For companies out there with indefinite-lived intangible assets on their books, your annual impairment testing just got much simpler. On the heels of FASB permitting “qualitative” goodwill impairment analyses instead of requiring quantitative computations (see our previous blog, What Do the Proposed Changes to Goodwill Impairment Testing Mean For You), a similar change has been made for indefinite-lived intangible assets such as trademarks and licenses.
Rather than requiring an annual computation to determine whether the fair value of an indefinite-lived intangible asset is impaired, FASB is not providing companies the option to first assess certain qualitative factors to determine whether it is a more likely than not (greater than 50% chance) that the fair value of an indefinite-lived intangible is less than its carrying value. The qualitative factors typically considered include the financial performance of the company, industry and economic changes, cost factors, legal and regulatory matters, and other company-specific issues. If no impairment is indicated by this qualitative analysis, no further quantitative testing is necessary. This change is effective for annual and interim impairment tests performed for fiscal years beginning after Sept. 15, 2012, but early adoption is also permitted.
For finite-lived intangible assets such as customer relationships, covenants not to compete and technology, the old impairment testing rules still apply (see our previous blog, What We Can Learn About Intangible Asset Impairment from LeBron's Free-Agency). These rules require a company to compare the undiscounted future cash flows associated with a finite-lived intangible asset to the asset’s net carrying value on the balance sheet. If the future undiscounted cash flows are greater than the net carrying value of the asset (which is most often the case), then there is no impairment. If the future undiscounted cash flows are less than the net carrying value of the asset, however, then impairment exists and those future cash flows are discounted back to the testing date to determine the new fair value of the asset. Because finite-lived intangible assets are amortized, they decrease in value on a company’s balance sheet each year. Therefore, the standards allow companies to consider the undiscounted future cash flows associated with these intangibles in testing whether they are impaired, which makes it much more difficult to fail than if the actual fair values of the intangibles were determined (using discounted cash flows).
Remember, before implementing changes to your impairment testing procedures, discuss the changes with your auditors to ensure a smooth transition.