Amortització

To carry out their activities, companies acquire various assets that become part of their balance sheet. However, over time, due to use, wear, or obsolescence, these assets lose value. This loss must be recorded in the company’s accounting on a regular basis, until the end of the asset’s useful life or until it is no longer part of the company’s assets. To calculate the amortization of an asset, several elements must be considered:

• Acquisition or production cost: This is the price paid to acquire the asset, and it is the value that will be depreciated (known as historical cost in the Spanish General Accounting Plan).
• Useful life: The estimated period during which the asset will be useful to the company and can be used for its purpose. In Spain, the Tax Agency provides tables that set the maximum useful life for each type of fixed asset.
• Residual value: The estimated value of the asset at the end of its useful life, that is, the price the company could get if it sold the asset at that time.

When a company prepares its annual balance sheet or files its tax return, it must record amortization as a loss of value in its accounting records. If it fails to do so, the reported equity would be unrealistic and could result in a higher tax burden than actually corresponds. This is because amortization is a deductible expense when calculating accounting profit. This applies to tangible fixed assets, intangible assets, and investment properties, as long as it reflects an actual loss of value due to use, operation, wear and tear, or obsolescence.

The depreciation base is calculated based on the acquisition price (plus associated costs) excluding the residual value if applicable. It begins:

• For tangible assets, when they are ready to be used.
• For intangible assets, when they are capable of generating income.

All intangible assets are considered to have a defined useful life. However, if this cannot be reliably estimated:

• Accounting depreciation: 10% annually. This is the process by which a company spreads the cost of a tangible or intangible asset over its useful life.
• Tax depreciation: 5% annually. This is the method used by companies to deduct the value of their assets on their tax returns.

If depreciation exceeds the amount allowed for tax purposes, the excess is not deductible in that year, but it may be deductible in future years. These criteria combine accounting and tax regulations and are essential for effective financial and tax planning.

There are several methods of depreciation, which can involve fixed or variable rates, and the choice typically depends on the type of asset:

• Straight-line method: depreciation through constant installments based on the asset's useful life.
• Sum-of-the-years-digits method: this method is used to depreciate an asset faster in the early years of its life. Each year is assigned a number in descending order (n…, 3, 2, 1), and those numbers are added up. Then, you divide the total value of the asset by that sum to get a base amount. You multiply that base by the number for each year to calculate how much to depreciate annually. The result is higher depreciation in the first years and lower in the later ones, and that’s beneficial when we have profits and want to defer tax payments, because even though we’ll have to pay them in the future, €1 today is worth more than €1 tomorrow. But this method can’t be used for buildings, furniture, or fixtures.
• Constant depreciation per unit of production method: Instead of using the asset’s useful life in years, this method is based on the estimated number of units the equipment will produce over its lifetime. Once the total number of units is estimated, you then estimate how many units will be produced in the current year. This method calculates depreciation based on usage (production), not time.
• Constant percentage method: a fixed percentage is applied to the remaining value of the asset each year. Since the value gets smaller over time, the depreciation amount also decreases. However, the final percentage can never exceed 11%. To compute it, depending on the asset to be depreciated, we will refer to the depreciation tables, take the maximum percentage, and multiply it by one of the three coefficients as appropriate:
• • 1.5 if the asset’s useful life is less than 5 years
  • 2 if it's between 5 and less than 8 years
  • 2.5 if it’s 8 years or more
• Freedom of depreciation: the ability granted by the Tax Agency to companies to decide the pace of asset depreciation independently of the official depreciation rates, if it is considered more optimal for the type of asset. This is because it is not a different valuation, but rather a difference in timing of expense recognition.