BDC Clarifies Accounting Method for Long-Term Assets

The Business Development Bank of Canada (BDC) has published a clarification on amortization, an accounting method used to allocate the cost of tangible assets over their expected useful life. This process helps businesses account for the gradual decline in value of long-term assets.

Amortization expenses are recorded on a company's income statement and simultaneously reduce the carrying value of the asset on the balance sheet. This continues until the asset's cost is fully expensed or the asset is sold. In Canada, the Canada Revenue Agency sets annual limits on amortization, known as Capital Cost Allowances (CCA), dictating the maximum deductible amount each year.

BDC outlines two primary methods for calculating amortization: the straight-line method and the declining balance method. The straight-line method spreads the cost evenly over the asset's useful life. The declining balance method, often applied to assets that lose value more rapidly, results in larger amortization charges in the earlier years of an asset's life.

Amortization is classified as a non-cash expense, meaning it does not involve an immediate outflow of cash. While it reduces taxable income and thus corporate tax obligations, it is often excluded from performance metrics like EBITDA, as it does not directly reflect a company's operational cash flow or liquidity.