amortization
TRANSCRIPT
• Amortization
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Amortization
1 'Amortization' (or 'amortisation') is the process of decreasing, or
accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in
mortmain, from Anglo-French amorteser, alteration of amortir, from
Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.
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Amortization - Applications of amortization
1 Negative amortization is an amortization schedule where the loan
amount actually increases through not paying the full interest.
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Amortization - Applications of amortization
1 *In business, amortization (business)|amortization allocates a lump sum amount to different time periods,
particularly for loans and other forms of finance, including related interest or
other finance charges. Amortization is also applied to capital expenditures of certain assets under accounting rules,
particularly intangible assets, in a manner analogous to depreciation.
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Amortization - Applications of amortization
1 *In the context of zoning|zoning regulations, amortization refers to the time in which a property owner has to
conform or relocate when the property's use constitutes a preexisting
nonconforming use under amended zoning regulations. Specifically it is the ability of the owner of the property to recoup his/her investment during that
time.https://store.theartofservice.com/the-amortization-toolkit.html
Goodwill (accounting) - Amortization and adjustments to carrying value
1 Companies objected to the removal of the option to use pooling-of-interests, so amortization was
removed by Financial Accounting Standards Board as a concession
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Depreciation - Depletion and amortization
1 Depletion_(accounting) | Depletion and amortization are similar
concepts for minerals (including oil) and intangible assets, respectively.
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Earnings before interest, taxes, depreciation and amortization
1 A company's 'Profit (accounting)|earnings before interest, taxes, depreciation, and
amortization (tax law)|amortization' (commonly abbreviated 'EBITDA',
pronounced ,Professional English in Use Finance, Cambridge University Press , or ) is
computed by considering a company's earnings before interest payments, tax,
depreciation, and amortization are subtracted for any final accounting of its
income and expenses
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Earnings before interest, taxes, depreciation and amortization
1 It is intended to allow a comparison of profitability between different companies,
by canceling the effects of interest payments from different forms of financing (by ignoring interest payments), political jurisdictions (by ignoring tax), collections
of assets (by ignoring depreciation of assets), and different takeover histories
(by ignoring amortization often stemming from goodwill (accounting)|goodwill).
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Earnings before interest, taxes, depreciation and amortization
1 Warren Buffett famously asked: Does management think the tooth fairy
pays for capital expenditures? Depreciation is often a very good
approximation of the capital expenditures required to maintain
the asset base, so it has been argued that EBITA (Earnings before Interest, Taxes and Amortization) would be a
better indicator.https://store.theartofservice.com/the-amortization-toolkit.html
Amortization (tax law)
1 In tax law, 'amortization' refers to the cost recovery system for intangible property.
Although the theory behind cost recovery deductions of amortization is to deduct from cost basis|basis in a systematic manner over an asset's estimated useful economic life so
as to reflect its consumption, expiration, obsolescence or other decline in value as a result of use or the passage of time, many
times a perfect match of income and deductions does not occur for policy reasons.
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Amortization (tax law) - Depreciation
1 A corresponding concept for tangible assets is depreciation. Methodologies for allocating amortization to each tax period
are generally the same as for depreciation. However, many intangible assets such as
goodwill or certain brands may be deemed to have an indefinite useful life, or “self-created” and are therefore not subject to amortization.House Report No. 103-111,
103rd Congress, 25 May 1993.
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Amortization (tax law) - Intangible property
1 Intangible property which is subject to amortization is described in 26 U.S.C
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Amortization (tax law) - Intangible property
1 Under §197 most acquired intangible assets are to be amortized ratably over a fifteen-
year period.House Report No. 103-111. This is not the best treatment of an intangible
whose actual life is much shorter than fifteen years. Furthermore, if an intangible is not eligible for amortization under § 197,
the taxpayer can depreciate the asset if there is a showing of the assets useful life.Treasury Regulation § 1.167(a)(3).
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Amortization (tax law) - Start-up expenditure
1 For amortization as it relates to start-up expenses for a new business or activity.26
U.S.C
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Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs
1 'Earnings before interest, taxes, depreciation, amortization, and rent (or restructuring) costs' (EBITDAR) is a non-Generally Accepted Accounting
Principles|GAAP metric that can be used to evaluate a company's
financial performance.
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Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs
1 ::EBITDAR = revenue – expenses (excluding tax, interest, depreciation,
amortization and rent costs)
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Earnings before interest, taxes, depreciation, and amortization
1 A company's 'Profit (accounting)|earnings before interest, taxes, depreciation, and amortization (tax law)|amortization' (commonly abbreviated 'EBITDA',
pronounced ,Professional English in Use Finance, Cambridge University Press , or ) is an accounting
measure calculated using a company's net earnings, before interest expenses, taxes, depreciation and
amortization are subtracted, as a proxy for a company's current operating profitability, i.e., how much profit it makes with its present assets and its operations on the products it produces and sells, as
well as providing a proxy for cash flow.
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Earnings before interest, taxes, depreciation, and amortization
1 It is intended to allow a comparison of profitability between different companies,
by discounting the effects of interest payments from different forms of financing (by ignoring interest payments), political jurisdictions (by ignoring tax), collections
of assets (by ignoring depreciation of assets), and different takeover histories
(by ignoring amortization often stemming from goodwill (accounting)|goodwill)
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Negative amortization
1 The term is most often used for mortgage loans; corporate loans with negative amortization are called PIK
loans.
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Negative amortization
1 Amortization refers to the process of paying off a debt (often from a loan
or mortgage) over time through regular payments. A portion of each
payment is for interest while the remaining amount is applied towards
the principal balance. The percentage of interest versus principal in each payment is
determined in an amortization schedule.
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Negative amortization - Defining characteristics
1 Negative amortization only occurs in loans in which the periodic payment
does not cover the amount of interest due for that loan period
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Negative amortization - Typical circumstances
1 Start rates on negative amortization or minimum payment option loans
can be as low as 1%. This is the payment rate, not the actual interest
rate. The payment rate is used to calculate the minimum payment. Other minimum payment options
include 1.95% or more.
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Negative amortization - NegAm - mortgage terminology
1 :** F.I.R. times the principal balance, divided by 12 months (with no
amortization or reduction in the owed balance).
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Negative amortization - Criticisms
1 Negative-amortization loans, being relatively popular only in the last
decade, have attracted a variety of criticisms:
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Negative amortization - Criticisms
1 In addition, most negative amortization loans contain a clause saying that the payment may not
increase more than 7.5% each year, except if the 5-year period is over or
if the balance has grown by 15%
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Negative amortization - Criticisms
1 * Negative-amortization loans as a class have the highest potential for what is known as payment shock. Payment shock is when the required monthly payment jumps from
one month to the next, potentially becoming unaffordable. To compare various mortgages' payment-shock potential (note that the items here do not include escrow payments for insurance and taxes, which
can cause changes in the payment amount):
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Negative amortization - Criticisms
1 ** A 10-year interest only mortgage product, recasting to a 20-year
amortization schedule (after ten years of interest-only payments)
could see a payment increase of up to $600 on a balance of 330K.
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Negative amortization - Criticisms
1 ** Negative amortization mortgage: no payment jump either until 5 years OR the
balance grows 15% (depending on the product) higher than the original amount. The payment increases, by requiring a full
interest-plus-principal payment. The payment could further increase due to
interest-rate changes. However, all things being equal, the fully amortized payment is
almost triple the negatively amortized payment.
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Negative amortization - Difference between negative amortization and a reverse mortgage
1 This early stage is known as the negative amortization or NegAm
period
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Amortization calculator
1 An 'amortization calculator' is used to determine the periodic payment
amount due on a loan (typically a mortgage loan|mortgage), based on
the amortization (business)|amortization process.
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Amortization calculator
1 The amortization (business)|amortization repayment model factors varying amounts of both interest and principal into every
installment, though the total amount of each payment is the same.
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Amortization calculator
1 The amortization schedule is a table delineating these figures across the duration of the loan in chronological
order
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Amortization calculator - Derivation of the formula
1 The formula for the periodic payment amount A is derived as follows. For an amortization schedule, we can
define a function p(t) that represents the principal amount remaining at
time t. We can then derive a formula for this function given an unknown payment amount A and r = 1 + i.
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Amortization calculator - Other uses
1 While often used for mortgage-related purposes, an amortization
calculator can also be used to analyze other debt, including short-term loans, student loans and credit
cards.
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Tax amortization benefit
1 In Valuation (finance), 'tax amortization benefit' (or 'tax
amortisation benefit') refers to the present value of income tax savings
resulting from the tax deduction generated by the amortization of an
intangible asset.
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Tax amortization benefit - Intangible asset valuation
1 2007.] Specifically, the fair market value of the asset is increased by the
present value of the future tax savings derived from the tax
amortization of the asset
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Tax amortization benefit - Circularity of the tax amortization benefit
1 2011] This circularity can be handled using a two-step procedure consisting in
estimating the value of the intangible asset in the absence of the tax amortization benefit first and then grossing up the
previous value by a tax amortization benefit factor.[http://www.taxamortisation.com/theo
retical-background.html See section Calculating the TAB section about two-step
procedure to solve the circularity issue]
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Tax amortization benefit - Circularity of the tax amortization benefit
1 # t is the corporate tax rate applicable to the future amortization of the asset
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Tax amortization benefit - Circularity of the tax amortization benefit
1 For example, while trademarks can have an indefinite useful life for accounting purposes,
the tax legislation of the United States establishes a mandatory 15-year
amortization period for trademarks.[http://www.irs.gov/Businesses/Pa
rtnerships/Partnership---Audit-Technique-Guide---Chapter-3---Contribution-of-Property-
with-Built-in-Gain-or-Loss---IRC-section-704(c)-(Revised-12-2007)#13 IRC SECTION 704(c) AND IRC SECTION 197 INTANGIBLES]
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Amortization (business)
1 In business, 'amortization' refers to spreading payments over multiple periods. The term is used for two
separate processes: amortization of loans and amortization of intangible
assets.
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Amortization (business) - Amortization of loans
1 A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while
more money is applied to principal at the end
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Amortization (business) - Amortization of loans
1 where: P is the principal amount borrowed, A is the periodic
amortization payment, r is the periodic interest rate divided by 100
(nominal annual interest rate also divided by 12 in case of monthly installments), and n is the total
number of payments (for a 30-year loan with monthly payments n = 30
× 12 = 360).https://store.theartofservice.com/the-amortization-toolkit.html
Amortization (business) - Amortization of loans
1 Negative amortization (also called deferred interest) occurs if the
payments made do not cover the interest due. The remaining interest owed is added to the outstanding
loan balance, making it larger than the original loan amount.
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Amortization (business) - Amortization of intangible assets
1 In accounting, amortization refers to expensing the acquisition cost minus
the residual value of intangible assets (often intellectual property such as patents and trademarks or copyrights) in a systematic manner
over their estimated useful economic lives so as to reflect their
consumption, expiry, obsolescence or other decline in value as a result
of use or the passage of time.https://store.theartofservice.com/the-amortization-toolkit.html
Amortization (business) - Amortization of intangible assets
1 A corresponding concept for tangible assets is depreciation.
Methodologies for allocating amortization to each accounting
period are generally the same as for depreciation. However, many
intangible assets such as Goodwill (accounting)|goodwill or certain
brands may be deemed to have an indefinite useful life and are
therefore not subject to amortization (although goodwill is subjected to an
impairment test every year).
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Amortization (business) - Amortization of intangible assets
1 Amortization is recorded in the financial statements of an entity as a reduction in the book value|carrying value of the intangible asset in the balance sheet and as an expense in
the income statement.
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Amortization (business) - Amortization of intangible assets
1 Under International Financial Reporting Standards, guidance on accounting for the amortization of
intangible assets is contained in IAS 38. Under Generally Accepted
Accounting Principles (USA)|United States generally accepted accounting
principles (GAAP), the primary guidance is contained in FAS 142.
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Amortization (business) - Amortization of intangible assets
1 While theoretically amortization is used to account for the decreasing value of an
intangible asset over its useful life, in practice, many companies will amortize what would otherwise be one-time expenses by listing them as a capital expense on the cash flow statement and paying off the cost through
amortization, thereby improving the company's net income in the fiscal year or
quarter of the expense.wikinvest:Amortization|Wikinvest's Coverage of Amortization
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Amortization schedule
1 The percentage of interest versus principal in each payment is
determined in an amortization schedule
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Amortization schedule
1 An amortization schedule reveals the specific monetary amount put towards interest, as well as the specific amount put towards the
principal balance, with each payment
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Amortization schedule - Methods of amortization
1 There are different methods in which to arrive at an amortization schedule. These include:
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Amortization schedule - Methods of amortization
1 Amortization schedules run in chronological order. The first
payment is assumed to take place one full payment period after the
loan was taken out, not on the first day (the amortization date) of the loan. The last payment completely pays off the remainder of the loan. Often, the last payment will be a slightly different amount than all
earlier payments.https://store.theartofservice.com/the-amortization-toolkit.html
Amortization schedule - Methods of amortization
1 In addition to breaking down each payment into interest and principal portions, an amortization schedule also reveals interest-paid-to-date,
principal-paid-to-date, and the remaining principal balance on each
payment date.
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Amortization schedule - Example amortization schedule
1 This amortization schedule is based on the following
assumptions:
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Amortization schedule - Example amortization schedule
1 'Re-amortization' or restarting the amortization schedule via a refinance causes the entire schedule to restart:
the new loan will be 30 years from the refinance date, and initial
payments on this loan will again be largely interest, not principal
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