5/1/2017 Finite Lived vs Indefinite Lived Intangible Assets ­ How to test for impairment?

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Indeퟋ�nite Lived Intangible Assets – How to test for impairment?

Finite Lived vs Indefinite Lived Intangible Assets – How to test for impairment?
 350 - Intangibles - Goodwill and Other (http://www.popularaccounting.com/category/350-intangibles-goodwill-and-other/)  January 11, 2016

By: blaineb (http://www.popularaccounting.com/author/blaineb/)

A question came across my desk about the differences between ퟋ�nite lived assets vs indeퟋ�nite lived assets.

First and foremost, the basics. The ASC Master Glossary deퟋ�nes intangible assets as “assets (not including ퟋ�nancial assets) that lack physical substance.” The guidance separates out Goodwill from the
rest of the intangibles, so for the purposes of this post, I am not discussing Goodwill.

Often intangibles are recognized and recorded as part of a business combination or acquisition. Some of the more common ones that I see are signiퟋ�cant contracts (customer contracts), under market
rate leases, tradenames, other IP such as trade secrets or patented technology. See ASC 805 for how to account for these types of acquired assets.

Now, however, there is one important distinction between ퟋ�nite lived and indeퟋ�nite lived. It is well established that Goodwill is an indeퟋ�nite lived asset that is not subject amortization, however, Goodwill
does have it’s own guidance (ASC 350-20) vs other intangibles other than good will (ASC 350-30). In my personal experience, the number of intangible assets that are considered to be indeퟋ�nite lived
(other than Goodwill) is VERY limited. Part of this may be because in actuality there are few things in this world that we legitimately expect to have an indeퟋ�nite economic usefulness to us, however, part
of it also may be that companies apply the guidance very stringently on these types of assets due to some impairment work, or perhaps (since not subject to amortization) increased scrutiny from
external auditors when a conclusion that something is indeퟋ�nite lived is reached.

So let’s go through some of the main important differences in accounting.

Nature: Finite lived intangible assets have an expected useful life that is limited in nature.  This may be different from legal rights (e.g., perpetual licenses may provide an indeퟋ�nite right, however the
economic usefulness of said rights is theoretically limited due to changes in technology.  I have never seen a company make an argument that perpetual licenses are indeퟋ�nite lived assets, at least not
yet).  Indeퟋ�nite-lived intangible assets are basically the opposite.  These are assets where there is no legal, regulatory, contractual, or economic factors that could limit the economic life (useful life) to a
company.  i.e., there is no credible reason to assume that the company will ever not utilize said intangible in perpetuity.  Some examples of indeퟋ�nite lived intangibles may be certain trademarks (If I
bought Coca-Cola, I would probably make the argument that this is indeퟋ�nite lived as the brand is so valuable and pervasive in every business activity that I doubt any logical argument can be made that
this is anything but indeퟋ�nite lived).  Perpetual franchise agreements may be another example.  Again, this decision brings a certain amount of scrutiny, so just make sure you’ve thought through not only
the legal, but economic factors when arriving at your decision.

Amortization:  Real simple.  Finite lived assets are amortized over useful life.  The actual rule here states that a company should try to amortize in a pattern consistent with the timing that the economic
beneퟋ�ts of said asset are recognized.  (i.e., if 40% of the value of the intangible will be consumed in year 1, take 40% amortization in year one).  However, if no speciퟋ�c pattern can be reasonable
determined, the default then becomes straight line in practice (and is allowable under US GAAP).  Indeퟋ�nite lived intangibles are NOT AMORTIZED.  (What period would you amortize them over?)  This is
partly where the additional scrutiny from auditors may come from.  No amortization and essentially no P&L impact from receiving the beneퟋ�t of the asset over time.  However, because the intangible
asset will remain on your balance sheet at purchase date fair value (assuming acquired in a business combination), this places more importance on the asset impairment assessment (see below).

Impairment: Although a company may beneퟋ�t from not recording amortization related to their indeퟋ�nite lived intangibles, there is a downside in terms of logistics.  The impairment rules are different for
indeퟋ�nite lived intangibles (other than Goodwill) vs ퟋ�nite lived.  Finite-lived intangibles are tested for impairment in accordance with ASC 360 (not 350).  Testing for impairment of ퟋ�nite-lived assets is
required whenever events or circumstances indicate that the carrying amount of a long lived asset may not be recoverable.  ASC 360 prescribes a two step test whereby an impairment charge is
recognized if the carrying amount is not recoverable, and the amount is measured as the carrying value over fair value (most likely you are familiar with this already).   Indeퟋ�nite lived intangibles, on the
other hand, are tested for impairment in accordance with ASC 350.  Testing is required at least annually and more frequently if events or changes in circumstances indicate that the asset might be
impaired.  This can be an administrative burden.

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In 2012, the FASB issued ASU 2012-02, which essentially gave indeퟋ�nite live intangibles the same shortcut method that ASU 2011-08 provided for Goodwill impairment testing.   Prior to ASU 2012-02,
this assessment was required to be quantitative.  The new ASU inserts a step before a quantitative assessment which is qualitative in nature.  The ퟋ�rst step is assessing qualitative factors in order to
determine whether it is more likely than not that an indeퟋ�nite-lived intangible is impaired.  More likely than not is generally considered more than 50%.  FASB provided the following list of factors in Topic
350 in the FASB ASC that could signiퟋ�cantly affect inputs used to estimate the fair value of indeퟋ�nite-lived intangibles:

Cost factors such as increase in raw materials, labor, or other costs that have a negative effect on future expected earnings and cash 韓�ows
Financial performance such as negative or declining cash 韓�ows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods
Legal, regulatory, contractual, political, business, or other factors, including asset-speciퟋ�c factors
Other relevant entity-speciퟋ�c events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation
Industry and market consideration 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)
Macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, 韓�uctuations in foreign exchange rates, or other developments in equity and credit
markets
So one can clearly see how ensuring that a company has appropriately deퟋ�ned its indeퟋ�nite-live intangibles is important as this assessment will have P&L impacts as well as create a recurring
requirement and responsibility on Management to at least annually assess all indeퟋ�nite lived assets for impairment.

P.S.  A common question arises as to the unit of accounting to apply the impairment test on (if I have multiple trade names can I bundle them and perform one assessment?).  Please refer to ASC 350-
30-35-21 through 35-28 for guidance on unit of account considerations.

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Unit of Accounting for Purposes of Testing for Impairment of Intangible Assets Not Subject to Amortization
35-21   Separately recorded indeퟋ�nite-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 indeퟋ�nite-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 indeퟋ�nite-lived intangible assets shall be combined as a single unit of accounting for impairment testing purposes are as
follows:
a. The intangible assets were purchased in order to construct or enhance a single asset (that is, they will be used together).
b. Had the intangible assets been acquired in the same acquisition they would have been recorded as one asset.
c. 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 signiퟋ�cant reduction in the fair value of the remaining assets as a group.
d. 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 indeퟋ�nite-lived intangible assets shall not be combined as a single unit of accounting for impairment testing purposes are
as follows:
a. Each intangible asset generates cash 韓�ows independent of any other intangible asset (as would be the case for an intangible asset licensed to another
entity for its exclusive use).
b. 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.
c. The entity has adopted or is considering a plan to dispose of one or more intangible assets separately.
d. The intangible assets are used exclusively by different asset groups (see the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-
10).
e. 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 indeퟋ�nite-lived intangible assets for impairment:
a. The unit of accounting shall include only indeퟋ�nite-lived intangible assets—those assets cannot be tested in combination with goodwill or with a ퟋ�nite-lived
asset.
b. The unit of accounting cannot represent a group of indeퟋ�nite-lived intangible assets that collectively constitute a business or a nonproퟋ�t activity.
c. A unit of accounting may include indeퟋ�nite-lived intangible assets recorded in the separate ퟋ�nancial statements of consolidated subsidiaries. As a result,
an impairment loss recognized in the consolidated ퟋ�nancial statements may differ from the sum of the impairment losses (if any) recognized in the separate
ퟋ�nancial statements of those subsidiaries.
d. If the unit of accounting used to test impairment of indeퟋ�nite-lived intangible assets is contained in a single reporting unit, the same unit of accounting and
associated fair value shall be used for purposes of measuring a goodwill impairment loss in accordance with paragraphs 350-20-35-9 through 35-18.
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
indeퟋ�nite-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.

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