Plain definition
Amortisation is the systematic allocation of the cost of a finite-life intangible asset over the period it is expected to provide benefit. It is the intangible-asset counterpart to depreciation, though the applicable requirements and asset characteristics govern the method. It starts when the asset is available for use and is not a current cash payment.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A company acquires a software licence for that is available for use for three years and has no residual value. Using a straight-line pattern, it records amortisation each year. The purchase cash left the bank at acquisition; annual amortisation shows the cost of using the licence in the periods that benefit.
| Licence cost | |
|---|---|
| Useful life (years) | |
| Annual amortisation |
An indefinite-life intangible asset is not simply amortised because time passes, and a finite-life asset may need impairment review. Useful life, renewals, usage, and contract rights require evidence.
Why it matters
Without amortisation, profit can look too high while a finite right is being consumed. Expensing the full licence on purchase can make the acquisition year look weak and later periods too strong, obscuring the economics of the service.
Practical consequence
Keep an intangible-asset register with contract, cost, available-for-use date, legal term, expected useful life, renewal assumptions, method, annual charge, and reviewer. Reassess the estimates when technology or contractual rights change, and keep amortisation separate from the cash forecast.