Responding to concerns from companies that the annual process of quantitatively testing intangible assets for impairment was too difficult and too costly, the FASB changed the process in September 2012. Now, under the revised provisions of ASC 350 (fka FAS 142), a company may perform a qualitative assessment first and will only need to perform the additional work of a quantitative assessment if it is “more likely than not” that it can determine that the intangible asset is impaired during the qualitative assessment.
Things to be considered in the qualitative test include:
• changes in costs (materials, labor, or other inputs);
• changes in financial performance (negative or declining cash flows);
• changes in legal, regulatory, or business factors;
• entity-specific events (changes in
• industry and market conditions (deterioration in the environment, change in competition, technological change, or change in distribution); and
• macroeconomic conditions (deterioration in general conditions, limitations in accessing capital, or changes in exchange rates).
Both negative and positive factors are to be weighed, to the extent that they mitigate one another.
If the intangible asset fails the “more likely than not” test, then a company should perform a quantitative test. This consists of comparing the fair value of the intangible asset with its carrying amount. If the carrying amount exceeds its fair value, then a company must recognize an impairment loss in an amount equal to the excess. Afterward, the adjusted carrying amount of the intangible asset becomes its new
The review should be done at least annually, but more often if a company has reason to think that the intangible asset has become impaired.
The new policy makes it easier for a company to perform the first test (qualitative) on its own, without having to pay a valuation specialist; however, a valuation specialist still may be needed for the second test (quantitative).
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