tests for impairment of of intangible assets

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Companies may soon have more flexibility in testing for impairment of indefinite-lived intangible assets, if changes exposed for comment by the FASB in January 2012 are adopted as proposed. This new proposal follows closely on the heels of guidance recently released for impairment tests of goodwill, and there are similarities in both the objectives and the overall approach. Like the guidance on goodwill, the proposal for other indefinite-lived intangible assets responds to concerns about the recurring cost and complexity of performing impairment tests, and the proposed relief includes an option to use qualitative assessments to determine when additional quantitative testing is necessary. This Messenger highlights the proposed changes that would apply to other indefinite-lived intangible assets, including trademarks, licenses and distribution rights.

Highlights of Proposed Changes

The proposed changes would permit the use of qualitative assessments by all kinds of entities – public companies, nonpublic companies and not-for-profit organizations. The application of this approach to indefinite-lived intangible assets other than goodwill would work as follows:

MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRM

A publication of the Professional Standards Group

February 2012

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Tests for Impairment of of Intangible Assets

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Management would choose one of two options:

• proceed directly to a determination of the fair value of an indefinite-lived intangible asset, or

• start with an assessment of qualitative factors before calculating the fair value of the asset.

If management opts for the qualitative assessment, the requirements include the following:

• Management would need to evaluate the likelihood that events and circumstances, either individually or collectively, could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset. The FASB’s proposal provides examples of the factors to be considered, and these examples are similar to the ones provided in the guidance for goodwill. (See MHM Messenger 2-12.)

• Management would also need to consider specific factors when evaluating whether it is more likely than not that the intangible asset is impaired. These factors include:

• changes to the carrying amount of the asset,

• positive and mitigating events and circumstances, and

• if the entity has made a recent fair value calculation for an indefinite-lived intangible, the difference between that fair value and the current carrying amount.

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The results of the qualitative assessment would determine the next steps. The entity can bypass the quantitative assessment of the fair value of the asset, if the analysis of all the relevant factors leads to the conclusion that it is not more likely than not that the asset is impaired. If this is not the case, then management must determine the fair value of the asset and compare that value with the carrying amount of the asset to measure the amount of the required write-off.

Other Aspects of the Proposal

The proposed amendments do not change how or when an entity must measure an impairment loss, nor do they add any new disclosure requirements; but they can require considerable judgment to apply, especially for intangibles such as in-process research and development. The FASB has included an exception to the fair value disclosure requirements for nonpublic entities as summarized below.

The need for judgment.

Under US accounting standards,an intangible asset that is not subject to amortization must be tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. Included in this category are intangible assets whose fair values can involve significant uncertainties. For example, assets acquired in a business combination (or an acquisition by a not-for-profit entity) may include intangibles used in R&D activities and the fair values of these assets may depend on uncertainties associated with regulatory approvals. The FASB acknowledges the level of difficulty in applying qualitative factors to evaluate assets of this type. But the Board has tentatively decided not to exclude any types of indefinite-lived

intangible assets because the qualitative assessment is optional, and there may be circumstances when it would be appropriate for use with these types of assets.

Concessions for private companies.

The proposed amendments would provide an exception for nonpublic entities that would exempt these entities from disclosing quantitative information about significant unobservable inputs used in fair value measurement that are categorized within Level 3 of the fair value hierarchy and relate to the accounting and reporting for an indefinite-lived intangible asset after its initial recognition. The FASB’s reasons for this exception include the beliefs that:

• users of nonpublic entity financial statements have the ability to question management directly about such matters when necessary, and

• most users are generally already informed of a significant impairment loss and the underlying reasons well before the financial statements are finalized.

Additional Analysis

The FASB expects to issue the final standard by June 2012 after it considers the comments on the exposure draft and conducts additional outreach. Among other things, the Board is interested in hearing whether preparers believe the proposed amendments will reduce overall costs and complexity associated with the current guidance and whether preparers expect that their entities will choose to perform the qualitative assessment as opposed to proceeding directly to a quantitative impairment test.

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM service provider to further discuss the impact on your financial statements.


The comment period ends on April 24, 2012. The proposed effective date is for annual impairment tests performed for fiscal years beginning after June 15, 2012, with early adoption permitted.

For More Information

MHM’s Professional Standards Group will provide a comment letter to the FASB. We are interested in your views on the pros and cons of the proposed approach.

If you have any specific questions, comments or concerns, please share them with James Comito of MHM’s Professional Standards Group or your MHM service professional. James is located in our San Diego office and can be reached by email at [email protected] and phone at 858-795-2029.

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tests for impairment of of intangible assets

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