What is amortisation?

Amortisation is the process of gradually writing off the cost of an intangible asset over its useful life. It can also refer to paying down a loan through regular scheduled payments.

When your business buys an intangible asset (like a patent or software licence), you don’t expense the full cost in the year you buy it. Instead, you spread that cost across the years you’ll use it. This is amortisation, and it applies to both your financial reports and your tax returns.

The term also applies to loans. When you make regular repayments on a mortgage or business loan, you’re amortising that debt over time.

How amortisation works

Amortisation records the declining value of an intangible asset on your financial statements over time.

When you buy an intangible asset, you record its full value on your balance sheet. Each year, you reduce that value by the amortisation amount. This reduction appears as an expense on your profit and loss statement.

An amortisation schedule tracks this process. It shows exactly how much of the asset’s value is written off each period and what the remaining book value is. For loans, an amortisation schedule breaks down each payment into the portion that goes towards interest and the portion that reduces the principal.

This process continues until the asset reaches the end of its useful life or the loan is fully repaid.

Asset amortisation vs loan amortisation

There are two main types of amortisation, and they work differently.

Asset amortisation

Asset amortisation applies to intangible assets: non-physical things your business owns that have value, like patents, copyrights, and software licences. You spread the purchase cost of the asset across the years you expect to use it. Each year, you record an amortisation expense that reduces the asset’s book value.

Loan amortisation

Loan amortisation is how you pay down a debt through regular, scheduled payments. Each payment covers both principal and interest. Early in the loan term, a larger share of each payment goes towards interest. Over time, more of each payment reduces the principal balance.

Common amortised loans include mortgages, car loans, and business loans.

Why amortisation matters for your business

Amortisation isn’t just an accounting requirement. It gives you a clearer picture of how your business is performing.

Accurate profit reporting: spreading an asset’s cost over its useful life avoids distorting your profits in any single year.
Lower tax liability: amortisation expenses reduce your taxable income each year, which can lower your tax bill at the end of the financial year.
Better budgeting: knowing your amortisation schedule helps you plan cash flow and allocate resources.
Matching costs with revenue: you recognise expenses in the same periods that the asset generates value for your business.
Tax compliance: Indonesia’s Directorate General of Taxes (DJP) requires you to follow specific rules when claiming amortisation deductions.

What assets can and can’t be amortised in Indonesia

Indonesia’s tax rules for amortising intangibles (harta tak berwujud) come from Article 11A of the Income Tax Law (UU PPh) and Government Regulation (PP) 55/2022. Minister of Finance Regulation (PMK) 72/2023 sets out the detail and took effect on 17 July 2023. It replaced three older regulations, according to the Directorate General of Taxes (DJP).

Assets that can be amortised

For Indonesian income tax purposes, you amortise spending on intangible assets that last more than 1 year and help you earn income. Article 9 of PMK 72/2023 names goodwill and land-right extension costs. Custom software falls under Article 10, while establishment and capital-expansion costs come from Article 11A(3) of the Income Tax Law:

acquired goodwill, which PP 55/2022 calls muhibah
costs of extending hak guna bangunan (HGB), hak guna usaha (HGU) or hak pakai land rights, as set out in PMK 72/2023
custom (special-purpose) application software, which goes in Group 1 under Article 10 of the regulation
establishment and capital-expansion costs, which you can deduct in the year you spend them or amortise, according to PwC’s Indonesia tax summary

Each intangible asset sits in one of four groups based on its useful life, and PwC lists the same rates as PMK 72/2023:

4 years for Group 1, at 25% straight-line or 50% declining balance
8 years for Group 2, at 12.5% straight-line or 25% declining balance
16 years for Group 3, at 6.25% straight-line or 12.5% declining balance
20 years for Group 4, at 5% straight-line or 10% declining balance

You can choose straight-line or declining balance, as long as you stick with that method. When an asset lasts more than 20 years, you can use Group 4 or the actual useful life in your books, applied consistently, DJP explains. Amortisation starts in the month you spend the money, with exceptions for some sectors like forestry and livestock, under PMK 72/2023.

Say your business spends Rp400,000,000 on custom software, which falls in Group 1. At the 25% straight-line rate, you’d claim Rp100,000,000 a year for 4 years. At the 50% declining balance rate, you’d claim Rp200,000,000 in year 1 and Rp100,000,000 in year 2.

Assets that can’t be amortised

Two kinds of spending aren’t amortised under PMK 72/2023:

land (hak milik, HGB, HGU or hak pakai), which isn’t depreciated under Article 2(1) of PMK 72/2023, though HGB, HGU and hak pakai extension costs are amortised
general-purpose application software, which you expense in full in the year you buy it

This is general information as of October 2026, so check DJP guidance and talk to a licensed tax adviser (konsultan pajak) before you claim. You can find an accountant who knows these rules through the Xero advisor directory.

How to calculate amortisation

The most common way to calculate amortisation for intangible assets is the straight-line method. Here’s how it works, step by step.

Determine the total cost of the asset (including any purchase and registration fees).
Estimate the asset’s useful life in years. For Indonesian income tax, use the useful life of the asset’s group under PMK 72/2023.
Divide the total cost by the number of years of useful life. This gives you the annual amortisation expense.

For example, say your business buys a patent for Rp100,000,000 with a useful life of 10 years. The annual amortisation expense would be Rp100,000,000 / 10 = Rp10,000,000 per year. After year 1, the patent’s book value drops to Rp90,000,000. After year 2, it’s Rp80,000,000, and so on until the book value reaches Rp0.

Some accounting software can automate these calculations, but you’ll need to make sure the inputs are correct and comply with DJP rules.

Common methods of amortisation

There are several methods for calculating amortisation. For Indonesian income tax, PMK 72/2023 allows two methods.

Straight-line method

An equal portion of the asset’s cost is written off each year over its useful life. This is the simplest method and the most commonly used for intangible assets.

For example, a Rp150,000,000 asset with a 15-year useful life would have an amortisation expense of Rp10,000,000 per year.

Declining balance method

A larger amount is written off in the earlier years, with smaller amounts in later years. This reflects that many assets deliver more value when they’re new.

For example, if an asset costs Rp10,000,000 and you apply a 30% declining balance rate, you’d amortise Rp3,000,000 in year 1. In year 2, the remaining value is Rp7,000,000, so you’d amortise Rp2,100,000 (30% of Rp7,000,000). This pattern continues until the asset is fully written off.

Your accountant can help you choose the right method based on the type of asset and DJP requirements.

Amortisation vs depreciation

Amortisation and depreciation are closely related, but they apply to different types of assets.

Amortisation applies to intangible assets: non-physical things like patents, copyrights, and software licences.
Depreciation applies to tangible assets: physical things like vehicles, equipment, and machinery.
Both spread the cost of an asset over its useful life.
Both are recorded as non-cash expenses on your profit and loss statement.
Intangible assets typically have no salvage value at the end of their useful life, while tangible assets often do.

The key difference is the type of asset. If it’s something you can touch, it’s depreciation. If it’s non-physical, it’s amortisation. You can learn more about depreciation methods and how they apply to your business.

Simplify amortisation with Xero

Tracking amortisation manually can be time-consuming, especially when you’re managing multiple assets with different useful lives and methods. Cloud accounting software can automate the calculations, generate amortisation schedules, and keep your records accurate for tax time. Get one month free.

FAQs on amortisation

Here are some frequently asked questions about amortisation.

Can a single asset be both amortised and depreciated?

No. Each asset is classified as either tangible or intangible. Tangible assets are depreciated, and intangible assets are amortised. An asset can’t fall into both categories at the same time.

Can goodwill be amortised in Indonesia?

For income tax, yes: goodwill (muhibah) you acquire that lasts more than 1 year is amortised over the Group 1–4 lives in PMK 72/2023. Under Indonesian Financial Accounting Standards (SAK Indonesia, PSAK 103), acquired goodwill isn’t amortised and is tested for impairment at least yearly, says KPMG.

What is an amortisation schedule?

An amortisation schedule is a record that shows how an asset’s value or a loan balance decreases over time. For loans, it breaks each payment into the interest and principal portions.

Is amortisation an expense or a liability?

Amortisation is a non-cash expense. It appears on your profit and loss statement and reduces the book value of the asset on your balance sheet. It’s not a liability.

How long can you amortise an intangible asset?

The amortisation period depends on the asset’s useful life. For Indonesian income tax, that’s 4, 8, 16 or 20 years depending on its group under PMK 72/2023, or its actual useful life in your books if it lasts more than 20 years.

Learn more about amortisation

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Disclaimer

This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.

What is amortisation?

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