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8.2 Accounting for indefinite-lived intangible assets
Publication date: 30 Jun 2021
us Business combinations guide 8.2
The useful life of an intangible asset should be considered indefinite if no legal, regulatory, contractual, competitive, economic, or other factors limit its useful life to the reporting entity. The term indefinite, however, does not mean infinite or indeterminate, as described in ASC 350-30-35-4.
All factors that are pertinent to whether an intangible asset has an indefinite life should indicate that there is no foreseeable limit to the period over which the asset is expected to contribute to the reporting entity’s cash flows. All available evidence should be considered and based on historical and projected trends in demand, competition, technological change, and other economic factors affecting the entity and its industry.
It may be difficult to support an indefinite life, except for certain classes of intangible assets (e.g., Federal Communications Commission licenses and trade names). For example, it would be rare for a customer-related intangible asset to have an indefinite life due to the frequency of customer turnover and changes in relationships. In considering whether an intangible asset has an indefinite life, it may be important to consider how an entity determines the fair value of an intangible asset and assesses that asset for impairment (e.g., a forecasted deterioration in annual cash flows may be inconsistent with an indefinite useful life determination).
Indefinite-lived intangible assets should be reassessed each reporting period to determine whether events or circumstances continue to support an indefinite useful life in accordance with ASC 350-30-35-16. See BCG 8.2.1 for further information on the accounting considerations when an asset that is not being amortized is subsequently determined to have a finite useful life.
Example BCG 8-1 and Example BCG 8-2 illustrate the determination of useful lives.
EXAMPLE BCG 8-1
Intangible asset determined to have an indefinite life
Intangible asset determined to have an indefinite life
As part of ABC Company’s purchase of XYZ Company, ABC recognizes an intangible asset related to XYZ’s registered trademark, which is used to distinguish a leading consumer product. The trademark has a remaining legal life of seven years, but is renewable every 10 years for minimal cost. ABC intends to continuously renew the trademark and evidence supports its ability to do so. Analysis of the product life cycle provides evidence that the trademarked product will generate cash flows for ABC for an indefinite period of time.
What useful life should be assigned to the trademark?
Analysis
The trademark may have an indefinite useful life because it is expected to contribute to cash flows indefinitely and the associated costs of renewal are not significant. Therefore, the trademark would not be amortized until its useful life is no longer indefinite. However, the trademark would need to be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired in accordance with ASC 350-30-35-18.
EXAMPLE BCG 8-2
Intangible asset determined to have a finite life
Intangible asset determined to have a finite life
As part of Entity B’s acquisition of Entity M, Entity B recognizes an intangible asset related to Brand K, a brand known for its association with the production of an economic alternative to carbon-based fuel. Management of Entity B has committed significant resources in support of Brand K and continued improvement of the underlying technology. There is significant competition in this technological area and therefore the technology is subject to constant change and improvement. Brand K does not have an established pattern of surviving changes in the underlying technology.
What factors should be considered by Entity B in determining the useful life that should be assigned to the brand?
Analysis
Since the technology is subject to constant change and improvement, a significant discovery may make previously cutting-edge technology obsolete, resulting in reduced utilization of the brand. Additionally, there is no evidence to support an assertion that Brand K would continue to exist beyond the life of the current underlying technology. These factors would likely make it difficult to conclude that the entity would benefit economically from the brand indefinitely. On the other hand, if Brand K had an established pattern of surviving changes in the underlying technology, Entity B may be able to support Brand K having an indefinite life.
8.2.1 Reclassifying intangible assets to/from indefinite-lived
As described in ASC 350-30-35-17, when a reporting entity subsequently determines that an indefinite-lived intangible asset has a finite useful life, the reporting entity should test the asset for impairment as an indefinite-lived intangible asset prior to commencing amortization. The intangible asset should then be amortized prospectively over its estimated useful life and accounted for the same as other intangible assets subject to amortization (including applying the impairment provisions of ASC 360-10). Conversely, as described in ASC 350-30-35-10, if a finite-lived intangible asset is subsequently determined to have an indefinite life, the entity should cease amortizing the asset and test it for impairment as an indefinite-lived intangible asset. Reclassification from a finite-lived intangible asset may result in an impairment charge as the first step in the ASC 360-10 impairment test, the recoverability test, is performed on an undiscounted basis. The recoverability of the asset using the undiscounted cash flow approach is not considered when assessing the indefinite-lived intangible asset for impairment. In accordance with ASC 350-30-35-11, any resulting impairment loss would be due to a change in accounting estimate, and thus would be presented in the income statement consistent with other impairment losses. While the reclassification of an indefinite-lived intangible asset to a finite-lived intangible asset may occur as a result of changes in circumstances, the reclassification of a finite-lived intangible asset to an indefinite-lived intangible asset is expected to be rare.
8.2.2 Renewable intangible assets (postacquisition)
Under ASC 350-30-55-1C, an entity should consider its own historical experience in renewing or extending similar arrangements when developing its assumptions about renewals or extensions used to determine the useful life of an intangible asset. For example, an entity in the television broadcasting business may acquire broadcast licenses. The license may have a stated term but is expected to be renewed indefinitely consistent with past experience. In this case, the entity may conclude that the broadcast license is indefinite lived. In the absence of that experience, an entity should consider the assumptions that market-participants would use about renewals or extensions (consistent with the highest and best use of the asset by market-participants), adjusted for the entity-specific factors in ASC 350-30-35-3.
In some instances, finite-lived intangible assets, such as customer relationships, may be valued using long-term, or even perpetual cash flows. This does not imply that the asset has an indefinite life.
8.2.3 Reacquired rights (intangible assets postacquisition)
An entity may, as part of a business combination, reacquire a right it had previously granted to the acquiree to use the acquirer’s recognized or unrecognized intangible assets. It is rare that such rights would have an indefinite life. See BCG 2.5.6 for further information on reacquired rights and BCG 2.5.6.1 for further detail on the determination of the value and useful life of reacquired rights.
8.2.4 Intangible assets used in R&D (postacquisition)
As discussed in BCG 4.3.4.1, ASC 805 requires the recognition of both tangible and intangible research and development assets acquired in a business combination. This applies even if the intangible assets do not have an alternative future use. After initial recognition, tangible research and development assets are accounted for in accordance with their nature. On the other hand, in-process research and development intangible assets (IPR&D) should be considered indefinite-lived until the abandonment or completion of the associated research and development efforts, as described in ASC 350-30-35-17A. If abandoned, the assets are expensed in the period of abandonment. Impairment of acquired IPR&D intangible assets immediately after being acquired in a business combination is possible, but rare.
If the activities are completed, the acquiring entity would make a determination of the useful lives and methods of amortization of those assets. Refer to BCG 8.2.1 for impairment considerations when reclassifying an indefinite-lived intangible asset. Research and development expenditures that are incurred after the acquisition, including those for completing the research and development activities related to the acquired intangible research and development assets, are generally expensed as incurred.
Subsequent to a business combination, ASC 350 provides that acquired-in-process research and development intangible assets should not be amortized; instead, they would be subject to an impairment assessment, at least annually in accordance with ASC 350-30-35-18 through ASC 350-30-35-20. See BCG 8.3 for further information on impairment of intangible assets with indefinite useful lives. Further, if these intangible assets are temporarily idled, they should not be accounted for as abandoned, consistent with ASC 360-10-35-49.
This requirement makes it necessary for companies to track capitalized research and development projects for impairment testing purposes. As projects evolve (for instance, multiple projects are combined), such tracking will be necessary for companies to properly test for impairment and determine the point of completion or abandonment of a project. Furthermore, costs incurred after the acquisition related to acquired research and development intangible assets will likely be relevant in performing the impairment testing as they may impact the fair value of the assets.
The AICPA IPR&D Guide provides a best practices publication addressing the financial reporting and emerging practice issues companies are dealing with in regard to research and development assets acquired in a business combination or an asset acquisition. Research and development intangible assets acquired or costs incurred outside of a business combination should be expensed, unless there is an alternative future use, in accordance with ASC 730-10-25-1. See PPE 2 for further information on research and development assets acquired outside of a business combination.
8.2.4.1 Enabling technology (intangible assets postacquisition)
The IPR&D Guide eliminates the concept of core technology and introduces the concept of enabling technology which is intended to have a narrower definition. Enabling technology is defined in the IPR&D Guide as follows:
Partial definition from IPR&D 6.51
Enabling technology: …underlying technology that has value through its continued use or reuse across many products or product families.
Examples of enabling technology provided in the IPR&D Guide include a portfolio of patents, a software object library, or an underlying form of drug delivery technology. If enabling technology meets the criteria for recognition as an intangible asset, it could be a separate unit of accounting if it does not share the useful life, growth, risk, and profitability of the products in which it is used. The IPR&D Guide indicates that enabling technology will be recognized as a separate asset less frequently than core technology had previously been recognized, and that the introduction of enabling technology is not expected to significantly contribute to the amount of recognized goodwill. As a result, elements of value previously included in core technology likely will be recognized separately as identifiable intangible assets that increase the value of developed technology and/or an IPR&D asset.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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