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Developments and events after a business combination or an asset acquisition may result in a material and sustained decrease in the value of intangible assets, potentially leading to impairment. As defined in ASC 360-10, impairment is the condition that exists when the carrying amount of an asset (or asset group) exceeds its fair value. ASC 350 addresses impairment of indefinite-lived intangible assets. An indefinite-lived intangible asset is considered to be impaired when the asset’s carrying amount is greater than its fair value. There are various approaches to determine whether an impairment should be recognized and, if so, how to measure and record such impairment in the financial statements. The identification of the applicable impairment approach is an important part of assessing and measuring an asset’s impairment.
As discussed in PPE 5.2 the carrying amounts of any assets (including indefinite-lived intangible assets) that are not in the scope of ASC 360-10, other than goodwill, should be tested for impairment prior to testing long-lived assets for impairment. Refer to PPE 5.2 for further discussion regarding the order of impairment testing.
Figure BCG 8-1 illustrates impairment approaches for indefinite-lived intangible assets.
Figure BCG 8-1
Impairment approaches for indefinite-lived intangible assets
ASC 350 does not prescribe when to perform the annual impairment test for indefinite-lived intangible assets. Similar to goodwill impairment testing, current practice is to perform the test at the same time each year. Any change in the testing date for an indefinite-lived intangible asset should not result in more than one year elapsing between impairment tests, nor should such a change be made to avoid recognizing an impairment loss. Different indefinite-lived intangible assets may be tested for impairment at different times of the year.
Unlike a change in an annual goodwill impairment test date, the SEC staff has stated that a preferability letter is not required if a registrant changes its impairment test date for indefinite-lived assets. This is because ASC 350 does not specifically require the test to be performed at the same time each year.
An impairment loss that an entity recognizes for an indefinite-lived intangible asset should be reported as a component of income from continuing operations before income taxes or discontinued operations, as appropriate. The impairment loss should be included in the subtotal “income from operations,” if presented. After an impairment loss is recognized, the adjusted carrying amount of the indefinite-lived intangible asset will become its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited in accordance with ASC 350-30-35-20.

8.3.1 Indefinite-lived intangible asset impairment test

ASC 350 allows an entity to first assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not (that is, a likelihood of more than 50%) that an indefinite-lived intangible asset is impaired (i.e., the asset’s carrying amount exceeds its fair value). If it is more likely than not that the asset is impaired, the entity must calculate the fair value of the asset and record an impairment charge if the carrying amount exceeds fair value. If an entity concludes that it is not more likely than not that the asset is impaired, no further action is required.
Question BCG 8-1 addresses whether the option to apply the qualitative assessment changes how an entity determines whether they need to perform an event-driven interim impairment test.
Question BCG 8-1
Does the option to apply the qualitative assessment change how an entity determines whether they need to perform an event-driven interim impairment test?
PwC response
No. An indefinite-lived intangible asset should be tested for impairment between annual tests (“interim tests”) if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. If such events or changes have occurred, a quantitative assessment is required. Refer to BCG 8.3.1.1 for examples of events and circumstances that could trigger the need for an interim impairment test.

8.3.1.1 Qualitative impairment: indefinite-lived intangible asset

In evaluating whether a quantitative test is necessary, an entity should consider the totality of all relevant events or circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. Examples of such events and circumstances include:
  • Macroeconomic conditions, such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets
  • Industry and market considerations, such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (in both absolute terms and relative to peers), or a change in the market for an entity’s products or services due to the effects of obsolescence, demand, competition, or other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing business environment, and expected changes in distribution channels)
  • Cost factors, such as increases in raw materials, labor, or other costs that will have a negative effect on future expected earnings and cash flows
  • Overall financial performance, such as negative or declining cash flows or a decline in actual or planned revenue or earnings
  • Relevant entity-specific events, such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation
  • Legal, regulatory, contractual, political, business, or other factors, including asset-specific factors

These examples are not all-inclusive. An entity should consider other relevant events and circumstances. For example, a sustained decrease in the entity’s share price should not be ignored as changes in share price may be a relevant indicator when testing an asset that is critical to an entity’s operating and financial performance, such as a certain trade name, distribution right, or license. In addition to the adverse factors, an entity should consider any positive or mitigating events and circumstances, including the difference between the asset’s fair value and carrying amount if determined from its most recent fair value calculation (i.e., “cushion’’), as well as any changes to the carrying amount of the asset.
Entities should place more weight on those events and circumstances that most significantly affect an indefinite-lived intangible asset’s fair value. None of the individual examples of events and circumstances are intended to represent stand-alone triggering events that would necessarily require an entity to calculate the fair value of an indefinite-lived intangible asset. Similarly, the existence of positive and mitigating events and circumstances would not represent a rebuttable presumption that an entity should not perform the quantitative impairment test.
If an entity determines that it is not more likely than not that the indefinite-lived intangible asset is impaired, management should document its conclusion and the events and circumstances taken into consideration to reach that conclusion.

8.3.1.2 Qualitative impairment: selecting intangible assets

An entity can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets. An entity can bypass the qualitative assessment for any asset in any period and proceed directly to the quantitative impairment test. It can choose to return to a qualitative assessment in any subsequent period. The selection of assets on which to perform the qualitative assessment is not an accounting policy decision that needs to be followed consistently. Therefore, an entity should tailor its use of the qualitative assessment based on each asset’s specific facts and circumstances.
In some cases, a qualitative assessment may not provide sufficient support to conclude that there is no impairment. In other cases, the qualitative assessment may not be cost effective compared to performing the quantitative impairment test. For example, an entity that already has an efficient and robust process in place for determining the fair value of its assets may prefer to bypass the qualitative assessment and proceed directly to the quantitative impairment test rather than implement additional processes and internal controls for performing the qualitative assessment.
The qualitative assessment is generally effective when there is significant cushion based on a recent fair value measurement and no significant adverse changes have since occurred. See BCG 8.3.1.3 for further information on considering the results of prior fair value measurements in the qualitative assessment. Conversely, a qualitative assessment alone may not be cost effective or efficient for an asset whose fair value approximated its carrying amount in a recent fair value calculation. The lack of cushion in this situation results in the fair value inputs being highly sensitive to adverse factors, such as changes in actual and forecasted cash flows, tax rates, and discount rates. It may also be difficult to apply the qualitative impairment test to IPR&D assets since, given the nature of the assets, they are subject to frequent and significant changes in fair value.
Question BCG 8-2 addresses how management should support its conclusion as a result of a qualitative assessment of its indefinite-lived intangible assets. Question BCG 8-3 addresses the consideration of how much cushion between an indefinite-lived intangible asset’s fair value and its carrying amount would allow an entity to consider a qualitative impairment test.
Question BCG 8-2
How should management support its conclusion as a result of a qualitative assessment of its indefinite-lived intangible assets?
PwC response
In most cases, a robust process with supporting documentation will be needed to support an entity’s conclusion that the quantitative impairment testing is not necessary. Generally, entities that plan to use the qualitative assessment should consider developing a comprehensive process to:
  • Determine which factors are the key drivers of the significant inputs of each asset’s fair value and monitor changes in those factors.
  • Identify the internal and external sources of information needed to monitor the relevant factors for each asset. Consider whether analyst and other external information are consistent with management’s assessment of events and circumstances that could affect the significant inputs used in calculating an asset’s fair value.
  • Consider the amount of “cushion” from the most recent fair value calculation and evaluate both positive and adverse events and circumstances since that analysis. Underperformance relative to budget or prior expectations may suggest a quantitative impairment test is warranted.
  • Monitor changes in other market-based metrics that could affect the significant inputs used in calculating an asset’s fair value, including changes in the discount rate.
  • Evaluate and weigh the impact of adverse and mitigating factors based on the extent those factors affect the comparison between fair value and carrying amount.
Management should document the results of its qualitative assessment, including the basis for its conclusion. Generally, the more analysis needed to assert that no further testing is necessary, the greater the extent of documentation that should be prepared. Management should also consider if, and how frequently, a quantitative impairment test should be performed for the purpose of “refreshing’’ the baseline valuation.
Question BCG 8-3
How much cushion between an indefinite-lived intangible asset’s fair value and its carrying amount would allow an entity to consider a qualitative impairment test?
PwC response
There are no bright lines. The test is qualitative and should consider all facts and circumstances impacting the asset’s fair value, including the length of time elapsed since the last fair value calculation, the impact of adverse and mitigating or positive qualitative factors, as well as current year changes in the asset’s carrying amount. All else being equal, an asset with a significant cushion is more likely to allow an entity to start with a qualitative assessment than an asset with little or no cushion.

8.3.1.3 Results of prior intangible asset fair value measurements

When testing an indefinite-lived intangible asset for impairment, the amount of cushion, if any, between the fair value and the carrying amount of the asset from a prior fair value measurement is a critical factor when considering a current period qualitative assessment. However, an entity should not look solely at the amount of cushion from a recent fair value measurement to determine whether to perform a qualitative assessment. An entity must first determine whether the assumptions and projections underlying the previous fair value measurement are still reasonable in the current period. For example, using the multi-period excess earnings method of valuation (see FV 7), an entity’s actual results for the current year combined with updated forecasts may differ from the forecasts used in the valuation model. The significance of the differences may indicate that the projections used for the last fair value calculation were too aggressive and that less weight should be given to the apparent cushion from the prior valuation. Conversely, more weight would likely be given to a prior cushion amount when actual results are consistent with or more favorable than results used in the recent fair value calculation projections.

8.3.1.4 Periodically refresh indefinite-lived asset’s fair value

Entities should consider periodically “refreshing” an indefinite-lived intangible asset’s fair value calculation. The more time that has elapsed since a recent fair value calculation, the more difficult it may be to support a conclusion based solely on a qualitative assessment. The frequency with which an entity refreshes its fair value calculation for an asset will depend on a variety of factors, including how much cushion existed in the last fair value calculation, the current operating environment, the current market environment for similar assets and any changes in carrying amount of an asset.
Question BCG 8-4 addresses the consideration of how many years an entity can use a previously-measured fair value of an indefinite-lived intangible asset as a basis for assessing the extent of cushion between an asset’s fair value and its carrying amount.
Question BCG 8-4
How many years can an entity use a previously-measured fair value of an indefinite-lived intangible asset as a basis for assessing the extent of cushion between an asset’s fair value and its carrying amount?
PwC response
There are no bright lines. The appropriate length of time between quantitative measurements of the fair value of an asset is a matter of judgment. Some entities may establish a policy requiring assets’ fair values to be reassessed periodically. Even with such a policy, an entity may still need to determine an asset’s fair value more frequently than the policy requires if events and circumstances indicate that a quantitative impairment test is appropriate.

8.3.2 Quantitative impairment: indefinite-lived intangible assets

If an entity bypasses the qualitative assessment or determines from its qualitative assessment that an indefinite-lived intangible asset is more likely than not impaired, a quantitative impairment test should be performed. The quantitative impairment test compares the fair value of an indefinite-lived intangible asset with the asset’s carrying amount. If the fair value of the indefinite-lived intangible asset is less than the carrying amount, an impairment loss should be recognized in an amount equal to the difference in accordance with ASC 350-30-35-19.

8.3.2.1 Unit of accounting for indefinite-lived intangible assets

Generally, the unit of accounting for the impairment test of separately recorded indefinite-lived intangible assets is the individual indefinite-lived intangible asset. However, some reporting entities may acquire indefinite-lived intangible assets in separate transactions, but collectively use the individual assets in a manner that suggests they represent one asset. For example, an entity may acquire FCC licenses in separate transactions to assemble nationwide cell service coverage. ASC 350-30-35-21 through ASC 350-30-35-28 addresses the circumstances under which separately recorded indefinite-lived intangible assets should be combined into a single unit of accounting for purposes of impairment testing.
Under ASC 350-30-35-21 through ASC 350-30-35-28, separately recorded indefinite-lived intangible assets, whether acquired or internally developed, should be combined into a single unit of accounting for impairment testing if those assets are operated as a single asset and, as such, are essentially inseparable from one another. However, the unit of accounting cannot represent a group of indefinite-lived intangible assets that collectively constitute a business. Further, the unit of accounting should include only indefinite-lived intangible assets and cannot be tested in combination with long-lived assets or goodwill.
Determining whether two or more indefinite-lived intangible assets are essentially inseparable is a matter of judgment that depends upon the relevant facts and circumstances. Figure BCG 8-2 provides a list of indicators from ASC 350-30-35-23 and ASC 350-30-35-24 that an entity should consider in making a determination about whether to combine intangible assets for impairment testing purposes. None of the indicators should be considered presumptive or determinative.
Figure BCG 8-2
Indicators to consider when determining whether to combine indefinite-lived intangible assets for impairment testing
Combined
Not combined
The intangible assets were acquired to construct or enhance a single asset (i.e., they will be used together).
Each intangible asset generates cash flows independent of any other intangible asset (as would be the case for an intangible asset licensed to another entity for its exclusive use).
Had the intangible assets been acquired in the same acquisition, they would have been recorded as one asset.
If sold, each intangible asset would likely be sold separately. A past practice of selling similar assets separately is evidence, indicating that combining assets as a single unit of accounting may not be appropriate.
The intangible assets as a group represent the highest and best use of the assets (e.g., they yield the highest price if sold as a group).
The entity has adopted or is considering a plan to dispose of one or more intangible assets separately.
The marketing or branding strategy provides evidence that the intangible assets are complementary as that term is used in ASC 805-20-55-18.
The intangible assets are used exclusively by different ASC 360-10 asset groups.
The economic or other factors that might limit the useful economic life of one of the intangible assets would not similarly limit the useful economic lives of other intangible assets combined in the unit of accounting.
If it is determined that indefinite-lived intangible assets that were previously tested for impairment separately can now be combined into a single unit of accounting, those assets should be tested separately for impairment prior to being combined.
The unit of accounting is determined from the reporting entity’s perspective based on the indicators above. A consolidated entity’s unit of accounting may include indefinite-lived intangible assets that are recorded in the separate financial statements of the entity’s consolidated subsidiaries. As a result, an impairment loss that is recognized in the consolidated financial statements may differ from the sum of the impairment losses, if any, that are recognized in the separate financial statements of the entity’s subsidiaries.
Prior to the adoption of ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, when (1) the unit of accounting used to test indefinite-lived intangible assets for impairment is contained in a single reporting unit, and (2) a goodwill impairment loss for that reporting unit must be measured, an entity should use that same unit of accounting and the associated fair value for the indefinite-lived intangible assets in performing step two of the goodwill impairment test. Upon adoption of ASU 2017-04, step two of the goodwill impairment test is eliminated.
Example BCG 8-3 illustrates the determination of the unit of accounting for trade names.
EXAMPLE BCG 8-3
Unit of accounting—trade names
Company A acquired Company B, an international fragrance manufacturer. Company B has four legal entities. Each legal entity owns the registered trade name of Company B used in that country. In acquisition accounting, Company A recorded four trade name assets because separate financial statements are prepared for each legal entity. The trade name assets have an indefinite life and the value is expected to be recovered from the worldwide sales of Company B’s fragrances.
What is the appropriate unit of accounting for the acquired trade names?
Analysis
Company A should combine the four trade name assets into a single unit of accounting for purposes of impairment testing because the four trade name assets were acquired in the same business combination, the worldwide marketing of the fragrances utilizes the same trade name and the four registered trade names would likely be sold together. Further, if there was not a requirement to prepare separate financial statements for each legal entity, the trade names would have been recorded as a single asset.

Unit of accounting: intangible assets used in research and development
The determination of the appropriate unit of accounting will impact the postacquisition accounting for IPR&D, including impairment assessments and the determination of amortization periods and/or useful lives. Determining the appropriate unit of accounting for valuing and recognizing intangible assets used in research and development activities may be especially complex when such activities may ultimately benefit various jurisdictions and/or versions of a product.
One common approach is to record separate “jurisdictional” assets for a research and development activity that will benefit various jurisdictions or versions, while another approach is to record a single “global” asset. Factors to consider in making this determination may include:
Jurisdictional asset:
  • The nature of the activities and costs necessary to further develop the project are not substantially the same.
  • The risks associated with the further development of the project are not substantially the same.
  • The amount and timing of benefits expected to be derived in the future from the developed assets are not substantially the same.
  • Based on historical experience and current intent, once completed, the product (if ever transferred) would not be transferred as a single asset.
  • The manner in which the product will be advertised and sold will not be substantially the same.

Global asset:
  • The development of the project will occur centrally and the company only intends to incur a small portion of development costs to obtain approvals in future jurisdictions.
  • Based on historical experience (or expectations), the risks associated with the further development of the IPR&D project are substantially the same. For example, the development of the project will occur centrally and the company only intends to incur a small portion of the total development costs to obtain approval within each regulatory jurisdiction towards the later stages of testing.
  • The amount and timing of benefits expected to be derived in the future from the developed assets and the expected economic life of the developed assets are substantially the same.
  • Based on historical experience and current intentions, once completed, the product (if ever transferred) would be transferred in one worldwide arrangement.
  • Advertising and selling costs will be managed from the perspective of a global brand, not the individual jurisdictions where the product is sold.
None of these factors are individually determinative, and the assessment should be based on the facts and circumstances specific to each situation.
Example BCG 8-4 illustrates making a determination of whether acquired in-process research and development should be measured and recognized as a single asset or multiple assets.
EXAMPLE BCG 8-4
Unit of accounting – IPR&D
Company C acquired Company D, which is accounted for as a business combination. At the acquisition date, Company D was pursuing completion of an in-process research and development (IPR&D) project that, if successful, would result in a drug for which Company C would seek regulatory approval in the United States and Japan. This research and development project is in the later stages of development but is not yet complete. The nature of the activities and costs necessary to successfully develop the drug and obtain regulatory approval in the two jurisdictions are not substantially the same. If approved, the respective patent lives are expected to be different as well. In addition, Company C intends to manage advertising and selling costs separately in both countries. Lastly, Company C has determined that any future sale of the in-process research and development assets would likely involve two different buyers.
What is the unit of accounting for the acquired IPR&D?
Analysis
The acquired IPR&D project would likely be recorded as two separate “jurisdictional” in-process research and development assets. While there may be other factors to consider, Company C’s assessment may lead it to believe that the development risks, the nature of the remaining activity and costs, the risk of not obtaining regulatory approval, and expected patent lives for the acquired in-process research and development are not substantially the same in both countries. Finally, Company C intends to manage the drug separately, including separate advertising and selling costs in each country.

8.3.2.2 Portion of intangible removed from single unit of account

As described in ASC 350-30-35-21 through ASC 350-30-35-28, separately recorded indefinite-lived intangible assets, whether acquired or internally developed, should be combined into a single unit of accounting for impairment testing if those assets are operated as a single asset and are essentially inseparable from one another. An indefinite-lived intangible asset previously combined with one or more indefinite-lived intangible asset as a single unit of account may be separated or removed from the single unit of account as a result of a disposition, a reassessment of the unit of account, or an indefinite-lived intangible asset being reclassified as a finite-lived intangible asset.
When an indefinite-lived intangible asset is removed from a single unit of account consisting of two or more indefinite-lived intangible assets, and the single unit of account was previously impaired, a reporting entity should remove the indefinite-lived intangible asset from the single unit of account after considering the impact of the impairment charge. In the absence of guidance specific to indefinite-lived intangible assets, we believe a reporting entity may apply the guidance in ASC 360-10-35-28 by analogy.

Excerpt from ASC 360-10-35-28

An impairment loss for an asset group shall reduce only the carrying amounts of a long-lived asset or assets of the group. The loss shall be allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable without undue cost and effort.

In applying this guidance by analogy, an indefinite-lived intangible asset removed from a single unit of account would be based on the historical carrying amount of the indefinite-lived intangible asset when it was initially included in the single unit of account, less a pro-rata allocation of the impairment loss previously recorded. Given the lack of prescriptive guidance, other reasonable and supportable methodologies may be applied.
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