Depreciation and amortisation – what’s the difference?

Depreciation and amortisation are terms that are often used interchangeably – so are they the same or not?  Well, yes and no!

Both refer to an asset being written off over a period of time to reflect that it is being used up.  Hence why they are considered to be the same and the terminology is used interchangeably.  However the distinction is what type of asset is being written off.

Depreciation relates to tangible assets, so items such as property, machinery, vehicles and equipment.

Amortisation relates to intangible assets such as licences, copyrights or patents.

Depreciation relates to items that fall under the guidance of IAS 16: Property, plant and equipment whereas amortisation relates to items that are under the scope of IAS 38: Intangible assets.  The terms are defined in these accounting standards and both definitions contain the phrase “systematic allocation of the depreciable amount of an asset over its useful life” – so it’s no wonder that the terms are muddled up.

On the whole, depreciation and amortisation are both expenses.  Writing off the cost of an asset results in a depreciation or amortisation expense being charged against profits.  However, just to confuse things further, amortisation can be an item of income as well as an expense.

Amortisation is also referred to in relation to government grants.  In this situation a grant received towards an asset is recognised as income over the useful life of the asset.  In other words the grant income is matched against the period of time over which the asset is written off – or to be technical, the grant is recognised in profit on a systematic basis over the useful life of the asset.  Due to the similarity in terminology this is often referred to as amortisation of the government grant.

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