FAF3
Syllabus D. Recording Transactions And Events D6. Intangible non-current assets and amortisation

D6e. Purpose of amortisation 5 / 7

Syllabus D6e)

Explain the purpose of amortisation.

Treatment of Capitalised Development Costs

Once development costs have been capitalised, the asset should be amortised in accordance with the accruals concept over its finite life.

What is amortization?

A tangible non-current asset, e.g. machinery, is capitalised and then depreciated over its useful life.  Similarly, the cost of the development expenditure should be amortised over the useful life.  Therefore, the cost of the development expenditure is matched against the revenue it produces.

Amortisation must only begin when the asset is available for use (hence matching the income and expenditure to the period in which it relates). It is an expense in the statement of profit or loss: -

Dr Amortisation expense (I/S)
Cr Accumulated amortization (SOFP)

Each development project must be reviewed at the end of each accounting period to ensure that the recognition criteria are still met. If the criteria are no longer met, then the previously capitalised costs must be written off to the statement of profit or loss immediately.

If the intangible asset is considered to have an indefinite useful life, it should not be amortised but should be subjected to an annual impairment review, i.e. check wehter there has been a fall in the value of the intangible asset.