typically amortised over 3-5 years), patents and trademarks (over the period of legal protection or economic usefulness), customer relationships acquired in business combinations (typically 5-15 years), and goodwill arising on acquisition (under FRS 102, goodwill has a presumed maximum useful life of 10 years unless a longer period can be justified).

For software companies, the capitalisation and amortisation of development costs is particularly important. Under FRS 102 Section 18, development costs can be capitalised if specific criteria are met (technical feasibility, intention to complete, ability to use or sell). Once capitalised, these costs are amortised from the point the software is available for use.

FP&A teams should track amortisation by asset category and forecast new additions from the CapEx budget. For acquired intangibles, the purchase price allocation (PPA) from the acquisition determines the amortisation schedule.

Like depreciation, amortisation is added back in cash flow calculations and excluded from EBITDA. For companies with significant intangible asset bases — particularly post-acquisition — the difference between EBITDA and EBIT can be substantial.