Client-held funds, which are deposits held on behalf of our Clients to facilitate administration of our CDBs, and from which we generate custodial revenue, were $0.9 billion as of January 31, 2025. As of January 31, 2025, HealthEquity had $295.9 million of cash and cash equivalents and $1.06 billion of outstanding debt, net of issuance costs. This compares to $404.0 million in cash and cash equivalents and $875.0 million of outstanding debt as of January 31, 2024. Adjusted EBITDA was $471.8 million for the fiscal year ended January 31, 2025, an increase of 28% compared to $369.2 million for the fiscal year ended January 31, 2024.
Methods of Amortization for Intangible Assets
- Conceptually, the amortization of intangible assets is identical to the depreciation of fixed assets like PP&E, with the non-physical nature of intangible assets being the main distinction.
- The deciding factor on whether a line item gets capitalized as an asset or immediately expensed as incurred is the useful life of the asset, which refers to the estimated timing of the asset’s benefits.
- Selecting the right method ensures that the amortization expense accurately mirrors the asset’s consumption pattern, providing a more realistic view of the company’s financial health.
- HealthEquity reported net income of $26.4 million, or $0.30 per diluted share, and non-GAAP net income of $61.3 million, or $0.69 per diluted share, for the fourth quarter ended January 31, 2025.
We believe that these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends relating to the Company’s definition of total intangible amortization expense financial condition and results of operations. In addition, while amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is not excluded. Whenever we use these non-GAAP financial measures, we provide a reconciliation of the applicable non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed in the tables below. Depreciation impacts the cash flow statement through tax benefits, as it is a non-cash expense that can reduce taxable income, thereby preserving cash flow. Amortization, while also a non-cash expense, primarily affects the income statement by gradually reducing net income without directly influencing cash flows.
This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. Turn to Thomson Reuters to get expert guidance on amortization and other cost recovery issues so your firm can serve business clients more efficiently and with ease of mind. By leveraging Thomson Reuters Fixed Assets CS®, firms can effectively manage assets with unlimited depreciation treatments, customized reporting, and more.
Understanding the implications of these shifts is crucial for every tax professional as we navigate through these transformative times. Companies have a lot of assets and calculating the value of those assets can get complex. This method can significantly impact the numbers of EBIT and profit in a given year; therefore, this method is not commonly used. In short, the double-declining method can be more complex compared with a straight-line method, but it can be a good way to lower profitability and, as a result, defer taxes.
The net carrying amount of debt is defined as “the amount due at maturity, adjusted for unamortized premium, discount, and cost of issuance” (FASB ASC Master Glossary). For this reason, loss or gain on extinguishment of debt may include unamortized premium, discount, and debt issuance costs. Explore the principles and practices of amortizing intangible assets, including calculation methods and their impact on financial statements. Several factors influence the calculation of amortization expense, including the asset’s initial cost, estimated useful life, and any residual value. Companies often use the straight-line method for simplicity, dividing the asset’s cost evenly over its useful life. However, other methods, such as the sum-of-the-years-digits or units of production, may be used depending on the asset’s nature and the company’s accounting policies.
How corporate tax departments are applying indirect tax technology
Consider the following example of a company looking to sell rights to its intellectual property. Amortization is an important concept not just to economists, but to any company figuring out its balance sheet. In the subsequent step, we’ll calculate annual amortization with our 10-year useful life assumption.
Recent Changes in Accounting Standards
This knowledge helps businesses make informed decisions about managing and leveraging their intangible assets effectively. This patent doesn’t wear out like machinery, but its value diminishes over time due to competition and new innovations. Amortization helps companies allocate the cost of such intangible assets over their useful life, ensuring accurate financial reporting and better decision-making. Amortization follows the matching principle in accounting, which states that expenses should be recorded in the same period as the revenues they help generate. Since intangible assets contribute to business operations over many years, amortization ensures that their costs are spread out over time.
If the carrying amount of goodwill exceeds its recoverable amount, an impairment loss is recognized, impacting the income statement. The impairment test involves comparing the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value is less than the carrying amount, the difference is recorded as an impairment loss. This process ensures that the value of goodwill on the balance sheet remains realistic and aligned with the company’s actual economic benefits. Calculating the amortization expense for intangible assets involves a blend of financial acumen and strategic foresight. The process begins with determining the asset’s initial cost, which includes not only the purchase price but also any additional expenses directly attributable to preparing the asset for its intended use.
What’s the Difference Between Depreciation and Amortization?
Tangible assets are items you can touch, such as equipment, inventory, and a company car. CPAs first should address whether the company intends to renew or extend the contract. A business acquires a broadcast license for $500,000, which it expects will be terminated in five years. Using the straight-line method, the firm should charge $100,000 of the carrying amount of this asset to expense in each of the next five years.
The amortization methods used for these two purposes are different from each other. When used for tax purposes, the actual lifespan of the assets is not considered, and only the base cost is amortized over a specific number of years. Intangible assets are not physical, and finding an actual value for them is not as easy as in the case of tangible assets. Some regulations group certain assets under intangible assets and give them particular value. Amortizing intangible assets involves different methods to allocate the cost over the asset’s useful life.
This means that GAAP changes in value can be accounted for through changing amortization schedules or potentially writing down the value of an intangible asset, which would be considered permanent. However, the process of deducting these expenses is different from the deduction of other expenses . Calculate the sum of each individual intangible asset’s amortization expense to determine your total intangible amortization expense. Continuing with the example, assume you have another patent with a $5,000 amortization expense. Add the $5,000 amortization expense of that patent to the $2,000 amortization expense of the other patent to get $7,000 in total intangible amortization expense. ABC Corporation spends $40,000 to acquire a taxi license that will expire and be put up for auction in five years.
This method amortizes the intangible asset based on its usage, rather than the passage of time. It is typically used for intangible assets where the consumption of the asset is tied to output or usage, such as software licenses or patents that are tied to units produced or sold. Amortization helps to track the value of intangible assets over time, and businesses must test for impairment if the asset’s value declines significantly. Businesses that constantly record amortization can better identify when an asset’s value has been impaired and take necessary action, such as reducing the asset’s carrying amount.
The accounting for amortization expense is a debit to the amortization expense account and a credit to the accumulated amortization account. If an intangible asset will continue to provide economic value without deterioration over time, then it should not be amortized. Instead, its value should be periodically reviewed and adjusted with an impairment. First, the company will record the cost to create the software on its balance sheet as an intangible asset. Accountants amortize intangible assets just like they depreciate physical capital assets. Understanding the types of intangible assets and the factors determining their useful life is crucial for accurate amortization and financial reporting.
- Companies must assess the patent’s economic life, considering factors such as technological advancements and market demand, to determine the appropriate amortization period.
- If the asset has no residual value, simply divide the initial value by the lifespan.
- On the income statement, amortization is recorded as an expense, reducing the company’s reported net income.
- This approach ensures that the expense is matched with the revenue generated from the copyrighted work, providing a more accurate reflection of the company’s financial health.
- That being said, the way this amortization method works is the intangible amortization amount is charged to the company’s income statement all at once.
Examples include customer lists and relationships, licensing agreements, service contracts, computer software, and trade secrets (such as the recipe for Coca-Cola). It used to be amortized over time but now must be reviewed annually for any potential adjustments. The company does not intend to ever sell this software; it’s only to be used by company staff. This software is considered an intangible asset, and it must be amortized over its useful life.
This nuanced understanding helps stakeholders evaluate a company’s asset management strategies, ensuring a comprehensive analysis of its overall financial performance. While both amortization and depreciation involve the allocation of an asset’s cost over its useful life, they pertain to different types of assets and are applied in distinct ways. Understanding the differences between these two accounting practices is crucial for accurately interpreting financial statements and assessing a company’s financial health. For example, a copyright will take on a legal life of 50 years, but it is expected to be useful only for 10 years. The costs of internally developing, maintaining or restoring intangible assets generally should be expensed as incurred .
That being said, the way this amortization method works is the intangible amortization amount is charged to the company’s income statement all at once. On the income statement, typically within the “depreciation and amortization” line item, will be the amount of an amortization expense write-off. Since intangible assets are not easily liquidated, they usually cannot be used as collateral on a loan. The amortization schedule shows the allocation of an intangible asset’s cost over its useful life. For a loan, the amortization schedule details the breakdown of each payment toward the loan principal and interest. Typically, amortization is classified as a contra-asset account on the balance sheet.
In contrast, amortization is reserved for intangible assets, which lack physical presence yet yield economic benefits. The choice of method for amortization is influenced by the asset’s expected revenue generation pattern and is usually simpler, with the straight-line method being the most common. Goodwill is an example of an intangible asset that has an indefinite useful life, and is therefore tested for impairment on an annual basis as opposed to being amortized on a straight line basis. A company cannot purchase goodwill by itself; it must buy an entire business or a part of a business to obtain the accompanying intangible asset. Under current US GAAP, firms are required to compare the fair value of reporting units to the respective reporting unit’s book value, which is calculated as assets plus goodwill less liabilities.