What is the Difference Between Amortization and Impairment?
🆚 Go to Comparative Table 🆚Amortization and impairment are both related to the value of a company's intangible assets, which are reported on the balance sheet. Intangible assets include goodwill, patents, trademarks, and copyrights, among others. Here are the key differences between amortization and impairment:
Amortization:
- Reflects the reduction in value of an intangible asset over its lifespan.
- Accounts for the expense of using up an intangible asset's value.
- Determined by calculating the present value of the intangible asset and defining its useful life, similar to calculating depreciation.
- The annual amount is deducted each year on the balance sheet to reflect the asset's current value.
- Amortization is used for intangible assets, not physical assets.
Impairment:
- Occurs when an intangible asset is deemed less valuable than stated on the balance sheet after amortization.
- Impairment usually has no effect on taxes.
- You have to calculate the value of your goodwill every year.
In summary, amortization is an accounting method used to allocate the cost of an intangible asset over its useful life, while impairment occurs when the value of an intangible asset on the balance sheet is less than its original value due to changes in its anticipated future cash flows.
Comparative Table: Amortization vs Impairment
Amortization and impairment are accounting concepts related to the value of a company's intangible assets, which are reported on the balance sheet. Here is a table comparing the differences between the two:
| Feature | Amortization | Impairment |
|---|---|---|
| Definition | Amortization is the practice of spreading an intangible asset's cost over that asset's useful life, allocating the cost over a specific period of time. | Impairment occurs when an intangible asset is deemed less valuable than is stated on the balance sheet after amortization. |
| Purpose | To account for the expense of using up an intangible asset's value over its lifespan. | To show a more realistic and fair value of the intangible asset, as its value may have decreased due to various factors. |
| Method | Amortization is typically calculated using the straight-line method, where the same amount of amortization expense is recognized each year. | Impairment is determined by comparing the carrying amount of the asset with its recoverable amount, which is the higher of the asset's fair value less costs to sell and its value in use. |
| Effect on Financial Statements | Amortization reduces the carrying amount of the intangible asset and the accumulated amortization on the balance sheet, while it also impacts the income statement by recognizing amortization expense. | Impairment reduces the carrying amount of the intangible asset on the balance sheet and may result in an impairment loss recognized in the income statement. |
In summary, amortization is used to reflect the reduction in value of an intangible asset over its lifespan, while impairment occurs when an intangible asset is deemed less valuable than is stated on the balance sheet after amortization.
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