On July 27, 2012, the FASB issued Accounting Standards Update (ASU) 2012-02, Intangibles—Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment with the intent of simplifying the impairment testing of indefinite-lived intangible assets and promoting consistency with the goodwill impairment testing. The revised guidance provides entities with an option to first perform a qualitative assessment to determine whether impairment exists. If an entity concludes that it is more likely than not that impairment exists, it is required to move on to the quantitative assessment and determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. Otherwise, no further quantification is required.
The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.
- An entity can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets. An entity can also bypass the qualitative assessment and proceed directly to the quantitative impairment test and then choose to perform the qualitative assessment again in any subsequent period. However, the more time has passed from an earlier fair value determination, the more likely it is that a reliable qualitative assessment might be difficult to perform.
- The guidance includes a list of factors, many of them similar to those used in the goodwill impairment testing, to consider while performing the qualitative assessment for indefinite-lived intangible assets. While various facts and circumstances may need to be evaluated, no single one of them determines the need to calculate the asset’s fair value. However, a quantitative approach may be required if significant uncertainties exist as it might, for example, in the case of in-process R&D.
- If a recent fair value calculation is available, the extent of any cushion between an asset’s fair value and carrying amount is an important factor when concluding whether to perform the qualitative assessment.
- The revised guidance does not change the methodology for calculating the impairment loss when a quantitative analysis is performed. Similarly, to the extent impairment loss has been recognized and the carrying value of the asset has been written down, a reversal in subsequent periods is not allowed. In addition, the guidance is also unchanged as to the frequency of performing the testing (at least annually and if required for interim periods)
Entities that plan to use the qualitative option will need to develop a comprehensive process for evaluating the relevant factors impacting the valuation of each indefinite-lived asset. Each of these factors will then need to be monitored for change. Although it is a qualitative assessment, the evaluation of relevant events and circumstances will most often need to be supported by quantitative analysis. The evaluation of each factor and the reasoning for why an entity believes there is no impairment without performing an actual fair value calculation needs to be documented.