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FASB Simplifies Impairment Test for Intangible Assets

Tammy Whitehouse | January 27, 2012

After simplifying the impairment test for goodwill, the Financial Accounting Standards Board has issued a proposal to extend the same testing simplification to indefinite-lived intangible assets, such as licenses, distribution rights, and trademarks with an indefinite shelf life.

FASB has published a proposed Accounting Standards Update that would add a preliminary but optional step to the front end of the current impairment test intended to allow preparers to bypass a complete, quantitative analysis when it seems obvious enough that the full test shouldn't be necessary. It would allow preparers to assess qualitative factors to determine whether it's more likely than not that a given asset is not impaired.

Under current rules contained in Accounting Standards Codification Topic 350, entities are required to conduct a test annually to determine if the fair value of a given indefinite-lived intangible asset is greater or less than the carrying value, or the value currently carried on the books. If the carrying value is greater than the fair value, then the entity must measure the loss and write down the value of the asset.

As FASB worked last year to develop a simplified method for testing goodwill for impairment, the board heard from preparers than the testing for indefinite-lived intangible assets was equally burdensome and could benefit from the same approach, says FASB member Daryl Buck in a podcast to explain the proposal. “The new amendments address stakeholder concerns and will provide them with more qualitative options, simply their assessments, and improve the consistency of testing, all at a lower cost,” he says.

Under the proposed standard, an entity can elect to assess the likelihood that a given indefinite-lived intangible asset is impaired based on qualitative factors, such as events or circumstances during the most recent period that might have affected its value. If, based on the qualitative assessment, the entity can assert that the value is not impaired, then a qualitative test will not be required.

The qualitative assessment is not required, however, so an entity can elect to proceed straight to the quantitative testing if it chooses to do so. FASB says the proposed amendments will not change the way an entity would measure an impairment loss, so it is not expected to affect the information reported to users of financial statements.

The proposal is open for comment through April 24. The board expects to finalize the standard in time for it to take effect for annual and interim periods beginning after June 15, 2012.