The Financial Accounting Standards Board issued guidance in July 2012 that applies to all reporting entities – public, private and not-for-profit – for testing impairment of indefinite-lived intangible assets.
Some examples of intangible assets that will be subject to the new “optional” qualitative impairment testing guidance include indefinite-lived trademarks, licenses and distribution rights.
The guidance, Accounting Standards Update (ASU) 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, amends requirements in FASB Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other. It builds upon the guidance in ASU 2011-08, Testing Goodwill for Impairment, which was issued by the FASB in September 2011.
Before being amended by ASU 2012-02, the guidance in FASB ASC 350 requires reporting entities to test indefinite-lived intangible assets for impairment on at least an annual basis by comparing the fair value of the assets with their carrying amounts. When the carrying amounts exceed fair value, impairment losses need to be recognized in an amount equal to the difference.
Importantly, the amended guidance in FASB ASC 350 still includes the requirement for these assets to be tested for impairment on at least an annual basis.
In assessing whether it is more likely than not that indefinite-lived intangible assets are impaired, financial statement preparers need to assess all relevant events and circumstances that could affect the significant inputs used in determining fair value of the assets.
Examples of these types of events and circumstances include, but are not limited to, the following:
- Cost factors (e.g., increase in materials costs, etc.)
- Financial performance (e.g., declining cash flows, etc.)
- Legal, regulatory, contractual, political, business or other factors (e.g., asset-specific factors that could affect fair value)
- Other relevant entity-specific events (e.g., changes in management, contemplation of bankruptcy)
- Industry and market considerations (e.g., deterioration in the environment in which the entity operates)
- Macroeconomic conditions (e.g., deterioration in general economic conditions, limitations on accessing capital)
Financial statement preparers also should consider:
- Positive and mitigating events and circumstances that could affect the significant inputs used to determine fair value
- Where recent fair value calculations have been made, the difference between the fair value amounts and carrying amounts of these assets
- Any changes to the carrying amounts of the assets
None of the individual examples noted above are intended to represent standalone events and circumstances that necessarily require preparers to calculate the fair value of the indefinite-lived intangible assets. Also, the existence of positive and mitigating events and circumstances is not intended to represent a rebuttable presumption that preparers should not perform the quantitative impairment test to discern whether the indefinite-lived intangible assets are impaired.
Paralleling the amendments in ASU 2011-08 for goodwill, the 2012-02 amendments to FASB ASC 350 “allow” financial statement preparers to make a qualitative evaluation about the likelihood of impairment of indefinite-lived intangible assets. The qualitative evaluation would be used to determine whether it is necessary to apply the quantitative evaluation and calculate the fair value of the indefinite-lived intangible assets.
Essentially, preparers of financial statements now will have the option to first assess qualitative factors – events and circumstances – that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible assets to determine whether it is more likely than not (a likelihood of greater than 50 percent) that the indefinite-lived intangible assets have been impaired.
The FASB ASC 350 amendments in ASU 2012-02 are effective for annual and interim impairment tests performed in fiscal years beginning after Sept. 15, 2012. Earlier implementation is permitted.