Thanks to changes introduced in FASB Accounting Standards Update No. 2012-02, your company now has more flexibility in testing for impairment of certain intangible assets. This applies to intangible assets that are not amortized because they’re determined to have indefinite useful lives — such as certain trademarks, licenses, and distribution rights. You may now use an optional qualitative assessment along with the impairment testing for these kinds of intangibles. This is beneficial when a low likelihood of impairment is indicated — meaning it isn’t likely the realizable value of the assets has declined to the point where the carrying amount exceeds the fair value.
Here are six quick things to consider when using qualitative assessments for indefinite-lived intangibles:
- Test annually, at a minimum. Accounting standards require that an indefinite-lived intangible must be tested for impairment at least annually. Prior to ASU 2012-02, impairment was evaluated using a quantitative test that involved a comparison of the fair value of an asset with its carrying amount to determine the amount of impairment loss, if any.
- Available to companies and not-for-profits. Public and private companies, as well as not-for-profit organizations, now have the option to make a qualitative assessment to assist in determining if a quantitative impairment test is required.
- Flexibility in use. Companies have considerable flexibility in their use of the qualitative assessment. The option can be applied to some, all, or none of an entity’s indefinite-lived intangibles. The choice does not need to be consistent from period to period like an accounting policy election.
- Factors affecting significant inputs. A qualitative assessment requires consideration of the events and circumstances that could have affected the significant inputs used in determining the fair values of indefinite-lived intangible assets.
- Impairment. The objective of the qualitative assessment is to determine whether it is more likely than not (a probability of more than 50 percent) that the indefinite-lived intangible asset is impaired. If the entity concludes it is more likely than not the asset is impaired, then the entity must proceed with the quantitative test. Alternatively, if the entity concludes it is more likely than not that the asset is not impaired, the entity is not required to take any further action.
- Evaluations between tests. Accounting standards also require evaluation of impairment between annual tests if events and circumstances indicate it is more likely than not that the asset is impaired. The new guidance replaces the examples of these events and circumstances.
Our experts at Mayer Hoffman McCann P.C. have put together an MHM Messenger with more details about the use of qualitative assessments to give you an overview of what to expect from the standards set in ASU 2012-02.