Straight line amortization allocates an equal amount of a cost, or of a discount or premium, to each period of the asset’s or the instrument’s life, so the charge for a period is the amount to be amortized divided by the number of periods in the life. It is the simplest of the amortization methods, and in US accounting it is rarely the free choice it looks like: for intangibles it is a fallback, for bond discount and premium it is a permitted approximation, and for a large class of purchased intangibles the tax code makes it mandatory.
Amortization applies to intangible assets and to instrument discounts and premiums, which is what separates it from straight line depreciation, the identical arithmetic applied to tangible assets.
Amortization for one period = amount to be amortized / number of periods in the lifeFor Intangible Assets, It Is the Fallback
The accounting standard puts pattern first and straight line second. The method of amortization is required to reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up, and if that pattern cannot be reliably determined, a straight line amortization method is used (FASB, Statement of Financial Accounting Standards No. 142, paragraph 12).
That ordering matters more than it looks. Straight line is correct where the benefits genuinely arrive evenly, and it is also correct where nobody can establish how they arrive. What it is not is a default a preparer may reach for without asking the pattern question first, and documenting the answer is the difference between a supported policy and an unsupported habit.
Two mechanics travel with it. The amount to be amortized is the amount initially assigned to the asset less any residual value, and residual value is assumed to be zero unless at the end of its useful life the asset is expected to remain useful to another entity and either the reporting entity holds a commitment from a third party to buy it or its residual value can be read off an exchange transaction in an existing market expected to still exist then (FASB, Statement of Financial Accounting Standards No. 142, paragraph 13). And an intangible with a finite useful life is amortized while one with an indefinite useful life is not amortized at all (FASB, Statement of Financial Accounting Standards No. 142, paragraph 11), which is why the useful life determination precedes the method choice rather than following it.
For Bond Discount and Premium, It Is an Approximation
The other place the phrase appears is the amortization of a discount or premium on a note or bond, and here the standard names a different method as the reference.
Amortization is to be applied so as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period, which is the interest method. Other methods of amortization may be used if the results obtained are not materially different from those which would result from the interest method (AICPA Accounting Principles Board Opinion No. 21, paragraph 15).
Straight line amortization of bond discount is therefore permitted by a condition rather than by a rule. The condition is a materiality test against the interest method, and it is one an auditor can ask to see worked. The gap widens with the term and with the size of the discount, because the interest method front-loads or back-loads a charge that straight line spreads flat, so the same test can pass on a short instrument issued near par and fail on a long one issued at a deep discount. Where that discount or premium then sits on the balance sheet is in bonds payable.
For Purchased Intangibles on a Return, It Is Mandatory
The tax treatment removes the choice entirely for a large category of acquired intangibles.
A taxpayer is entitled to an amortization deduction for any amortizable section 197 intangible, and the amount is determined by amortizing the adjusted basis of the intangible ratably over the 15-year period beginning with the month in which it was acquired (26 U.S.C. 197(a)). Ratably over a fixed period is straight line by another name, and the route is exclusive, since no other depreciation or amortization deduction is allowable for one (26 U.S.C. 197(b)), a point worked through in intangible property.
Which acquired intangibles the class reaches, and where the self-creation exclusion switches off, is set out in intangible resources examples.
The result is that the same intangible can be amortized over one life on the books and a different one on the return, and neither figure is wrong. Book amortization follows the asset’s useful life under the accounting standard; tax amortization follows the statutory period. Reconciling the two is ordinary work, and treating either as the correct number is the error.
Purchased customer list, cost 600,000
Book life, pattern not reliably determinable 8 years
Book amortization per year 600,000 / 8 75,000
Tax life under section 197 15 years
Tax amortization per year 600,000 / 15 40,000
Annual book-to-tax difference 35,000Common Questions
The arithmetic is identical and the subject is not. Depreciation allocates the cost of a tangible asset over its useful life, amortization does the same for an intangible asset and for a discount or premium on a note or bond. The rules that govern each also differ: the intangibles method has to reflect the pattern of benefit consumption where that pattern is determinable, while the tangible rules never ask about a benefit pattern, fixing the method, the recovery period and the convention instead, which is set out in straight line depreciation.
Only if it produces results not materially different from the interest method, which is a computation rather than a preference. Run both for the instrument in question and keep the comparison in the file. Where the difference is immaterial straight line is available and simpler; where it is not, the interest method is the requirement (AICPA Accounting Principles Board Opinion No. 21, paragraph 15).
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can grade that amortization work on its own files through a trial task before a client engagement depends on it.
