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 8-1 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 8-1
Indicators to consider when determining whether to combine indefinite-lived intangible assets for impairment testing
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
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?
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. The AICPA IPR&D Guide (IPR&D 2.21
) provides factors to consider in making this determination, as outlined below.
- The nature and costs of the activities to develop the project are not substantially the same.
- The risks of further development of the project are not substantially the same.
- The amount and timing of benefits expected from the developed assets and the expected economic life of those assets are not substantially the same.
- Based on historical experience and current intent, once completed, the product (if 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.
- 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 of further development of the IPR&D project are substantially the same.
- The amount and timing of benefits expected 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?
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.