Chapter 4 — Subsequent Accounting for Intangible Assets

4.2 Determining the Useful Life of an Intangible Asset

ASC 350-30

35-1 The accounting for a recognized intangible asset is based on its useful life to the reporting entity. An intangible asset with a finite useful life shall be amortized; an intangible asset with an indefinite useful life shall not be amortized.

35-2 The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. The useful life is not the period of time that it would take that entity to internally develop an intangible asset that would provide similar benefits. However, a reacquired right recognized as an intangible asset is amortized over the remaining contractual period of the contract in which the right was granted. If an entity subsequently reissues (sells) a reacquired right to a third party, the entity includes the related unamortized asset, if any, in determining the gain or loss on the reissuance.

35-3 The estimate of the useful life of an intangible asset to an entity shall be based on an analysis of all pertinent factors, in particular, all of the following factors with no one factor being more presumptive than the other:

The expected use of the asset by the entity.
The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate.
Any legal, regulatory, or contractual provisions that may limit the useful life. The cash flows and useful lives of intangible assets that are based on legal rights are constrained by the duration of those legal rights. Thus, the useful lives of such intangible assets cannot extend beyond the length of their legal rights and may be shorter.
The entity’s own historical experience in renewing or extending similar arrangements, consistent with the intended use of the asset by the entity, regardless of whether those arrangements have explicit renewal or extension provisions. In the absence of that experience, the entity shall consider the assumptions that market participants would use about renewal or extension consistent with the highest and best use of the asset by market participants, adjusted for entity-specific factors in this paragraph.
The effects of obsolescence, demand, competition, and other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels)
The level of maintenance expenditures required to obtain the expected future cash flows from the asset (for example, a material level of required maintenance in relation to the carrying amount of the asset may suggest a very limited useful life). As in determining the useful life of depreciable tangible assets, regular maintenance may be assumed but enhancements may not.

Further, if an income approach is used to measure the fair value of an intangible asset, in determining the useful life of the intangible asset for amortization purposes, an entity shall consider the period of expected cash flows used to measure the fair value of the intangible asset adjusted as appropriate for the entity-specific factors in this paragraph.

35-4 If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to be indefinite. The term indefinite does not mean the same as infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon — that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the reporting entity. Such intangible assets might be airport route authorities, certain trademarks, and taxicab medallions.

35-5 Examples 1 through 9B (see paragraphs 350-30-55-2 through 55-28F) illustrate different intangible assets and how they should be accounted for in accordance with this Subtopic, including determining whether the useful life of an intangible asset is indefinite.

Once an intangible asset is recognized, an entity must determine the asset’s estimated useful life, which is either finite or indefinite. Under ASC 350-30-35-4, an intangible asset’s useful life is considered indefinite if it is not limited by any “legal, regulatory, contractual, competitive, economic, or other factors.” Otherwise, the asset’s useful life is finite. ASC 350-30-35-4 further clarifies that the “term indefinite does not mean . . . infinite or indeterminate”; it only means that the intangible asset’s life “extends beyond the foreseeable horizon.” While certain intangible assets, such as FCC licenses or trade names, often have indefinite useful lives, most intangible assets are finite-lived. For example, a customer-related or technology intangible asset would not be expected to have an indefinite useful life.

The subsequent accounting for an intangible asset varies considerably on the basis of whether the useful life of the asset to the entity is considered indefinite or finite. The following table highlights some key differences between finite-lived and indefinite-lived intangible assets:

	Finite-Lived Intangible Assets	Indefinite-Lived Intangible Assets
Characteristics	Expected useful life to the entity is limited.	No legal, regulatory, contractual, competitive, economic, or other factors limit the useful life to the entity.
Amortization period	Over the expected useful life to the entity.	Not applicable.
Amortization method	On the basis of the pattern in which the economic benefits are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method should be used.	Not applicable.
Impairment testing	Tested for impairment in accordance with ASC 360 whenever events or circumstances indicate that the carrying amount of the asset (or asset group) may not be recoverable. An impairment loss is recognized if the carrying amount of the asset or asset group tested is not recoverable and its carrying amount exceeds its fair value (two-step test).	Tested for impairment in accordance with ASC 350 at least annually and more frequently if events or changes in circumstances indicate that the asset might be impaired. An entity may first perform the optional qualitative impairment assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If it is more likely than not that the asset is impaired, the entity would be required to perform a quantitative test by comparing the fair value of the asset with its carrying amount and recognizing an impairment loss for any excess. ASC 350-30-35-21 through 35-28 provide guidance on the unit of account to apply.

ASC 350-30-35-2 states, in part, that an intangible asset’s useful life “is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity” but “is not the period of time that it would take that entity to internally develop an intangible asset that would provide similar benefits.” Therefore, the useful life of an intangible asset is entity-specific, not based on market-participant assumptions, and does not necessarily represent the asset’s economic life. The entity may estimate that the intangible asset will generate cash flows for a period longer than the entity expects to own or use the asset. In this case, the entity would amortize the intangible asset over the period it expects to use the asset, taking into account the asset’s expected residual value, although intangible assets often have no residual value. (See Section 4.3.2 for more information about determining the residual value of an intangible asset.) In addition, ASC 350-30-35-3 clarifies that “if an income approach is used to measure the fair value of an intangible asset, in determining the useful life of the intangible asset for amortization purposes, an entity shall consider the period of expected cash flows used to measure the fair value of the intangible asset adjusted as appropriate for the entity-specific factors.”

The determination of an intangible asset’s useful life is based on an analysis of all available or obtainable evidence, including the “pertinent factors” (not all-inclusive) listed in ASC 350-30-35-3, which are discussed in the sections below. Note that none of these factors is “more presumptive than the other,” and an entity should also consider other factors that may be relevant to a particular intangible asset. For example, for a customer-related intangible asset, expected customer churn rate and the customer’s ability to cancel or terminate the relationship would affect the asset’s useful life.

All evidence that an entity considers in determining the useful life of an asset should be appropriately documented. Because the entity’s analysis is not limited to readily known factors, some entities may need to gather additional information. An entity may, for instance, need to consult a specialist in evaluating certain of the factors in ASC 350-30-35-3, such as the legal, regulatory, or contractual provisions related to an intangible asset.

SEC Considerations

The SEC staff closely scrutinizes the useful life an entity assigns to intangible assets and is expected to continue to do so, especially when the useful life is determined to be either (1) indefinite or (2) finite but unusually long or short, since such a determination may significantly affect the entity’s financial results. For example, entities should not expect to avoid scrutiny by selecting a long, finite useful life that would result in insignificant amortization charges.

4.2.1 The Expected Use of the Asset by the Entity

The useful life should reflect the period over which an intangible asset will contribute directly or indirectly to the entity’s cash flows (i.e., the period of expected use by the entity), regardless of how long other market participants might decide to use the asset. Unless an entity expects to continue to use an intangible asset indefinitely, an indefinite life is not appropriate, even if a market participant would be expected to use the asset indefinitely.

4.2.2 The Expected Useful Life of Another Asset or Group of Assets to Which the Useful Life of the Intangible Asset May Be Related

An intangible asset’s useful life to the entity may be limited by the useful life of another asset or asset group. The example below illustrates this point.

Example 4-1

Company A acquires Company B in a business combination. Company A identifies a nontransferable right held by B to manufacture a specific product in a specific geographic area. The remaining term is 10 years. However, manufacturing the product, whose sales have steadily declined in recent years, requires significant investment in specialized equipment. Company B is using specialized equipment with an estimated remaining useful (and economic) life of eight years. Because of the product’s declining sales and the investment necessary for replacement equipment, A does not intend to replace the specialized equipment at the end of its estimated useful life. Although the manufacturing right has a remaining contractual term of 10 years, the 8-year term of the specialized equipment, along with management’s intention not to replace the equipment, would limit the useful life of the right to a period shorter than its remaining contractual term.

4.2.3 Legal, Regulatory, or Contractual Provisions That May Limit the Useful Life of an Intangible Asset

Entities should consider existing contractual provisions (including stated renewal or extension provisions), as well as actual or anticipated regulatory or legal changes related to the ownership or use of an asset, to determine their impact on an intangible asset’s useful life; such provisions or changes may indicate that the asset’s useful life is finite. ASC 350-30-35-3(c) clarifies that “[t]he cash flows and useful lives of intangible assets that are based on legal rights are constrained by the duration of those legal rights. Thus, the useful lives of such intangible assets cannot extend beyond the length of their legal rights and may be shorter.”

Examples 4 and 5 in ASC 350-30-55-11 through 55-16 illustrate this factor.

ASC 350-30

Example 4: Acquired Broadcast License Deemed to Have an Indefinite Life

55-11 This Example illustrates the guidance in paragraphs 350-30-35-1 through 35-20.

55-12 An acquired broadcast license expires in five years. The broadcast license is renewable every 10 years if the entity provides at least an average level of service to its customers and complies with the applicable Federal Communications Commission (FCC) rules and policies and the FCC Communications Act of 1934. The license may be renewed indefinitely at little cost and was renewed twice prior to its recent acquisition. The acquiring entity intends to renew the license indefinitely, and evidence supports its ability to do so. Historically, there has been no compelling challenge to the license renewal. The technology used in broadcasting is not expected to be replaced by another technology any time in the foreseeable future. Therefore, the cash flows from that license are expected to continue indefinitely.

55-13 The broadcast license would be deemed to have an indefinite useful life because cash flows are expected to continue indefinitely. Therefore, the license would not be amortized until its useful life is deemed to be no longer indefinite. The license would be tested for impairment in accordance with paragraphs 350-30-35-18 through 35-20.

Example 5: Acquired Broadcast License Deemed to Have a Finite Life

55-14 This Example illustrates the guidance in paragraphs 350-30-35-1 through 35-20.

55-15 Regarding the broadcast license acquired in Example 4 (see paragraph 350-30-55-11), the FCC subsequently decides that it will no longer renew broadcast licenses, but rather will auction those licenses. At the time the decision is made, the broadcast license has three years until it expires. The cash flows from that license are expected to continue until the license expires.

55-16 Because the broadcast license can no longer be renewed, its useful life is no longer indefinite. Thus, the acquired license would be tested for impairment in accordance with paragraphs 350-30-35-18 through 35-20. The license would then be amortized over its remaining three-year useful life following the pattern in which the expected benefits will be consumed or otherwise used up. Because the license will be subject to amortization, in the future it would be reviewed for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10.

4.2.4 The Entity’s Own Historical Experience in Renewing or Extending Similar Arrangements

ASC 350-30-35-3(d), states that one of the pertinent factors an entity must consider in determining an intangible asset’s estimated useful life is:

The entity’s own historical experience in renewing or extending similar arrangements, consistent with the intended use of the asset by the entity, regardless of whether those arrangements have explicit renewal or extension provisions. In the absence of that experience, the entity shall consider the assumptions that market participants would use about renewal or extension consistent with the highest and best use of the asset by market participants, adjusted for entity-specific factors in this paragraph.

If renewal is not prohibited, an entity customarily evaluates the likelihood of renewal or extension to determine the useful life of an intangible asset and should consider its own historical experience in renewing or extending similar arrangements. In addition, ASC 350-30-35-3 states that “if an income approach is used to measure the fair value of an intangible asset, in determining the useful life of the intangible asset for amortization purposes, an entity shall consider the period of expected cash flows used to measure the fair value of the intangible asset adjusted as appropriate for the entity-specific factors in this paragraph.”

Therefore, an entity should look to its valuation model, adjusted for the entity-specific factors in ASC 350-30-35-3(a)–(f), for further evidence of an intangible asset’s useful life. In addition, ASC 350-30-55-1C states the following:

ASC 350-30

Consideration of Entity’s Historical Experience in Subsequent Measurements

55-1C This paragraph provides implementation guidance on paragraph 350-30-35-3(d). For a recognized intangible asset, there might continue to be a difference between the useful life of the asset and the period of expected cash flows used to measure the fair value of the asset. However, that difference likely will be limited to situations in which the entity's own assumptions about the period over which the asset is expected to contribute directly and indirectly to the future cash flows of the entity are different from the assumptions market participants would use in pricing the asset. In those situations, it is appropriate for the entity to use its own assumptions because amortization of a recognized intangible asset should reflect the period over which the asset will contribute both directly and indirectly to the expected future cash flows of the entity.

An entity may have a history of renewing or extending an intangible asset perfunctorily. Judgment may be required in other situations, including those in which the asset has not yet been subject to renewal or extension or in which historical patterns are less uniform. In these instances, in accordance with ASC 350-30-35-3(d), the “entity shall consider the assumptions that market participants would use about renewal or extension consistent with the highest and best use of the asset by market participants, adjusted for entity-specific factors” related to determining the useful life of the asset.

The examples below from ASC 350-30-55 illustrate the determination of the useful life when an entity lacks historical experience.

ASC 350-30

Example 6: Acquired Airline Route

55-17 This Example illustrates the guidance in paragraphs 350-30-35-1 through 35-20.

55-18 An acquired airline route authority from the United States to the United Kingdom expires in three years. The route authority may be renewed every five years, and the acquiring entity intends to comply with the applicable rules and regulations surrounding renewal. Route authority renewals are routinely granted at a minimal cost and have historically been renewed when the airline has complied with the applicable rules and regulations. The acquiring entity expects to provide service to the United Kingdom from its hub airports indefinitely and expects that the related supporting infrastructure (airport gates, slots, and terminal facility leases) will remain in place at those airports for as long as it has the route authority. An analysis of demand and cash flows supports those assumptions.

55-19 Because the facts and circumstances support the acquiring entity's ability to continue providing air service to the United Kingdom from its U.S. hub airports indefinitely, the intangible asset related to the route authority is considered to have an indefinite useful life. Therefore, the route authority would not be amortized until its useful life is deemed to be no longer indefinite and would be tested for impairment in accordance with paragraphs 350-30-35-18 through 35-20.

Example 7: Acquired Trademark Deemed to Have an Indefinite Useful Life

55-20 This Example illustrates the guidance in paragraphs 350-30-35-1 through 35-20.

55-21 An acquired trademark that is used to identify and distinguish a leading consumer product has been a market-share leader for the past eight years. The trademark has a remaining legal life of 5 years but is renewable every 10 years at little cost. The acquiring entity intends to continuously renew the trademark, and evidence supports its ability to do so. An analysis of product life cycle studies; market, competitive, and environmental trends; and brand extension opportunities provides evidence that the trademarked product will generate cash flows for the acquiring entity for an indefinite period of time.

55-22 The trademark would be deemed to have an indefinite useful life because it is expected to contribute to cash flows indefinitely. Therefore, the trademark would not be amortized until its useful life is no longer indefinite. The trademark would be tested for impairment in accordance with paragraphs 350-30-35-18 through 35-20.

Example 9A: Acquired Technology License That Renews Annually

55-28A This Example illustrates the guidance in paragraphs 350-30-35-1 through 35-20.

55-28B An exclusive, annually renewable technology license with a third party is acquired by an entity that has made significant progress in developing next-generation technology for digital video products. The acquiring entity believes that in two years, after it has completed developing its next-generation products, the acquired technology license will be obsolete because customers will convert to the acquiring entity's products. Market participants, however, are not as advanced in their development efforts and are not aware of the acquiring entity’s proprietary development efforts. Thus, those market participants would expect the technology license to be obsolete in three years. The acquiring entity determines that the fair value of the technology license using 3 years of cash flows is $10 million, consistent with the highest and best use of the asset by market participants.

55-28C In applying paragraph 350-30-35-3(d), the acquiring entity would consider its own historical experience in renewing or extending similar arrangements. In this case, the acquiring entity lacks historical experience in renewing or extending similar arrangements. Therefore, in accordance with that paragraph, the entity would consider the assumptions that a market participant would use consistent with the highest and best use of the technology license. However, because the acquiring entity expects to use the technology license until it becomes obsolete in two years, it must adjust the market participants' assumptions for the entity-specific factors in paragraph 350-30-35-3, specifically item (a), which requires consideration of the entity's expected use of the asset. As a result, the technology license would be amortized over a two-year period. The technology license would be reviewed for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10.

Example 9B: Acquired Customer Relationship

55-28D This Example illustrates the guidance in paragraphs 350-30-35-1 through 35-20.

55-28E An insurance entity acquired 50 customer relationships operating under contracts that are renewable annually. The acquiring entity determines that the fair value of the customer relationship asset is $10 million, considering assumptions (including turnover rate) that a market participant would make consistent with the highest and best use of the asset by market participants. An income approach was used to determine the fair value of the acquired customer relationship asset.

55-28F In applying paragraph 350-30-35-3, the acquiring entity would consider its own historical experience in renewing or extending similar customer relationships. In this case, the acquiring entity concludes that its customer relationships are dissimilar to the acquired customer relationships and, therefore, the acquiring entity lacks historical experience in renewing or extending similar arrangements. Accordingly, the acquiring entity considers turnover assumptions that market participants would make about the renewal or extension of the acquired customer relationships or similar arrangements. Without evidence to the contrary, the acquiring entity expects that the acquired customer relationships will be renewed or extended at the same rate as a market participant would expect, and no other factors would indicate a different useful life is appropriate. Thus, absent any other of the entity-specific factors in paragraph 350-30-35-3, in determining the useful life for amortization purposes, the entity shall consider the period of expected cash flows used to measure the fair value of the asset. The customer relationships would be reviewed for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10.

4.2.5 The Effects of Obsolescence, Demand, Competition, and Other Economic Factors

ASC 350-30-35-3(e) states that another pertinent factor an entity must consider in determining the useful life of an intangible asset is “[t]he effects of obsolescence, demand, competition, and other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels).” For example, although an entity may have the right to use an intangible asset indefinitely, the effects of obsolescence, demand, competition, and other factors could impose a foreseeable limit on the period over which the asset can generate cash flows for the entity, in which case the useful life would not be indefinite.

Example 3 in ASC 350-30-55-8 through 55-10 illustrates an analysis related to this pertinent factor.

ASC 350-30

Example 3: Acquired Copyright

55-8 This Example illustrates the guidance in paragraphs 350-30-35-1 through 35-20.

55-9 An acquired copyright has a remaining legal life of 50 years. An analysis of consumer habits and market trends provides evidence that the copyrighted material will generate cash flows for approximately 30 more years.

55-10 The copyright would be amortized over its 30-year estimated useful life following the pattern in which the expected benefits will be consumed or otherwise used up and reviewed for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10.

4.2.6 The Level of Maintenance Expenditures Required to Obtain the Expected Future Cash Flows From the Asset

As described in ASC 350-30-35-3(f), another pertinent factor that an entity must consider in determining the useful life of an asset is “[t]he level of maintenance expenditures required to obtain the expected future cash flows from the asset.” In some cases, the amount of maintenance that an entity would need to perform would be too great for the entity to continue to use the asset. ASC 350-30-35-3(f) also clarifies that “regular maintenance may be assumed but enhancements may not.”

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