9.3 Impairment of intangible assets

Intangible assets, like patents and trademarks, can lose value over time. Companies must regularly assess these assets for impairment, comparing their carrying amount to fair value. This process ensures financial statements accurately reflect the true worth of a company's intangible assets.

Impairment testing methods vary for finite-lived and indefinite-lived intangibles. When impairment occurs, companies recognize losses in their financial statements. Understanding these concepts is crucial for proper accounting and financial reporting of intangible assets.

Identifying intangible assets for impairment

• Intangible assets are non-physical assets that provide future economic benefits to a company, such as patents, trademarks, and goodwill
• Impairment occurs when the carrying amount of an intangible asset exceeds its fair value, indicating a decline in the asset's value
• Identifying intangible assets for impairment is crucial for accurate financial reporting and decision-making

Internal indicators of impairment

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• Significant changes in how an intangible asset is used or expected to be used within the company
• Deterioration in the asset's performance or cash flows generated compared to initial projections
• Plans to discontinue or restructure the operation to which the intangible asset belongs
• Evidence of obsolescence or physical damage to the intangible asset

External indicators of impairment

• Decline in the asset's market value due to technological advancements, market conditions, or legal factors
• Significant adverse changes in the business environment, such as increased competition or regulatory changes
• Increases in market interest rates that could affect the discount rate used in valuing the intangible asset
• Lower than expected market performance of products or services associated with the intangible asset

Impairment testing for intangible assets

• Impairment testing determines whether the carrying amount of an intangible asset exceeds its fair value
• The frequency and method of impairment testing depend on whether the intangible asset has a finite or indefinite useful life

Impairment testing for finite-lived intangibles

• Finite-lived intangible assets are amortized over their useful lives and tested for impairment only when indicators of impairment are present
• If indicators exist, compare the undiscounted future cash flows expected from the asset to its carrying amount
• If the carrying amount exceeds the undiscounted cash flows, measure the impairment loss as the difference between the asset's fair value and its carrying amount

Impairment testing for indefinite-lived intangibles

• Indefinite-lived intangible assets are not amortized but are tested for impairment at least annually or more frequently if indicators of impairment exist
• Compare the asset's fair value to its carrying amount
• If the carrying amount exceeds the fair value, recognize an impairment loss equal to the difference

Measuring impairment loss for intangible assets

• Impairment loss is the amount by which an asset's carrying amount exceeds its fair value

Fair value vs carrying amount

• Fair value is the price that would be received to sell the asset in an orderly transaction between market participants
• Carrying amount is the asset's cost less accumulated amortization and any prior impairment losses
• If the fair value is less than the carrying amount, an impairment loss is recognized

Allocating impairment loss to asset groups

• When an intangible asset is part of a larger cash-generating unit (CGU) or asset group, allocate the impairment loss to the individual assets within the group
• Allocate the impairment loss pro-rata based on the relative carrying amounts of the assets in the group
• The allocated impairment loss cannot reduce an individual asset's carrying amount below its fair value

Recognizing and reporting impairment losses

• Impairment losses are recognized in the period when the impairment occurs

Timing of impairment loss recognition

• For finite-lived intangibles, recognize impairment loss when indicators of impairment are present and the undiscounted cash flows are less than the carrying amount
• For indefinite-lived intangibles, recognize impairment loss when the fair value is less than the carrying amount during the annual impairment test or when indicators of impairment are present

Financial statement presentation of impairment losses

• Report impairment losses in the income statement as a separate line item or included in operating expenses
• Disclose the amount, nature, and circumstances leading to the impairment in the notes to the financial statements

Reversing impairment losses for intangible assets

• In some cases, impairment losses recognized in prior periods may be reversed if there is evidence of recovery in the asset's value

Criteria for reversing impairment losses

• Reversal of impairment loss is permitted only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized
• The reversal cannot exceed the carrying amount that would have been determined (net of amortization) had no impairment loss been recognized in prior years

Accounting for impairment loss reversals

• Reverse the impairment loss by increasing the asset's carrying amount to its recoverable amount
• The reversal is recognized as a gain in the income statement in the period when it occurs
• Adjust future amortization charges to allocate the asset's revised carrying amount over its remaining useful life

Tax considerations for intangible asset impairment

• Impairment losses on intangible assets can have tax implications

Deductibility of impairment losses

• In some tax jurisdictions, impairment losses on intangible assets may be tax-deductible
• The deductibility depends on the specific tax laws and regulations of the jurisdiction
• Consult with tax professionals to determine the tax treatment of impairment losses

Deferred tax assets and valuation allowances

• When impairment losses are recognized for financial reporting but not tax purposes, it creates a temporary difference and a deferred tax asset
• Assess the recoverability of the deferred tax asset and record a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized

Disclosure requirements for intangible asset impairment

• Companies must provide adequate disclosures related to intangible asset impairment in their financial statements

Required disclosures for impairment testing

• Disclose the methods and key assumptions used in determining the fair value of intangible assets during impairment testing
• For indefinite-lived intangibles, disclose the date of the most recent impairment test and the reasons for performing the test if it was done outside the annual testing cycle

Disclosures for recognized impairment losses

• Disclose the amount of impairment loss recognized during the period for each major class of intangible assets
• Describe the events and circumstances that led to the recognition of the impairment loss
• Disclose the method used to determine the fair value of the impaired assets and the key assumptions applied