FASB Issues Guidance to Simplify Impairment Testing for Indefinite-lived Intangible AssetsNovember 14, 2012
Virendra N. Shah, CPA
On July 27, 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2012-02 to simplify impairment testing of indefinite-lived intangible assets other than goodwill. ASU 2012-02 applies to intangible assets that are not subject to amortization. Examples of intangible assets subject to the revised standard include indefinite-lived trademarks, licenses and distribution rights.
FASB’s prior guidance required an entity to perform a quantitative test by comparing the fair value of an indefinite-lived intangible asset with its carrying amount at least annually to test for impairment. If the carrying amount of the asset exceeded its fair value, the difference was recognized as an impairment loss.
The revised standard permits an entity to first assess qualitative factors to determine whether a quantitative impairment test of the indefinite-lived intangible asset is necessary. Based on the qualitative assessment, if the entity determines that it is “more likely than not” (i.e., more than a 50% likelihood) that the indefinite-lived intangible asset is impaired, then a calculation of the asset’s fair value is required, otherwise, no fair value calculation is necessary.
An entity has an option to bypass the qualitative assessment for any period and proceed directly to performing the quantitative test. An entity may resume performing the qualitative assessment in any subsequent period.
The revised standard also includes examples of events and circumstances that could affect the significant inputs used to determine the fair value of the indefinite-lived intangible asset when making the qualitative assessment. These include cost factors such as increases in labor, raw materials or other costs that impact cash flows negatively, financial performance such as negative or declining cash flows, legal, regulatory, contractual, political, business or other factors, including asset-specific factors, entity specific events such as changes in management, key personnel, strategy or customers, industry and market considerations such as increased competition and macroeconomic conditions such as a deterioration in general economic conditions. These examples are not all-inclusive, and the company should consider other relevant events or circumstances that could affect the significant inputs used to determine the fair value of the indefinite-lived intangible asset. An entity should also consider positive and mitigating factors including the difference between the fair value and the carrying amount from its most recent fair value calculation of its indefinite-lived intangible asset in the qualitative assessment.
ASU 2012-02 does not require public or non-public entities to provide any new or amended disclosures regarding their use of optional qualitative assessments to test indefinite-lived intangible assets for impairment. However, it does clarify that non-public entities are exempt from disclosing quantitative information about significant unobservable inputs used in the fair value measurements categorized within Level 3 of the fair value hierarchy after initial recognition for an indefinite-lived intangible asset.
The new ASU results in guidance that is very similar to the recently revised standard for impairment testing of goodwill issued in ASU 2011-08. The standards now permit the use of qualitative factors when testing for impairment of both indefinite-lived intangible assets and goodwill. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted.
If an entity can support that quantitative testing is unnecessary, it can avoid the cost and complexity of determining the fair value of its indefinite-lived intangible assets. We suggest that a company that seeks to benefit from the revised standard develop a clear plan for interim and annual testing of its indefinite-lived intangible assets. The plan, which should be discussed with the company’s auditors and external valuation specialists, should identify the key drivers or inputs that would be used in the fair value measurement of each indefinite-lived intangible asset and the documentation that will be necessary to support the company’s qualitative assessment.
Virendra N. Shah, CPA, is a manager with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut and Massachusetts. The firm, with nearly 300 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plans, litigation support and valuation, and financial staffing. The firm, with offices in West Hartford and Shelton, CT and Boston and Rockland, MA, serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.