Intangible Asset Impairment Testing (#146)
/In this podcast episode, we discuss the new accounting standard pertaining to the impairment testing process for intangible assets. Key points made are noted below.
This episode is about a rules change for testing intangible assets for impairment. You may have noticed that I haven’t been talking much about new accounting standards for the last couple of years, and that’s because there haven’t been very many to talk about. A couple of rules changes have been issued that were too minor to bother with, but this one should actually be of interest to a fair number of listeners.
The Testing of Intangible Assets
There’s already some existing accounting under generally accepted accounting principles for intangible assets that have indefinite lives. Before the new rules change, you had to test all of this class of assets for impairment at least once a year by comparing the fair value of an asset to its carrying amount. Figuring out fair value can be expensive, since you might have to hire a valuation firm every year to do the testing.
Well, the financial accounting standards board received some rather pointed comments about this from users. They wanted an exemption if there wasn’t much of a chance of impairment actually having taken place.
And because of those complaints, things are now easier. The rule adjustment is that you can assess “qualitative factors” to see if it’s more likely than not that an intangible asset with an indefinite life is impaired. If you conclude that impairment is unlikely – which should be most of the time – then you’re done. No further impairment testing is required until the next year.
And by the way, that “more likely than not” bit means having a likelihood of more than 50 percent.
Qualitative Factors in Impairment Testing
So what are these qualitative factors? Well, they give examples of the situations that you can review to form a judgment about whether impairment has occurred. That means these aren’t necessarily the only factors to consider. Still, the factors you look at are likely to be similar to what they’ve listed.
So this is what they have. First is an increase in costs that could reduce future cash flows. The next factor is quite similar – it’s a decline in cash flows, or revenues, or profits, and especially in comparison to projected results.
This is a bit broader than the first one, since it encompasses more than an increase in costs. It could mean that revenues are going down.
The third item is regulatory or contract-related changes that could reduce the fair value of the asset. So, for example, a regulation change to increase the number of available taxi licenses would reduce the value of the existing taxi licenses.
The fourth item is non-financial changes to the business, such as losing a key employee or a key customer, or being hit with a lawsuit, but only to the extent that it impacts the fair value of the asset.
The final items are basically changes in market conditions. So this could be a general decline in the economy, or maybe the appearance of low-cost competition or new technology, or even unfavorable exchange rates.
The examples given are pretty broad-ranging, so I wouldn’t expect that you’d find some other qualitative reason that falls completely outside of these examples. If you do, you might want to run it by your auditors to see if it’s acceptable to them.
And by the way, you have the option to bypass the qualitative testing and go straight to the old-style comparison of fair value to carrying amount. Why anyone would do that, I’m not exactly sure, unless it’s so obvious that impairment has occurred that you just want to go straight to figuring out the amount of the loss.