What is the difference between amortisation and impairment of intangible assets?

Full Explanation

Amortisation and impairment are both mechanisms that reduce the carrying amount of intangible assets on the balance sheet, but they operate differently and serve different purposes. Amortisation is a systematic allocation of an intangible asset's cost over its estimated useful life. It is planned, predictable, and reflects the expected pattern of consumption of the asset's economic benefits. For example, a customer relationship valued at £10M with a 10-year useful life is amortised at £1M per year (assuming straight-line). Amortisation applies only to finite-life intangible assets. Impairment is an unplanned, event-driven write-down that occurs when an asset's carrying amount exceeds its recoverable amount (the higher of fair value less disposal costs and value-in-use). Impairment can affect any intangible asset — both finite-life and indefinite-life — and is triggered by events or changes in circumstances such as: significant decline in revenues, loss of a major customer, technological disruption, regulatory changes, or adverse economic conditions. Goodwill and indefinite-life intangibles must be tested for impairment at least annually, regardless of triggers. Finite-life intangibles are tested only when indicators exist. Key practical differences include: amortisation is predictable and budgetable, while impairment is unpredictable and can significantly impact reported earnings in a single period; amortisation follows a predetermined schedule (straight-line or pattern-based), while impairment reflects current market and operational conditions; and under IFRS, impairment of goodwill cannot be reversed once recognised, while impairment of other intangible assets can be reversed if conditions improve.

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