The Financial Accounting Standards Board (FASB) recently issued a proposed accounting standards update intended to reduce the cost and complexity of performing impairment tests for indefinite-lived intangible assets other than goodwill by simplifying how the tests are performed. The proposal, developed in response to feedback from the FASB’s 2011 outreach activities, would also improve the consistency of impairment-testing guidance for indefinite-lived intangible assets, goodwill, and long-lived assets.
Currently, an intangible asset that’s not subject to amortization is tested at least annually for impairment by calculating its fair value and comparing it with its carrying value. The proposal would allow an entity to first assess qualitative factors to determine whether it’s necessary to then perform the quantitative impairment test. This approach would be similar to the one allowed by ASU 2011-08 for testing goodwill for impairment. Comments on the proposal are due by April 24, 2012.
Effective Date
The proposal would be effective for annual and interim impairment tests performed for fiscal years beginning after June 15, 2012. Early adoption would be permitted. Upon issuance of the new standard, entities that had not yet completed their annual or interim period impairment tests and had not issued or made their financial statements available for issuance would be allowed to apply the qualitative approach.
Who It Would Impact
The proposal would apply to entities with indefinite-lived intangible assets reported in their financial statements and prepared in conformity with US generally accepted accounting principles.
Summary of the Main Provisions
An entity would have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it’s more likely than not that an indefinite-lived intangible asset is impaired. If an entity believes, as a result of the qualitative assessment, that it’s not more likely than not that the asset is impaired, no further testing would be required. If an entity concludes otherwise, then it would be required to perform the quantitative impairment test by determining the fair value of the indefinite-lived intangible asset and comparing it with its carrying value.
An entity would have the unconditional option to bypass the qualitative assessment in any period and proceed directly to determining the asset’s fair value and then resume performing the qualitative assessment in any subsequent period. Accordingly, deciding whether to apply the optional qualitative assessment would not be an accounting policy decision.
To conduct a qualitative assessment, an entity would consider the extent to which relevant events and circumstances included in paragraphs 3C(a)–(e) of ASC 350-20-35, both individually and in the aggregate, could have adversely affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset since the last assessment. An entity would also consider positive and mitigating events and circumstances that may affect its determination. If an entity has made a recent fair value calculation for an indefinite-lived intangible asset, it also would include as a factor in its consideration the difference between that fair value and the current carrying amount in reaching its impairment conclusion. An entity also would consider whether there have been any changes to the carrying amount of the indefinite-lived intangible asset in its determination.
In its basis for conclusions, the FASB notes that the more time that elapses since an entity last calculated the fair value of an indefinite-lived intangible asset, the more difficult it may be to make a conclusion based solely on a qualitative assessment of relevant events and circumstances.
The proposal would not require any disclosure about when an entity uses the optional qualitative assessment. The FASB also decided to exempt nonpublic entities from the quantitative disclosure requirements regarding significant inputs used in Level 3 nonrecurring fair value measurements, such as an impairment of indefinite-lived intangible assets.
Although the proposal would permit early adoption, it’s important to note that an annual quantitative impairment test will still be required until a standard is issued.
We're Here to Help
We’ll continue to keep you apprised of important developments. If you have questions about how the proposal could impact your impairment tests, please contact your Moss Adams LLP professional.