# Choice of Amortization Method and Assumptions

The amortization expense, financial statements, and the ratios derived from them may be significantly impacted by a company’s selected amortization method and the accompanying assumptions and estimates.

## The Effect of the Choice of Amortization Method and Assumptions on Amortisation Expense, Financial Statements, and Financial Ratios

Both the choice of the amortization method and the estimate of the useful life of an asset can affect the amount of the amortization expense that is recorded in each period. A shorter estimated useful life will result in a higher amortization expense each year over a shorter period. Even then, the total accumulated amortization expense over the life of an intangible asset is never affected by the estimate of the useful life.

Similarly, the total accumulated amortization expense over the life of an intangible asset is never affected by the choice of the amortization method. The amortization expense per period will, however, depend on the amortization method.

For example, if the straight-line method is used, the amortization expense remains constant for each of the years of the asset’s useful life. If, however, the accelerated method is used, the amortization expense will be higher in the earlier years.

### Question 1

Which of the following statements is the most accurate?

1. A longer estimated useful life will result in a higher amortization expense each year.
2. The total accumulated amortization expense over the life of an intangible asset is unaffected by the choice of the amortization method.
3. A higher expected residual value will increase the amount of annual amortization expense relative to a lower expected residual value.

Solution

The total accumulated amortization expense over the life of an intangible asset will not be affected by the choice of the amortization method used.

A is incorrect because a longer estimated useful life will result in a lower, not higher, amortization expense each year.

C is incorrect because a higher expected residual value will decrease, not increase, the amount of annual amortization expense relative to a lower expected residual value.

### Question 2

How would the decrease of the estimated useful life of an intangible asset affect a company’s net income?

1. It has no effect.
2. It would increase net income.
3. It would decrease net income.

Solution

Decreasing the useful life would increase the depreciation expense, which in turn would decrease net income.

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

Subscribe to our newsletter and keep up with the latest and greatest tips for success

Sergio Torrico
2021-07-23
Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
diana
2021-07-17
So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
Kriti Dhawan
2021-07-16
A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
nikhil kumar
2021-06-28
Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
Marwan
2021-06-22
Great support throughout the course by the team, did not feel neglected
Benjamin anonymous
2021-05-10
I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
Daniel Glyn
2021-03-24
I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
michael walshe
2021-03-18
Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.