Depreciation & amortisation

Depreciation and amortisation are non-cash accounting charges that spread the cost of a long-lived asset over its useful life rather than expensing it all at once when purchased.

Depreciation applies to tangible assets such as machinery, buildings, vehicles, and equipment. Reflecting the gradual consumption of their economic value through use and time. Amortisation applies to intangible assets such as patents, trademarks, customer relationships, acquired software, and goodwill in some frameworks. Reflecting the same concept applied to assets without physical form.

The distinction matters because intangibles are often acquired in M&A transactions, meaning a company that grows through acquisition will carry heavy amortisation charges that a company growing organically will not. This makes their reported earnings difficult to compare on a like-for-like basis.

On the income statement, D&A is embedded within cost of goods sold for production-related assets and within operating expenses for corporate assets. It is rarely shown as a single line. It is disclosed in the notes and the cash flow statement, where it appears as an add back to net income under operating activities because no cash actually left the business.

The method of depreciation, straight-line, declining balance, or units of production is a management choice that affects the timing of expense recognition and introduces another layer of incomparability across companies.

D&A is the reason EBITDA exists as a metric. By adding it back to operating profit, analysts attempt to neutralise the effect of past capital allocation decisions and accounting method differences. In capital intensive businesses however, this strips out a very real economic cost that will eventually demand cash reinvestment.