4.4 Intangible Assets Not Subject to Amortization
ASC 350-30
35-15
If an intangible asset is determined to have an indefinite
useful life, it shall not be amortized until its useful life
is determined to be no longer indefinite.
Under ASC 350-30-35-15, an intangible asset would not be amortized while its useful
life is indefinite. ASC 350-30-35-4 states that an indefinite useful life is one
that is not limited by any “legal, regulatory, contractual, competitive, economic,
or other factors.” Accordingly, entities are expected to analyze and document all
relevant factors before determining that the useful life of an intangible asset is
not limited by such factors and is therefore indefinite.
Entities are also required to reevaluate the useful life of their intangible assets
in each reporting period. See Section 4.5 for more information.
4.4.1 Testing Indefinite-Lived Intangible Assets for Impairment
ASC 350-30
35-18 An intangible asset
that is not subject to amortization shall be tested for
impairment annually and more frequently if events or
changes in circumstances indicate that it is more likely
than not that the asset is impaired.
An entity must select a recurring annual testing date for each of its
indefinite-lived intangible assets or each unit of account (see
Section 4.4.5).
In testing indefinite-lived intangible assets for impairment, an entity may first
elect to perform a qualitative assessment to determine whether it needs to
perform a quantitative impairment test (see Section 4.4.3).
The entity may, however, also elect to bypass the qualitative assessment and
move directly to the quantitative test (see Section 4.4.4).
If the entity decides to perform the qualitative assessment and determines that
an indefinite-lived intangible asset might be impaired, the entity must proceed
to the quantitative test.
When performing the quantitative test, an entity recognizes an impairment loss
when the carrying amount of an indefinite-lived intangible asset exceeds its
fair value; this amount is limited to the amount of the asset. Before testing an
indefinite-lived intangible asset for impairment, an entity should assess the
appropriate unit of account at which to test the asset, as discussed in the next
section.
4.4.2 Unit of Account for Impairment Testing of Intangible Assets Not Subject to Amortization
ASC 350-30
35-21 Separately recorded
indefinite-lived intangible assets, whether acquired or
internally developed, shall be combined into a single
unit of accounting for purposes of testing impairment if
they are operated as a single asset and, as such, are
essentially inseparable from one another.
35-22 Determining whether
several indefinite-lived intangible assets are
essentially inseparable is a matter of judgment that
depends on the relevant facts and circumstances. The
indicators in paragraph 350-30-35-23 shall be considered
in making that determination. None of the indicators
shall be considered presumptive or determinative.
35-23 Indicators that two or
more indefinite-lived intangible assets shall be
combined as a single unit of accounting for impairment
testing purposes are as follows:
- The intangible assets were purchased in order to construct or enhance a single asset (that is, they will be used together).
- Had the intangible assets been acquired in the same acquisition they would have been recorded as one asset.
- The intangible assets as a group represent the highest and best use of the assets (for example, they yield the highest price if sold as a group). This may be indicated if it is unlikely that a substantial portion of the assets would be sold separately or the sale of a substantial portion of the intangible assets individually would result in a significant reduction in the fair value of the remaining assets as a group.
- The marketing or branding strategy provides evidence that the intangible assets are complementary, as that term is used in paragraph 805-20-55-18.
35-24 Indicators that two or
more indefinite-lived intangible assets shall not be
combined as a single unit of accounting for impairment
testing purposes are as follows:
- Each intangible asset generates cash flows independent of any other intangible asset (as would be the case for an intangible asset licensed to another entity for its exclusive use).
- If sold, each intangible asset would likely be sold separately. A past practice of selling similar assets separately is evidence indicating that combining assets as a single unit of accounting may not be appropriate.
- The entity has adopted or is considering a plan to dispose of one or more intangible assets separately.
- The intangible assets are used exclusively by different asset groups (see the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10).
- The economic or other factors that might limit the useful economic life of one of the intangible assets would not similarly limit the useful economic lives of other intangible assets combined in the unit of accounting.
35-25 Paragraph superseded
by Accounting Standards Update No. 2010-07.
35-26 All of the following
shall be included in the determination of the unit of
accounting used to test indefinite-lived intangible
assets for impairment:
- The unit of accounting shall include only indefinite-lived intangible assets — those assets cannot be tested in combination with goodwill or with a finite-lived asset.
- The unit of accounting cannot represent a group of indefinite-lived intangible assets that collectively constitute a business or a nonprofit activity.
- A unit of accounting may include indefinite-lived intangible assets recorded in the separate financial statements of consolidated subsidiaries. As a result, an impairment loss recognized in the consolidated financial statements may differ from the sum of the impairment losses (if any) recognized in the separate financial statements of those subsidiaries.
- Subparagraph superseded by Accounting Standards Update No. 2017-04.
Pending Content (Transition Guidance: ASC
350-20-65-3)
35-26 All of the following shall be
included in the determination of the unit of
accounting used to test indefinite-lived
intangible assets for impairment:
- The unit of accounting shall include only indefinite-lived intangible assets — those assets cannot be tested in combination with goodwill or with a finite-lived asset.
- The unit of accounting cannot represent a group of indefinite-lived intangible assets that collectively constitute a business or a nonprofit activity.
- A unit of accounting may include indefinite-lived intangible assets recorded in the separate financial statements of consolidated subsidiaries. As a result, an impairment loss recognized in the consolidated financial statements may differ from the sum of the impairment losses (if any) recognized in the separate financial statements of those subsidiaries.
- Subparagraph superseded by Accounting Standards Update No. 2017-04.
35-27 If, based on a change
in the way in which intangible assets are used, an
entity combines as a unit of accounting for impairment
testing purposes indefinite-lived intangible assets that
were previously tested for impairment separately, those
intangible assets shall be separately tested for
impairment in accordance with paragraphs 350-30-35-18
through 35-20 prior to being combined as a unit of
accounting.
35-28 Examples 10 through 12
(see paragraphs 350-30-55-29 through 55-38) illustrate
the determination of the unit of accounting to use in
impairment testing.
ASC 350-30-35-21 states that “[s]eparately recorded indefinite-lived intangible
assets, whether acquired or internally developed, shall be combined into a
single unit of accounting for purposes of testing impairment if they are
operated as a single asset and, as such, are essentially inseparable from one
another.” An entity must use judgment and consider all relevant facts and
circumstances in determining whether indefinite-lived intangible assets are
“essentially inseparable” from one another. Indefinite-lived intangible assets
cannot be combined with finite-lived assets (i.e., they must have the same
useful lives to the entity). Further, if the intangible assets meet the
conditions to be combined into a single unit of account, the entity is required
to do so for impairment testing purposes. The entity cannot elect to continue to
test the assets separately in such circumstances.
ASC 350-30-35-26 also clarifies that the unit of account cannot:
- Include other assets such as goodwill or finite-lived assets.
- Represent “assets that collectively constitute a business or a nonprofit activity.”
Two or more indefinite-lived intangible assets should be combined into a single
unit of account if any of the indicators in ASC 350-30-35-23 are present (none
of which are “presumptive or determinative”) but should not be combined into a
single unit of account if any of the indicators in ASC 350-30-35-24 exist. The
table below summarizes and expands on the indicators listed in those two
paragraphs.
Indicators That Two or More Indefinite-Lived Intangible
Assets Must Be Combined
|
Indicators That Two or More Indefinite-Lived Intangible
Assets Cannot Be Combined
|
---|---|
The intangible assets are used together
as a single asset or were purchased to “construct or
enhance a single asset.”
|
The intangible assets generate “cash
flows independent of any other intangible asset.”
|
If the assets had been acquired in the
same acquisition, “they would have been recorded as one
asset.”
|
If the assets had been acquired in the same acquisition,
they would not have been recognized as a single
asset.
|
No “economic or other factors . . .
limit the useful economic life of the intangible assets”
(i.e., the intangible assets are determined to be
indefinite-lived).
|
“[E]conomic or other factors . . . limit
the useful life of one [or more] of the intangible
assets” (i.e., finite-lived and indefinite-lived
intangible assets cannot be combined).
|
“The intangible assets as a group
represent the highest and best use of the assets.” For
example, (1) the assets would “yield the highest price
if sold as a group,” (2) “it is unlikely that a
substantial portion of the assets would be sold
separately,” (3) “the sale of a substantial portion of
the intangible assets individually would result in a
significant reduction in the fair value of the remaining
assets as a group,” or (4) the entity has no past
practice of selling similar assets separately.
|
If sold, each intangible asset would
most likely be sold separately. For example, (1) the
assets would yield the highest price if sold
individually, (2) it is likely a substantial portion
would be sold separately, (3) “the sale of a substantial
portion of the intangible asset individually would [not]
result in a significant reduction in the fair value of
the remaining assets as a group,” or (4) the entity has
a past practice of selling similar assets
separately.
|
The entity has no history, and is not
currently considering a plan, “to dispose of one or more
intangible assets separately.”
|
The entity has a history, or is
considering a plan, “to dispose of one or more
intangible assets separately.”
|
The “marketing or branding strategy
provides evidence that the intangible assets are
complementary.”
|
The entity has different marketing or branding strategies
for the intangible assets.
|
The assets are used by all of the entity‘s asset
groups.
|
“The intangible assets are used
exclusively by different asset groups.”
|
ASC 350-30-35-26 further clarifies that the unit of account “may include
indefinite-lived intangible assets recorded in the separate financial statements
of consolidated subsidiaries” and that, accordingly, “an impairment loss
recognized in the consolidated financial statements may differ from the sum of
the impairment losses (if any) recognized in the separate financial statements
of those subsidiaries.” In this case, the unit of account would be tested for
impairment at both the consolidated level (in the aggregate) and separately at
the subsidiary level. As a result, different impairment losses could be
recognized in the consolidated financial statements than are recognized in the
subsidiary’s separate financial statements.
If, because of a change in how an entity uses its intangible assets, the entity
subsequently determines that it should combine into a single unit of account two
or more indefinite-lived intangible assets that were previously tested for
impairment separately, the entity must first test those intangible assets
individually for impairment in accordance with ASC 350-30-35-18 through 35-20.
Examples 10–12 in ASC 350-30-55-29 through 55-38 illustrate the determination of
the unit of account to use in impairment testing of indefinite-lived intangible
assets.
ASC 350-30
Example 10: Easements
55-29 This Example
illustrates the guidance in paragraphs 350-30-35-21
through 35-24.
55-30 Entity A is a
distributor of natural gas. Entity A has two
self-constructed pipelines, the Northern pipeline and
the Southern pipeline. Each pipeline was constructed on
land for which Entity A owns perpetual easements that
Entity A evaluated under Topic 842 and determined do not
meet the definition of a lease under that Topic (because
those easements are perpetual and, therefore, do not
convey the right to use the underlying land for a period
of time). The Northern pipeline was constructed on 50
easements acquired in 50 separate transactions. The
Southern pipeline was constructed on 100 separate
easements that were acquired in a business combination
and were recorded as a single asset. Although each
pipeline functions independently of the other, they are
contained in the same reporting unit. Operation of each
pipeline is directed by a different manager. There are
discrete, identifiable cash flows for each pipeline;
thus, each pipeline and its related easements represent
a separate asset group under the Impairment or Disposal
of Long-Lived Assets Subsections of Subtopic 360-10.
While Entity A has no current plans to sell or otherwise
dispose of any of its easements, Entity A believes that
if either pipeline was sold, it would most likely convey
all rights under the easements with the related
pipeline.
55-31 Based on an evaluation
of the circumstances, Entity A would have two units of
accounting for purposes of testing the easements for
impairment-the collection of easements supporting the
Northern pipeline and the collection of easements
supporting the Southern pipeline. The 50 easements
supporting the Northern pipeline represent a single unit
of accounting as evidenced by the fact that they are
collectively used together in a single asset group (see
paragraphs 360-10-35-23 through 35-26), if acquired in a
single transaction, they would have been recorded as one
asset, and if sold, they would likely be sold as a group
with the related pipeline. For the same reasons, the
easements supporting the Southern pipeline would
represent a single unit of accounting.
55-32 Because the collective
land easements underlying the Northern and Southern
pipelines generate cash flows independent of one another
and are used exclusively by separate asset groups under
the Impairment or Disposal of Long-Lived Assets
Subsections of Subtopic 360-10, they should not be
combined into a single unit of accounting.
Example 11: Trade Name
55-33 This Example
illustrates the guidance in paragraphs 350-30-35-21
through 35-24.
55-34 Entity B purchases an
international vacuum cleaner manufacturer, Entity A,
which sells vacuums under a well-known trade name. The
operations of Entity A are conducted through separate
legal entities in three countries and each of those
legal entities owns the registered trade name used in
that country. When the business combination was
recorded, Entity B recorded three separate intangible
trade name assets because separate financial statements
are required to be prepared for each separate legal
entity. There are separate identifiable cash flows for
each country, and each country represents an asset group
under the Impairment or Disposal of Long-Lived Assets
Subsections of Subtopic 360-10. A single brand manager
is responsible for the Entity A trade name, the value of
which is expected to be recovered from the worldwide
sales of Entity A’s products.
55-35 Based on an evaluation
of the circumstances, three separately recorded trade
name assets would be combined into a single unit of
accounting for purposes of testing the acquired trade
name for impairment. The three registered trade names
were acquired in the same business combination and,
absent the requirement to prepare separate financial
statements for subsidiaries, would have been recorded as
a single asset. The trade name is managed by a single
brand manager. If sold, Entity C would most likely sell
all three legally registered trade names as a single
asset.
Example 12: Brands
55-36 This Example
illustrates the guidance in paragraphs 350-30-35-21
through 35-24.
55-37 Entity Z manufactures
and distributes cereals under two different brands,
Brand A and Brand B. Both brands were acquired in the
same business combination. Entity Z recorded two
separate intangible assets representing Brand A and
Brand B. Each brand represents a group of complementary
indefinite-lived intangible assets including the
trademark, the trade dress, and a recipe. Brand A has
two underlying trade names for its Honey and Cinnamon
cereals. The trade name and recipe of Cinnamon were
internally generated subsequent to the acquisition of
Brand A. Sales of Honey have decreased while sales of
Cinnamon have increased over the past several years.
Despite the decline in sales of Honey, the combined
sales of Honey and Cinnamon have increased at the levels
expected by management. Sales of Brand B also have
increased at expected levels. There are discrete cash
flows for Honey, Cinnamon, and Brand B, and each
represents a separate asset group under the Impairment
or Disposal of Long-Lived Assets Subsections of Subtopic
360-10. Both Honey and Cinnamon are managed by one brand
manager. A separate brand manager is responsible for
Brand B; however, there are some shared resources used
by these groups, such as procurement. While Entity Z has
no current plans to sell its brands or exit the cereal
business, it believes if it ever did, it would exit the
cereal business in its entirety.
55-38 Based on an evaluation
of the circumstances, Entity Z would have two units of
accounting for purposes of testing the acquired brands
for impairment. Brand A's purchased Honey and internally
generated Cinnamon trademarks should be combined as a
single unit of accounting for purposes of impairment
testing. The intangible asset associated with the
Cinnamon trademark is simply a variation of the
previously acquired Brand A Honey trademark. Although
they are associated with different asset groups, they
are managed by a single brand manager. Entity Z would
consider Brand B to be a separate unit of accounting for
purposes of testing impairment because that brand is
managed separately from Brand A and is used exclusively
by a separate asset group under the Impairment or
Disposal of Long-Lived Assets Subsections of Subtopic
360-10.
4.4.3 Qualitative Assessment
ASC 350-30
35-18A An entity may first
perform a qualitative assessment, as described in this
paragraph and paragraphs 350-30-35-18B through 35-18F,
to determine whether it is necessary to perform the
quantitative impairment test as described in paragraph
350-30-35-19. An entity has an unconditional option to
bypass the qualitative assessment for any
indefinite-lived intangible asset in any period and
proceed directly to performing the quantitative
impairment test as described in paragraph 350-30-35-19.
An entity may resume performing the qualitative
assessment in any subsequent period. If an entity elects
to perform a qualitative assessment, it first shall
assess qualitative factors to determine whether it is
more likely than not (that is, a likelihood of more than
50 percent) that an indefinite-lived intangible asset is
impaired.
Entities must test indefinite-lived intangible assets for impairment at least
annually and more frequently if impairment indicators exist. In July 2012, the
FASB issued ASU 2012-02
(codified in ASC 350-30), which gives entities the option of first performing a
qualitative assessment to test their indefinite-lived intangible assets for
impairment (this option is similar to that described in Section 2.3 for goodwill). If an entity
concludes, on the basis of the qualitative assessment, that it is more likely
than not (i.e., a likelihood of more than 50 percent) that the fair value of an
indefinite-lived intangible asset is less than its carrying amount, the entity
must perform the quantitative impairment test (see Section
4.4.4). Alternatively, if the entity concludes that it is not
more likely than not that the fair value of an indefinite-lived intangible asset
is less than its carrying amount, it does not need to perform the quantitative
impairment test.
Because the qualitative assessment is optional, an entity may bypass it for any
of its indefinite-lived intangible assets in any periods and may instead perform
the quantitative test. Conversely, if an entity elects to perform the
qualitative assessment, it may then choose to resume performing the quantitative
test in a subsequent period.
Connecting the Dots
We have observed that many entities choose to bypass the qualitative
assessment and proceed directly to performing a quantitative assessment
because comprehensively assessing the qualitative factors can, at times,
take more effort than measuring the fair value of an indefinite-lived
intangible asset.
4.4.3.1 Performing the Optional Qualitative Assessment
ASC 350-30
35-18B In assessing
whether it is more likely than not that an
indefinite-lived intangible asset is impaired, an
entity shall assess all relevant events and
circumstances that could affect the significant
inputs used to determine the fair value of the
indefinite-lived intangible asset. Examples of such
events and circumstances include the following:
- Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on future expected earnings and cash flows that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
- Financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
- Legal, regulatory, contractual, political, business, or other factors, including asset-specific factors that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
- Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
- Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (in both absolute terms and relative to peers), or a change in the market for an entity's products or services due to the effects of obsolescence, demand, competition, or other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing business environment, and expected changes in distribution channels) that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
- Macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
35-18C The examples
included in the preceding paragraph are not
all-inclusive, and an entity shall consider other
relevant events and circumstances that could affect
the significant inputs used to determine the fair
value of the indefinite-lived intangible asset. An
entity shall consider the extent to which each of
the adverse events and circumstances identified
could affect the significant inputs used to
determine the fair value of an indefinite-lived
intangible asset. An entity also shall consider the
following to determine whether it is more likely
than not that the indefinite-lived intangible asset
is impaired:
- Positive and mitigating events and circumstances that could affect the significant inputs used to determine the fair value of the indefinite-lived intangible asset
- If an entity has made a recent fair value calculation for an indefinite-lived intangible asset, the difference between that fair value and the then carrying amount
- Whether there have been any changes to the carrying amount of the indefinite-lived intangible asset.
35-18D An entity shall
evaluate, on the basis of the weight of the
evidence, the significance of all identified events
and circumstances that could affect the significant
inputs used to determine the fair value of the
indefinite-lived intangible asset for determining
whether it is more likely than not that the
indefinite-lived intangible asset is impaired. None
of the individual examples of events and
circumstances included in paragraph 350-30-35-18B(a)
through (f) are intended to represent standalone
events and circumstances that necessarily require an
entity to calculate the fair value of an intangible
asset. Also, the existence of positive and
mitigating events and circumstances is not intended
to represent a rebuttable presumption that an entity
should not perform the quantitative impairment test
as described in paragraph 350-30-35-19.
35-18E If after assessing
the totality of events and circumstances and their
potential effect on significant inputs to the fair
value determination an entity determines that it is
not more likely than not that the indefinite-lived
intangible asset is impaired, then the entity need
not calculate the fair value of the intangible asset
and perform the quantitative impairment test in
accordance with paragraph 350-30-35-19.
35-18F If after assessing
the totality of events and circumstances and their
potential effect on significant inputs to the fair
value determination an entity determines that it is
more likely than not that the indefinite-lived
intangible asset is impaired, then the entity shall
calculate the fair value of the intangible asset and
perform the quantitative impairment test in
accordance with the following paragraph.
To perform a comprehensive qualitative assessment, an entity should consider
using the following approach, which is consistent with the framework
discussed in Section 2.3.1 with
respect to goodwill:
- Identify relevant inputs that affect fair value.
- Identify relevant events and circumstances that may affect fair value inputs.
- Evaluate, both individually and in the aggregate, the impact of events and circumstances on the inputs related to determining whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount.
We believe that an entity should also consider the qualitative factors listed
in ASC 350-30-35-18B between annual tests to determine whether it must
perform an interim impairment test (see Section
4.4.5.5). In addition, ASC 350-30-35-18C also indicates that
management should consider “other relevant events and circumstances that
could affect the significant inputs used to determine the fair value of the
indefinite-lived intangible asset” as well as ”the extent to which each of
the adverse events and circumstances identified could affect the significant
inputs used to determine the fair value of an indefinite-lived intangible
asset.”
While not required to do so by ASC 350-30, an entity should consider
establishing conditions under which it would proceed directly to performing
the quantitative test rather than expending the effort to support its
qualitative assessment. For example, it may be more cost-effective for an
entity to proceed directly to performing a quantitative test if any of the
following conditions exist:
- There was only a small excess of fair value over carrying amount (i.e., cushion) in the last quantitative test.
- There has been a decline in overall macroeconomic conditions.
- The entity has experienced a loss of one or more significant customers.
- The costs incurred by the entity have significantly increased.
While an entity is not specifically required to perform a quantitative test
at any prescribed interval, conclusions reached solely about qualitative
factors may become more difficult to defend as time elapses between fair
value/quantitative calculations since a fair value measurement becomes less
relevant as more time passes. An entity’s determination of when and how
often to refresh the fair value analysis is based on management’s judgment
and will depend on various factors, including, but not limited to, financial
performance, changes in the operating or market environment, volatility in
the underlying cash flows, and the amount of excess fair value as of the
last quantitative assessment date.
4.4.3.2 Identifying the Inputs That Most Affect Fair Value
To identify the most relevant drivers of fair value, entities should
understand the assumptions that are most likely to affect the fair value of
an indefinite-lived intangible asset. An entity would typically begin with
understanding the valuation method or methods used for the last quantitative
test, assess whether that approach is still appropriate (e.g., the
relief-from-royalty method or Greenfield method), and then consider the
assumptions that are most likely to affect each method. For example, revenue
stream, royalty rate, or the discount rate may be drivers of fair value for
an indefinite-lived intangible asset that is valued by using the
relief-from-royalty method. For more information, See Deloitte’s Roadmap
Fair Value Measurements and Disclosures
(Including the Fair Value Option).
4.4.3.3 Identifying Relevant Events and Circumstances That May Have an Impact on the Inputs and Assumptions
Once an entity has identified the relevant inputs that most affect fair
value, the entity should consider the guidance in ASC 350-20-35-18B(a)
through (f) to identify the relevant events and circumstances that may
affect these inputs.
4.4.3.3.1 Cost Factors
With respect to cost factors, an entity should:
- Consider the impact of increases or decreases in raw materials, labor, and other cost factors that have an effect on earnings and cash flows and, potentially, the fair value of an indefinite-lived intangible asset.
- Support the assessment by making quantitative analytical comparisons to measure the significance and extent of the impact of the cost factors. Such comparisons might include year-by-year results, budgeted versus actual results, and operating margins and capital expenditures versus prior-period and projected results.
- Develop a quantitative analysis to support how cost-cutting efforts initiated in the prior year have or have not affected current and projected margins.
- Consider whether the cost assumptions and judgments used for the qualitative assessment are consistent with those used for other purposes (e.g., whether the assumptions and judgments supporting the qualitative assessment are consistent with those used to prepare budgets used for compensation purposes).
4.4.3.3.2 Financial Performance
When evaluating its overall financial performance, an entity should:
- Consider the impact of the entity’s overall financial
performance metrics. Such an evaluation may include, but is not
limited to, analysis of the following:
- Increases or declines in planned or actual revenue or earnings by comparison with projected and actual results for relevant prior periods.
- Trends in historical revenue growth rates compared with those at peer companies.
- Perform a retrospective review of significant assumptions and
fair value drivers used in the most recent fair value
calculation. This review would include a comparison of:
- The actual recorded results for the current year with the forecasted results that were used in the most recently performed quantitative analysis.
- Updated current-period forecasts with the forecasts that were used in the most recently performed quantitative analysis.
- Analyze key accounting ratios that may be useful to measuring the entity’s business performance trends, such as gross profit margins, which indicate how much money is made after direct costs of sales have been taken into account.
4.4.3.3.3 Legal, Regulatory, Contractual, Political, Business, or Other Factors
An entity should consider the impact of legal, regulatory, contractual,
political, business, or other factors that may result in an increase or
a decline in an indefinite-lived intangible asset’s fair value. Such
events may include, but are not limited to, the following:
- Technological conditions and influences.
- Litigation.
- Regulatory or political developments. For example, an entity could incur additional costs when complying with new regulations, potentially resulting in a decrease of net cash flows and a reduction in the intangible asset’s fair value.
4.4.3.3.4 Other Relevant Entity-Specific Events
An entity should consider the impact of other events that may result in
an increase or a decline in an indefinite-lived intangible asset’s fair
value. Such events may include, but are not limited to, the following:
- Additions or losses of significant customers or dependence on major suppliers. For example, if any customers have discontinued, or are expected to discontinue, their use of the entity’s products or services at any time, there could be a material adverse effect on the entity’s future cash flows. Further, supply chain shortages could create a risk that orders placed by the customers might not be fulfilled, thereby affecting the entity’s ability to meet its contractual commitments in a timely manner.
- Products or industry trends.
- Future impacts of anticipated acquisitions/integrations, which could result in significantly abnormal returns and negative long-term performance in the postacquisition integration period.
- Changes in strategy.
- Expansion to new markets or withdrawal from certain markets.
- Loss of key management or other personnel.
- A lack of product acceptance in the market.
- Commencement of a liquidation sale.
- Natural disasters.
Moreover, the entity should consider supplementing the qualitative
discussion with a quantitative analysis or other underlying analysis, if
appropriate, of the significance and extent of the impact of the events
and circumstances described above.
4.4.3.3.5 Industry and Market Considerations
An entity should analyze the impact of the following industry and market
factors on the fair value drivers of the indefinite-lived intangible
asset:
- Deteriorations in the entity’s operating environment.
- Increases in competition. For example, new competitors may take market share away from the entity, causing a decrease in revenue, which could result in a reduction in a brand’s or trademark’s fair value.
- Changes in the market for the entity’s products or services. For example, a technological development or obsolescence of products or services could result in a reduction in the fair value of a brand.
Further, an entity should determine its market share and evaluate how
changes in market share and the overall market for the entity’s products
and services may affect fair value (e.g., a stable or increasing market
share may constitute evidence that the fair value of an intangible asset
has increased or has not declined). The entity should also consider
whether the industry, as well as the market assumptions and judgments,
used for the qualitative assessment are consistent with those used for
other purposes (e.g., whether the assumptions and judgments supporting
the qualitative assessment are consistent with those used to prepare
budgets used for compensation purposes).
4.4.3.3.6 Macroeconomic Conditions
An entity should analyze the impact of the following macroeconomic
conditions on the fair value drivers for indefinite-lived intangible assets:
- Deteriorations in general economic conditions.
- Fluctuations in foreign exchange rates.
- Other developments in equity and credit markets.
4.4.3.4 Evaluation of Whether It Is More Likely Than Not That the Fair Value of an Indefinite-Lived Intangible Asset Is Less Than Its Carrying Amount
In accordance with ASC 350-30-35-18D and 35-18E, after identifying the
relevant events and circumstances, an entity should consider the extent to
which each of these events and circumstances could affect the comparison of
an indefinite-lived intangible asset’s fair value with its carrying amount.
All available evidence, both positive and negative, should be considered,
and management may need to use significant judgment in weighting the various
factors. In addition, the entity should consider positive and mitigating
events and circumstances that may affect its determination of whether it is
more likely than not that the fair value of an asset is less than its
carrying amount. If an entity has a recent fair value calculation, it should
also take into account the difference between the fair value and the
carrying amount in reaching its conclusion about whether to perform the
quantitative goodwill impairment test.
For each event and circumstance contemplated in the qualitative assessment,
the entity should document a conclusion about whether it represents
positive, neutral, or adverse evidence that it is more likely than not that
the fair value of an asset is less than its carrying amount. No one factor
is meant to trigger a quantitative calculation. Both the individual and the
total impact of the events and circumstances should be evaluated. In
addition, the entity should consider how heavily (e.g., low, medium, or
high) each identified event or circumstance should be weighed in the overall
assessment (i.e., an entity should place more weight on the events and
circumstances that have the greatest effect on a reporting unit’s fair value
or the carrying amount of its net assets). A more robust analysis should be
performed for those factors considered to be more significant to the overall
analysis.
If, after assessing the totality of events or circumstances, an entity
determines that it is not more likely than not that the fair value of an
indefinite-lived intangible asset is less than its carrying amount, the
quantitative impairment test is unnecessary. Conversely, if, after assessing
the totality of events or circumstances, an entity determines that it is
more likely than not that the fair value of an indefinite-lived intangible
asset is less than its carrying amount, the entity must perform the
quantitative impairment test.
4.4.4 Quantitative Impairment Test for an Indefinite-Lived Intangible Asset
ASC 350-30
35-19 The quantitative
impairment test for an indefinite-lived intangible asset
shall consist of a comparison of the fair value of the
asset with its carrying amount. If the carrying amount
of an intangible asset exceeds its fair value, an entity
shall recognize an impairment loss in an amount equal to
that excess. After an impairment loss is recognized, the
adjusted carrying amount of the intangible asset shall
be its new accounting basis.
35-20 Subsequent reversal of
a previously recognized impairment loss is
prohibited.
To perform the quantitative impairment test for an indefinite-lived intangible
asset (or group of indefinite-lived intangible assets that represent a single
unit of account for testing purposes), the entity compares the asset’s fair
value with its carrying amount and recognizes an impairment loss for any excess.
An entity is not permitted to reverse an impairment loss.
The carrying amount of an indefinite-lived intangible asset represents the amount
initially recognized less any impairment losses. The fair value of an
indefinite-lived intangible asset is determined in accordance with ASC 820. ASC
820-10-20 defines fair value as “[t]he price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.” Accordingly, fair value is an exit price.
To meet the “exit price” measurement objective, an entity is required to develop
assumptions that market participants would use to determine the price of an
asset, liability, or equity instrument in an orderly transaction as of the
measurement date. ASC 820-10-20 defines market participants as “[b]uyers and
sellers in the [entity’s] principal (or most advantageous) market for the asset
or liability” that are (1) “independent of each other,” (2) “knowledgeable,” (3)
“able to enter into a transaction for the asset or liability,” and (4) “willing
to enter into a transaction for the asset or liability.” As noted in ASC
820-10-35-9, an entity “need not identify specific market participants” but
should “identify characteristics that distinguish market participants
generally.” The assumptions that market participants would use when measuring
fair value are relevant in the determination of the inputs to the fair value
measurement. An entity should not use its own assumptions if those assumptions
differ from market-participant assumptions. While ASC 820 provides for three
valuation approaches, in our experience, the fair value of indefinite-lived
intangible assets is generally determined by using an income approach, rather
than a market or cost approach.
Example 8 in ASC 350-30-55-23 through 55-25 illustrates the application of the
quantitative test.
ASC 350-30
Example 8: Acquired Trademark Determined to Have
Reduced Cash Flows
55-23 This Example illustrates
the guidance in paragraphs [350-30-35-1 through
35-20].
55-24 A trademark that
distinguished a leading consumer product was acquired 10
years ago. When it was acquired, the trademark was
considered to have an indefinite useful life because the
product was expected to generate cash flows
indefinitely. During the annual impairment test of the
intangible asset, the entity determines that unexpected
competition has entered the market that will reduce
future sales of the product. Management estimates that
cash flows generated by that consumer product will be 20
percent less for the foreseeable future; however,
management expects that the product will continue to
generate cash flows indefinitely at those reduced
amounts.
55-25 As a result of the
projected decrease in future cash flows, the entity
determines that the estimated fair value of the
trademark is less than its carrying amount, and an
impairment loss is recognized. Because it is still
deemed to have an indefinite useful life, the trademark
would continue to not be amortized and would continue to
be tested for impairment in accordance with paragraphs
350-30-35-18 through 35-20.
4.4.4.1 Adjusted Carrying Amount Becomes New Cost Basis
ASC 350-30-35-14 states that “[a]fter an impairment loss is
recognized, the adjusted carrying amount of the intangible asset shall be
its new accounting basis.” While the term “new cost basis” is not defined,
we believe that it suggests that any previously recognized accumulated amortization should be eliminated against the carrying amount of the asset when an impairment loss is recognized for the asset. This is supported by paragraph B34 of FASB Statement 144, which noted that “a decision to
continue to use the impaired asset is equivalent to a new asset purchase
decision, and a new basis of fair value is appropriate.” Therefore, the new
cost basis of an asset is its cost basis just before the recognition of the
impairment loss less (1) the accumulated amortization to date and (2) the
impairment loss allocated to the asset.
4.4.5 When to Test Indefinite-Lived Intangible Assets for Impairment
In accordance with ASC 350-30-35-18, an entity must test each of its indefinite lived intangible assets for impairment “annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.” Therefore, an entity must select a recurring annual testing date for each of its indefinite-lived intangible asset or each unit of account. While intangible assets that are being amortized are tested for impairment in accordance with ASC 360-10 only when a triggering event occurs, intangible assets that are not being amortized must be tested at least annually by using a more stringent fair value test. Paragraph B62 of FASB Statement 142 explained
the Board’s reasoning behind this requirement:
As the Board observed in
conjunction with its consideration of goodwill impairment, nonamortization
places heavy reliance on the reviews for impairment. Because the cash flows
associated with intangible assets having indefinite useful lives would
extend into the future indefinitely, those assets might never fail the
undiscounted cash flows recoverability test in [ASC 360-10], even if those
cash flows were expected to decrease over time.
4.4.5.1 Testing Different Indefinite-Lived Intangible Assets on Different Dates
While ASC 350-30 does not preclude an entity from electing
different annual testing dates for different indefinite-lived intangible
assets, we observe that most entities select the same date for all of their
indefinite-lived intangible assets (and the same date for testing goodwill).
In selecting an annual impairment testing date for its various
indefinite-lived intangible assets, an entity may want to consider the
following factors:
- For public companies, external reporting requirements and filing deadlines.
- Time and effort involved in each annual assessment.
- Timing and availability of information used in the assessment (e.g., availability of annual budgets and forecasts).
- Impairment testing of goodwill.
The testing date an entity chooses should be applied consistently to each
indefinite-lived intangible asset unless the date is changed as described in
Section 4.4.5.4.
4.4.5.2 Performing the Indefinite-Lived Intangible Asset Impairment Test When the Amount Has Only Been Determined Provisionally
In some cases, an entity may test a recently acquired
indefinite-lived intangible asset for impairment when the accounting for the
asset was only determined provisionally. For example, consider a scenario in
which an entity elects to test all of its indefinite-lived intangible assets
on October 1 but one of the entity’s assets was recently acquired in a
business combination and the measurement of the asset has only been
determined provisionally. We believe that if the entity recognizes any
significant adjustments during the measurement period, any impairment test
performed before the adjustments were recognized should be updated for the
adjusted carrying amount of the asset to determine whether the outcome of
the impairment test would be different. If measurement-period adjustments
lead to either an incremental impairment charge or a reduction of an
impairment charge as a result of retrospectively updating the annual
impairment test, we believe that the incremental charge (increase or
decrease) should be recorded in the current period and disclosed, if
material. An entity should not delay finalization of the accounting for the
business combination to avoid recognition of an impairment charge.
4.4.5.3 Impairment Testing Must Be Completed Before Financial Statements Are Issued
Because an entity must finish testing its indefinite-lived intangible assets
before issuing its financial statements, an entity should consider the
effort involved in completing its testing when selecting its annual
impairment testing date. For example, a calendar-year-end entity that
selects a December 31 date may have less time to complete its testing.
4.4.5.4 Changing the Date of the Impairment Test for Annual Indefinite-Lived Intangible Assets
An entity’s testing date for indefinite-lived intangible assets is not an
accounting policy election. Therefore, an entity is permitted to change the
date of its annual indefinite-lived intangible asset impairment test without
having to evaluate the change as a change in accounting principle under ASC
250, as is required when the annual testing date for goodwill is changed
(see Section 2.5.4). However, the
entity should ensure that no more than one year elapses between tests and
should not change its testing date to either avoid or accelerate an
impairment loss.
4.4.5.5 Assessing Indefinite-Lived Intangible Assets for Impairment Between Annual Testing Dates
ASC 350-30-35-18 states that “[a]n intangible asset that is not subject to
amortization shall be tested for impairment annually and more frequently if
events or changes in circumstances indicate that it is more likely than not
that the asset is impaired.” We believe that, in determining whether to
perform an interim test, entities should consider the factors listed in ASC
350-30-35-18B (see the next section) to assess whether it is more likely
than not that an indefinite-lived intangible asset is impaired. Because
those factors are not meant to be all-inclusive, we believe that entities
should also consider additional factors, such as the following:
- Cash or operating losses at the entity.
- Consecutive operating results that are significantly lower than those predicted in analysts’ or internal forecasts.
- Significant revisions to internal or external forecasts.
- Loss of one or more significant customers.
- A negative long-term outlook for the industry in which the entity operates.
To evaluate whether it is more likely than not that the fair value of an
indefinite-lived intangible asset is less than its carrying amount, an
entity should consider (1) the expected impact of all identified events or
changes in circumstances on the asset’s fair value and (2) the amount by
which the fair value exceeded the carrying amount as of the date of the last
quantitative impairment test. The entity may need to use judgment in
performing this evaluation. If an asset’s fair value was only marginally
higher than its carrying amount as of the date of the last quantitative
impairment test, any event or circumstance that would result in a decrease
in the fair value of the intangible asset since the last test would most
likely lead an entity to conclude that it should perform a quantitative
test.
4.4.5.6 Order of Impairment Testing
Indefinite-lived intangible assets are tested for impairment before an entity
tests its finite-lived intangible assets or its goodwill for impairment. For
additional details, see Sections 2.3.7
and 3.5.1 of Deloitte’s Roadmap
Impairments and Disposals of Long-Lived
Assets and Discontinued Operations.
4.4.6 In-Process Research and Development
ASC 350-30
35-7 An intangible asset
shall not be written down or off in the period of
acquisition unless it becomes impaired during that
period. However, paragraph 730-10-25-2(c) requires
amounts assigned to intangible assets acquired in a
transaction other than a business combination or an
acquisition by a not-for-profit entity that are to be
used in a particular research and development project
and that have no alternative future use to be charged to
expense at the acquisition date.
Pending Content (Transition Guidance: ASC
805-60-65-1)
35-7 An intangible asset shall not be
written down or off in the period of acquisition
unless it becomes impaired during that period.
However, paragraph 730-10-25-2(c) requires amounts
assigned to intangible assets acquired in a
transaction other than a business combination or
an acquisition by a not-for-profit entity or
recognized by a joint venture upon formation that
are to be used in a particular research and
development project and that have no alternative
future use to be charged to expense at the
acquisition date.
35-17A Intangible assets
acquired in a business combination or an acquisition by
a not-for-profit entity that are used in research and
development activities (regardless of whether they have
an alternative future use) shall be considered
indefinite lived until the completion or abandonment of
the associated research and development efforts. During
the period that those assets are considered indefinite
lived, they shall not be amortized but shall be tested
for impairment in accordance with paragraphs
350-30-35-18 through 35-19. Once the research and
development efforts are completed or abandoned, the
entity shall determine the useful life of the assets
based on the guidance in this Section. Consistent with
the guidance in paragraph 360-10-35-49, intangible
assets acquired in a business combination or an
acquisition by a not-for-profit entity that have been
temporarily idled shall not be accounted for as if
abandoned
Pending Content (Transition Guidance: ASC
805-60-65-1)
35-17A Intangible assets acquired in a
business combination, acquired in an acquisition
by a not-for-profit entity, or recognized by a
joint venture upon formation that are used in
research and development activities (regardless of
whether they have an alternative future use) shall
be considered indefinite lived until the
completion or abandonment of the associated
research and development efforts. During the
period that those assets are considered indefinite
lived, they shall not be amortized but shall be
tested for impairment in accordance with
paragraphs 350-30-35-18 through 35-19. Once the
research and development efforts are completed or
abandoned, the entity shall determine the useful
life of the assets based on the guidance in this
Section. Consistent with the guidance in paragraph
360-10-35-49, intangible assets acquired in a
business combination, acquired in an acquisition
by a not-for-profit entity, or recognized by a
joint venture upon formation that have been
temporarily idled shall not be accounted for as if
abandoned.
One of the most significant differences between the accounting for an asset
acquisition and that for a business combination lies in the accounting for
IPR&D assets. Before an acquisition, an entity may incur R&D
expenditures that could result in the development of certain intangible assets
that would be expensed as incurred in accordance with ASC 730 unless they had an
alternative future use. In other words, the entity may not have recognized any
R&D-related assets on its books. If that entity is acquired in a business
combination, an acquirer recognizes all acquired tangible and intangible R&D
assets (e.g., IPR&D) at their acquisition-date fair values regardless of
whether the acquired assets have an alternative future use. Uncertainty about
the outcome of an individual project does not affect the recognition of
IPR&D but does affect its fair value measurement.
ASC 350-30-35-17 states that IPR&D assets acquired in a business combination
“shall be considered indefinite lived until the completion or abandonment of the
associated research and development efforts.” Therefore, such assets are not
amortized but are tested for impairment in the manner of other indefinite-lived
intangible assets. See Section 4.10.4.7 of
Deloitte’s Roadmap Business
Combinations for more information.
By contrast, ASC 350-30-35-7 (as amended by ASU 2023-05) refers to the guidance
in ASC 730-10-25-2(c), which “requires amounts assigned to intangible assets
acquired in a transaction other than a business combination or an acquisition by
a not-for-profit entity or recognized by a joint venture upon formation that are
to be used in a particular research and development project and that have no
alternative future use to be charged to expense at the acquisition date.”
Therefore, an acquiring entity in an asset acquisition must allocate, on the
basis of relative fair values, the cost of the acquisition to both the tangible
and intangible R&D assets acquired. On the acquisition date, the acquiring
entity expenses IPR&D assets with no alternative future use and capitalizes
those with an alternative future use in accordance with ASC 730. In EITF Issue
09-2, the Task Force considered amending the guidance in ASC 730 on IPR&D
assets acquired in an asset acquisition; however, the Task Force was unable to
reach a consensus and removed the project from its agenda. Therefore, entities
continue to apply the guidance in ASC 730 in accounting for IPR&D assets
acquired in an asset acquisition. See Section
C.3.4.2 of Deloitte’s Roadmap Business Combinations for more information. The
examples below illustrate scenarios related to the accounting for IPR&D.
Changing Lanes
In August 2023, the FASB issued ASU
2023-05, under which an entity that qualifies as
either a joint venture or a corporate joint venture, as defined in the
ASC master glossary, is required to apply a new basis of accounting upon
the formation of the joint venture. Specifically, the ASU indicates that
a joint venture or a corporate joint venture (collectively, “joint
ventures”) must initially measure its assets and liabilities at fair
value on the formation date. The amendments in ASU 2023-05 apply to the
formation of all joint ventures regardless of whether the venture meets
the definition of a business in ASC 805-10.
Under the ASU, the accounting for IPR&D contributed to a joint
venture at formation is aligned with the treatment of IPR&D acquired
in a business combination. Therefore, the joint venture should account
for IPR&D as capitalized indefinite-lived intangible assets
regardless of whether the R&D asset has an alternative future
use.
Example 4-3
On June 30, 20X1, Company A acquires Company B in a
transaction accounted for as a business combination.
Before the acquisition, B incurred significant costs
related to the R&D of a new product, all of which it
expensed as incurred in accordance with ASC 730. Company
A plans to continue these R&D efforts in the hope of
commercializing the product in the future.
Using the acquisition method of accounting, and in a
manner consistent with the fair value measurement
guidance in ASC 820, A calculates the fair value of the
acquired IPR&D assets as $10 million. Therefore, as
of the acquisition date, A would record an
indefinite-lived intangible asset for $10 million.
On July 1, 20Y2, A concludes that development of the new
product is no longer feasible and decides to abandon its
project because there is no alternative future use for
the acquired IPR&D.
From June 30, 20X1, to June 30, 20Y2, A appropriately
tests the acquired IPR&D asset ($10 million) for
impairment in accordance with ASC 350-30-35-18 and does
not record any impairment losses.
Because of its plans to now abandon the project, as well
as the fact that the IPR&D assets have no
alternative future use, A would expense the entire
IPR&D asset balance of $10 million on July 1, 20Y2
(the date of abandonment), in the income statement.
Example 4-4
Assume the same facts as in Example 4-3 but with the following
exception: on July 1, 20Y2, Company A successfully
completes its IPR&D project and has developed a
commercially viable product that it intends to sell in
the marketplace.
In line with Example 4-3, from
June 30, 20X1, to July 1, 20Y2, A appropriately tests
the acquired IPR&D asset ($10 million) for
impairment in accordance with ASC 350-30-35-18 and does
not record any impairment losses.
Now A is required to assess the useful life of the
acquired IPR&D asset as of July 1, 20Y2 (the date
the IPR&D project is successfully completed), and
amortize the asset over the related products’ useful
lives. In other words, the acquired IPR&D asset’s
useful life is now finite rather than indefinite. In
addition, the reclassification to a finite useful life
triggers a required impairment test in accordance with
ASC 350-30-35-17 as of July 1, 20Y2.
4.4.7 Crypto Assets
Before the adoption of ASU
2023-08, entities (other than those within the scope of the
investment-company guidance in ASC 946 or certain types of broker-dealers)
accounted for crypto assets as indefinite-lived intangible assets (i.e., the
assets were measured at historical cost less impairment). While ASC 350-30
requires that indefinite-lived intangible assets be tested for impairment at
least annually, given the nature of crypto assets, they are typically tested for
impairment much more frequently. For more information about the accounting for
crypto assets, see the AICPA Practice Aid Accounting for and Auditing of Digital
Assets.
Changing Lanes
In December 2023, the FASB issued ASU 2023-08
(codified as ASC 350-60), which addresses the accounting and disclosure
requirements for certain crypto assets. The new guidance requires
entities to subsequently measure certain crypto assets at fair value,
with changes in fair value recorded in net income in each reporting
period. In addition, entities are required to provide additional
disclosures about the holdings of certain crypto assets.
The amendments are effective for all entities for fiscal years beginning
after December 15, 2024, including interim periods within those years.
Early adoption is permitted. An entity that adopts the amendments in an
interim period must adopt them as of the beginning of the fiscal year
that includes that interim period.
For more information about the requirements of ASU 2023-08, see
Deloitte’s December 15, 2023, Heads
Up.