The topic of impairment of nonfinancial assets such as goodwill, long-lived assets, and indefinite-lived intangible assets is complex and overwhelming for companies—especially if it is new to them.
If your company carries these assets on the books, you’re required to test them annually or more often in accordance with FASB ASC 350 and ASC 360. Here’s an overview of what you need to know:
ASC 350 lays out the basics on how to do impairment testing, but there are different subtopics of the code that explain the impairment models:
Goodwill: ASC 350-20
Indefinite-lived intangible assets: ASC 350-30
Long-lived assets: ASC 360
Unit of account
The unit of account to be tested differs for each type of nonfinancial asset. The unit of account can change too—in the event of a reorganization or a disposal transaction, for example. Generally, the unit of account is as follows:
- Goodwill: Reporting unit (operating segment)
- Indefinite-lived intangible assets: Single asset or group of assets (if they meet certain criteria)
- Long-lived assets: A group of assets and liabilities with independent cash flows
Annually or in the Event of a “Triggering Event”
Goodwill needs to be tested every year or in between annual tests if a “triggering event” occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. There’s a list of such events that includes:
- Macroeconomic conditions such as a deterioration of economic conditions, limitations on capital, other developments in equity/credit markets, etc.
- Industry and market considerations such as a deterioration of the environment in which an entity operates, an increased competitive environment, etc.
- Cost factors such as increases in raw materials, labor, or other costs that effect earnings/cash flows
- Overall financial performance such as negative or declining cash flows
- Other relevant entity-specific events such as change in management, key personnel, strategy, or customers, or contemplation of bankruptcy, etc.
- Events affecting a reporting unit such as an expectation of selling or disposing, etc.
- A sustained decrease in share price
Today’s economic environment post-pandemic onset certainly might mean that companies carrying goodwill and other intangible assets should consider doing this test sooner than later.
Steps of impairment testing
As mentioned, impairment testing must be conducted annually for goodwill and indefinite-lived intangible assets or when a trigger exists, and only when a trigger exists for long-lived assets. The steps are as follows:
Step 1: Preliminary qualitative assessment – Your company can perform an optional test to determine whether the goodwill/ indefinite-lived intangible asset carried on your balance sheet is likely to exceed its fair market value. This qualitative assessment is the “screen” to determine whether the quantitative test is necessary.
There’s more to this step, but the basic idea here is that you must consider the most recent fair market value, the drivers of that value, any events that have occurred since the measurement of that value and the impact of those events.
If your preliminary qualitative assessment shows that goodwill/ indefinite-lived intangible asset carried on the balance sheet is unlikely to exceed its fair market value, then you stop here—no further testing is required. However, if it seems likely that goodwill exceeds its fair market value, you have to go on to step two.
Step 2: Quantitative assessment (two parts) – The first part of this step is to calculate the fair market value of the reporting unit on which the goodwill/ indefinite-lived intangible asset is based. Then, you compare that to the fair market value of what is currently on the balance sheet. If you find that the value on your balance sheet does not exceed its fair market value, you’ll stop here. But if it does, you’ll proceed to a second part.
In the second part, you’ll scrutinize the value of the individual assets and liabilities of the reporting unit. Any excess of fair value is defined as an impairment, and will be reported as a goodwill/ indefinite-lived intangible asset impairment change on your financial statements.
Recoverability test for long-lived assets
For long-lived assets, a recoverability test is required when you conclude that there has been an event or change in circumstances that indicates the carrying amount might not be recoverable. If undiscounted estimated future cash flows exceed the carrying amount, there’s no impairment. But they are expected to be less than carrying amount, you’d proceed to measure the FMV of the asset group.
Order of impairment testing matters
Impairment testing should be performed in this order:
- Test other assets under applicable guidance and indefinite-lived intangible assets under ASC 350
- Test long-lived assets (asset group) under ASC 360-10
- Test goodwill of a reporting unit that includes the assets mentioned in #1 above under ASC 350.
Call TGRP for help with impairment testing
If intangible asset impairment testing is new to your company and you could use help facilitating this process, call TGRP Consulting. We work with companies’ management teams to help them set up their procedures for testing goodwill, long-lived assets, and indefinite-lived intangible assets and can assist with this each year as well. Many of our clients like to do this before year end, as there is no requirement that impairment assessment needs to happen at year end.
Make sure you are in compliance with disclosure requirements. Call us to learn more about impairment testing today at 303.789.1500 or contact us now.