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Companies have more flexibility in testing for impairment of certain intangible assets now, thanks to changes introduced in FASB Accounting Standards Update No. 2012-02. This ASU applies to intangible assets that are not amortized because they were determined to have indefinite useful lives. Examples include certain trademarks, licenses, and distribution rights. Under the new guidance, companies are permitted to use a qualitative assessment in connection with the impairment testing for these kinds of intangibles. The qualitative assessment is optional, and it is most helpful when the facts and circumstances indicate a low likelihood of impairment, meaning it is not likely the realizable value of the assets has declined to the point where the carrying amount exceeds the fair value. This Messenger provides an overview of the changes and factors to consider in applying the guidance.
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Companies have more flexibility in testing for impairment of certain intangible assets now, thanks to changes introduced in FASB Accounting Standards Update No. 2012-02. This ASU applies to intangible assets that are not amortized because they were determined to have indefinite useful lives. Examples include certain trademarks, licenses, and distribution rights.
Under the new guidance, companies are permitted to use a qualitative assessment in connection with the impairment testing for these kinds of intangibles. The qualitative assessment is optional, and it is most helpful when the facts and circumstances indicate a low likelihood of impairment, meaning it is not likely the realizable value of the assets has declined to the point where the carrying amount exceeds the fair value.
This Messenger provides an overview of the changes and factors to consider in applying the guidance.
Overview of qualitative assessments
The qualitative assessment can be used as a screen to determine whether or not a quantitative test should be performed to calculate an indefinite-lived intangible asset’s current fair value. This technique can reduce
January 2013
Impairment Testing of Indefinite-Lived Intangibles
the cost of impairment testing, but it can also require considerable judgment similar to the qualitative test for impairment of goodwill introduced in ASU 2011-08. (See MHM Messenger 2-12 for more details.)
Key points about the use of qualitative assessments for indefinite-lived intangibles:
• Accounting standards require that an indefinite-lived intangible must be tested for impairment at least annually. Prior to ASU 2012-02, impairment was evaluated using a quantitative test that involved a comparison of the fair value of an asset with its carrying amount to determine the amount of impairment loss, if any
• ASU 2012-02 introduces an optional qualitative assessment that applies to public and private companies, as well as not-for-profit organizations. All these entities now have the option to make a qualitative assessment to assist in determining if a quantitative impairment test is required.
• Companies have considerable flexibility in their use of the qualitative assessment. The option can be applied to some, all, or none of an entity’s indefinite-lived intangibles. The choice does not need to be consistent from period to period like an accounting policy election.
• A qualitative assessment requires consideration of the events and circumstances that could have affected the significant inputs used in determining the fair values of indefinite-lived intangible assets.
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• The objective of the qualitative assessment is to determine whether it is more likely than not (a probability of more than 50 percent) that the indefinite-lived intangible asset is impaired. If the entity concludes it is more likely than not the asset is impaired, then the entity must proceed with the quantitative test. Alternatively, if the entity concludes it is more likely than not that the asset is not impaired, the entity is not required to take any further action.
• Accounting standards also require evaluation of impairment between annual tests if events and circumstances indicate it is more likely than not that the asset is impaired. The new guidance replaces the examples of these events and circumstances.
Applying the guidance
In the ASU, the FASB indicated that it intends for an entity to make a positive assertion about the conclusion reached and the events and circumstances considered, if the entity determines that it is not more likely than not that the indefinite-lived intangible asset is impaired.
Examples of relevant events and circumstances include:
• Cost factors, such as increases in raw materials.
• Financial performance, such as a decline from prior periods’ actual or projected revenue or earnings.
• Legal, regulatory, contractual, political, business, or other factors, including asset-specific factors such as results of clinical trials for in-process research and development.
• Other relevant entity-specific events, such as changes in management or customers.
• Industry and market considerations, such as the effects of obsolescence, changes in demand or competition, known technological advances, or legislative action that results in an uncertain business environment.
• Macroeconomic conditions, such as an economic slowdown or other significant changes that affect equity or credit markets.
Other factors to consider include: (a) any changes to the carrying amount of the indefinite-lived intangible asset, and (b) the magnitude of the difference between the fair value and carrying amount of an indefinite-lived intangible asset, if an entity has made a recent fair value calculation.
Processes and documentation
Qualitative assessments typically involve subjective decisions and complex management estimates, with the result that companies may wish to establish processes for making the evaluations and documenting the results. As part of the evaluation process, management may wish to start with a list and monitor each of the following for each indefinite-lived intangible: the key drivers of the significant inputs of the asset’s fair value, the sources of information for each driver, and the recent events and circumstances that may impact the key drivers. As part of the documentation, companies may find it helpful to prepare a table that lists the factors monitored, the level of significance (high, medium, or low) for each factor, and the directional impact of the factor on fair value, (i.e., positive, negative, or neutral).
Effective date
The guidance in ASU 2012-02 is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. For example, the ASU
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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM service provider to further discuss the impact on your financial statements.
MHMMessengercould be adopted by a nonpublic entity for any fiscal 2012 annual financial statements not yet issued.
For more information
If you would like additional information or have any specific questions about the qualitative assessments, please contact Keith Peterka of MHM’s Professional Standards Group or your MHM service professional. You can reach Keith directly at [email protected] or 610-862-2744.
