cpe accounting 95403 (1 slide) (2)

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Tangible and Intangible Asset Impairment, Part 1

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Major Topic / Concept Index

Course Section Slide Number Major Topics/Concepts

Goodwill 13–69

• Initial valuation, creation, and measurement

• Testing for impairment over time

• ASC 350-20 and ASU 2011-08

• Treatment under IAS 36

Intangibles With Finite Useful Lives 70–116

• Initial creation and valuation

• Amortization over time

• Testing for impairment

• Disposals

• Internal use software

• Website development costs

Overview 5–12 • Assets covered

• Guidance addressed

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Learning Objective / Program Content

Learning Objective: During the first of this two-part course, participants will gain a practical

overview of the wide variety of rules affecting goodwill, tangible assets, and intangible assets.

After completing this session you will be able to:

• Outline the general rules to account for asset impairment to both tangible and intangible

assets.

• Explain the two-step process for testing goodwill for impairment as outlined in ASC 350 and the

change to ASC 350 created by ASU 2011-08.

• Summarize the financial accounting treatment and related impairment testing for general

intangibles other than goodwill, including internal-use software and website development.

Program Prerequisites: 2 to 3 years of Public or Corporate accounting experience

Program Level: Intermediate

Program Content: No matter whether assets are tangible (including buildings and equipment) or

intangible (such as copyrights, computer software, and customer lists), complex rules are in place

to account for asset impairment. Compliance today means knowing the process for testing

goodwill for impairment, how ASU 2011-08 changed ASC 350, financial statement presentation

guidelines, and disclosure requirements. Additionally, participants also will understand how U.S.

GAAP, IFRS, and convergence efforts are impacting the treatment of goodwill impairment.

Advance Preparation: None Field of Study: Accounting

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4


Overview

Goodwill

Intangibles With Finite Useful Lives

Intangibles Without Finite Useful Lives

Tangible Assets

Applying EITF 03-13: Applying Paragraph 42 (ASC 205)

Resources

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5


Overview

Goodwill



Tangible Assets


Resources

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6


Overview

I. Overview

A. Impairment

Impairment is the condition that exists when the carrying value of

an asset (goodwill, other general intangibles, or long-lived tangible

assets) exceeds its fair value.

B. Goodwill

An asset representing the future economic benefit arising from

other assets acquired in a business combination or an acquisition

by a not-for-profit entity that are not individually identified or

separately reported.

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Overview

C. Other General Intangibles

1. Assets (not including financial assets) that lack physical

substance.

2. The term "intangible assets" is used to refer to intangible

assets other than goodwill.

3. Internal-use software and website development costs are

covered in this section.

7

EXAMPLE

Intangible assets can include (but are not limited to) customer lists, copyrights, trademarks,

or patents.

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Overview

D. Long-lived Tangible Assets

1. Property, plant, and equipment consist of long-lived tangible

assets used to create and distribute an entity's products or

services, including:

a. Land and land improvements

b. Buildings

c. Machinery and equipment

d. Furniture and fixtures

2. Long-lived tangible assets exclude:

a. Goodwill

b. Intangible assets not being amortized that are to be held and

used

c. Servicing assets

d. Financial instruments

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Overview

e. Unproved oil and gas properties that are being accounted

for using the successful-efforts method of accounting or oil

and gas properties that are being accounted for using the

full-cost method of accounting

f. Certain industry-specific long-lived assets

E. Guidance to Consider

1. Topic 350, Intangibles—Goodwill and Other

2. ASU 2011-08, Intangibles—Goodwill and Other (Topic 350)

3. IAS 36 Impairment of Assets

4. Topic 360 Property, Plant, and Equipment

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KEY POINT

The guidance referenced above may be accessed directly through the FASB's website

using codification designations, or the IFRS website.

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F. Illustrative List of Identifiable Intangible Assets

1. Agreements and contracts

2. Rights

3. Permits

4. Patents

5. Copyrights

6. Trademarks and trade names

7. Franchises

8. Computer software and licenses

9. Technical drawings and manuals

10. Customer lists

11. Unpatented technology

12. Research and development

13. Noncompetes

Overview

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(continued)

14. Assembled workforce

15. Distribution channels

16. Technical expertise

17. Training and recruiting

18. Product/service support

19. Advertising programs

20. Geographic presence

21. Technological know-how

22. Government relations

Overview

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Overview

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Guidance to Consider

Asset Category ASC Guidance Impairment Rules

Goodwill ASC 350-20 ASC 350-35

General Intangibles Other than

Goodwill ASC 350-30 ASC 360-10-35-17 to 35-35

Internal-Use Software ASC 350-40 ASC 360-10-35-17 to 35-35

Website Development Costs ASC 350-50 ASC 360-10-35-17 to 35-35

Tangible Assets ASC 360-10 ASC 360-10-35-17 to 35-35

Intangibles Overall ASC 350-10 —

Tangible Assets Overall ASC 360-10 —

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Overview

Goodwill



Tangible Assets


Resources

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Goodwill

II. Goodwill

A. Initial Valuation, Creation, and Measurement

1. Goodwill arises out of a business combination under the

acquisition method of accounting.

a. Definition

An asset representing the future economic benefit arising

from other assets acquired in a business combination or

an acquisition by a not-for-profit entity that are not

individually identified or separately reported.

b. Date

Acquirer shall recognize goodwill as of the acquisition

date.1

14

1ASC 350-20-20 and ASC 805-30-30-1: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

c. Measurement

Goodwill is the excess of the aggregate of 1), 2), and 3) over

4) below.

1) Consideration transferred (usually acquisition date fair

value);

2) Fair value of non-controlling interest in the acquiree; and

3) Acquisition date fair value of acquirer's previously held

equity interest in the acquiree (for combinations

achieved in stages), over

4) Net amounts of identifiable assets acquired and

liabilities assumed.1

15

KEY POINT

The difference between an entity's purchase price and the fair value of identifiable

assets and liabilities assumed is goodwill.

1ASC 805-30-30-1: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

B. Topic 350 Goodwill Intangibles and Other

1. Tax Treatment of Goodwill

Amortized on a straight-line basis over 15 years.

2. Accounting Treatment of Goodwill

a. Not amortized.

b. Tested for impairment at the reporting unit level.1,2

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1IRC Sec. 197. The website of the Internal Revenue Service. Accessed January 2012. http://www.irs.gov 2ASC 350-20-35-1: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

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Example of Tax vs. Accounting Treatment of Goodwill1,2

Year Tax Basis Accounting Basis

Year 0 $150,000 $150,000

Year 1 $140,000 $150,000

Year 5 $100,000 $150,000

Year 10*

*Impairment of $20k $50,000 $130,000

Year 15 $0 $130,000

1IRC Sec. 197. The website of the Internal Revenue Service. Accessed January 2012. http://www.irs.gov 2ASC 350-20-35-1: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

3. Subsequent Measurement of Goodwill

a. Impairment occurs when the carrying amount of an asset

(in this case, goodwill) exceeds its fair value.1

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EXAMPLE

Goodwill may be impaired for a number of reasons, including major changes in a company's

personnel, unexpected competition, or changes in the regulatory environment.


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Goodwill

b. Total Impairment

1) The obsolete intangible assets and related accumulated

amortization are removed entirely from financial

statements and a loss is recognized for the difference.

2) The loss appears in the income statement as a

component of income from continuing operations before

taxes.1

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JOURNAL ENTRY EXAMPLE

DR: Amortization

DR: Loss

CR: Intangible Asset

1ASC 350-20-35: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

c. Partial Impairment

1) The asset should be written down to a new cost basis

through the amortization account, and the remaining

cost is then amortized over the remaining useful life.1

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JOURNAL ENTRY EXAMPLE

DR: Loss

CR: Accumulated amortization

1ASC 350-20-35: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

4. Impairment Measurement

a. Impairment is the condition that exists when the carrying

value of goodwill exceeds its implied fair value.

1) "Implied fair value" is the estimate of fair value

because the actual value of goodwill cannot be

measured directly.

2) A specific methodology is used to determine an

amount that achieves a reasonable estimate of the

value of goodwill for purposes of measuring an

impairment loss.1

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Goodwill

5. Two-Step Impairment Testing Process

a. Step 1

Compare the carrying value of goodwill to its implied

fair value.

1) Key Question

How does an entity determine fair value?

b. Step 2

Measure the amount of impairment loss.

1) Key Question

What accounting issues arise after the impairment?1

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1ASC 350-20-35-4 through 35-8 and ASC 350-20-35-9 through 35-13: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

c. Step 1

Compare the carrying value of goodwill to its implied

fair value.

1) "Fair value" of a reporting unit refers to a price that

would be received to sell the unit as a whole in an

orderly transaction between market participants at the

measurement date.

2) The best evidence of fair value is quoted market

prices in active markets (although these may not be

representative of the reporting unit as a whole).1

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Goodwill

3) Quoted market prices need not be the sole

measurement basis since synergies may arise from

control over another entity.

4) Valuation techniques based on multiples of earnings

or revenue (or similar performance measurement)

may be used if that technique is consistent with the

objectives of measuring fair value.1

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KEY POINT

A technique would be "consistent with the objectives of measuring fair value" when the

fair value of an entity with comparable operations and economic characteristics is

observable and the relevant multiples of the comparing entity are known (ASC 350-20-

35-24).

1ASC 350-20-35-22 through 35-24: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

5) The entity must decide whether the estimate of fair

value should be based on an assumption that the

reporting unit could be bought or sold in a taxable or

nontaxable transaction.

a) Judgment depends on facts and circumstances

and must be evaluated carefully on a case-by-

case basis.1

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Goodwill

b) The entity must consider the following three

criteria in making such a determination:

i. Whether the assumption is consistent with

those that market participants would

incorporate into their estimates of fair value;

ii. The feasibility of the assumed structure; and

iii. Whether the assumed structure results in the

highest economic value to the seller for the

reporting unit, including considerations of

related tax implications.1

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Goodwill

c) In determining the feasibility of a nontaxable

structure, the entity shall consider:

i. Whether the reporting unit could be sold in a

nontaxable transaction; and

ii. Whether there are any income tax laws or

regulations or other corporate governance

requirements that could limit an entity's ability

to treat the sale of the unit as a nontaxable

transaction.1

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28


Goodwill

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6) If the carrying value of a reporting unit is greater than

zero and its fair value exceeds its carrying amount, the

goodwill of the reporting unit is considered not

impaired; thus the second step of the impairment test

is unnecessary.1

KEY POINT

In many cases, Step 2 may be unnecessary if fair value exceeds carrying amount.

1ASC 350-20-35-6 (transitional guidance after December 15, 2011 is 350-10-65-2) : FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

d. Step 2

Measure the amount of impairment loss.

1) Loss Amount and Limitation

a) The loss is equal to the excess of carrying amount

over implied fair value of the reporting unit.

b) The impairment loss recognized cannot exceed

the carrying amount.1

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1ASC 350-20-35-9 and ASC 350-20-35-11: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

2) New Accounting Basis

After the loss is recognized, the new (adjusted)

carrying amount shall be its new accounting basis.

3) Subsequent Reversals

Subsequent reversal of a previously recognized

goodwill impairment loss is prohibited once the

measurement of that loss is recognized.1

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KEY POINT

Key question: What accounting issues arise after the impairment?

• The new (post-impairment) carrying amount is the new accounting basis, and

• Impairment cannot be "undone" once the loss is recognized.

1ASC 350-20-35-12 and 1ASC 350-20-35-13: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

e. When to Test Goodwill for Impairment

1) Annually

a) A test may be performed at any point during the

fiscal year (although the test should be performed

at the same time each year).

b) Different reporting units may test for impairment at

different points during the year.

2) Between Annual Tests if Certain "Triggering

Events" Occur

a) "Triggering events" are events or circumstances

that would more likely than not reduce the fair

value of a reporting unit below its carrying value.1

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Goodwill

b) Examples of Triggering Events

i. A significant adverse change in legal factors

or the business climate.

ii. An adverse action or assessment by a

regulator.

iii. Unanticipated competition.

iv. A loss of key personnel.

v. A more-likely-than-not expectation that a

reporting unit or a significant portion of a

reporting unit will be sold or otherwise

disposed of.1

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Goodwill

vi. The testing for recoverability of a significant

asset group within the reporting unit.

vii. Recognition of a goodwill impairment loss in

the financial statements of a subsidiary that is

a component of a reporting unit.

viii. Also, after a portion of goodwill has been

allocated to a business that has been

disposed of.1

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1ASC 350-20-35-30 and ASC 350-20-35-57 (for point h): FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

f. Fair Value Carry-Forward from Year to Year

1) Previously, entities were permitted to carry forward a

detailed determination of the fair value of a reporting

unit from one year to the next if all the following criteria

were met:

a) Assets and liabilities that make up the reporting

unit did not change significantly since the most

recent fair value determination.

b) The most recent fair value determination resulted

in an amount that exceeded the carrying value by

a substantial margin.

c) The likelihood that a current fair value

determination would be less than the current

carrying value of the reporting unit was remote.1

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35


Goodwill

2) Since the issuance of ASU 2011-08 (discussed

shortly), an entity is no longer permitted to carry

forward its detailed fair value determination from year

to year.1

35

ALERT

"Step 0" under ASU 2011-08 replaces an entity's fair value determination

carry-forward from year to year.

1"Intangibles—Goodwill and Other (Topic 350)." Financial Accounting Standards Board of the Financial Accounting Foundation. No. 2011-08, September 2011. Accessed

January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168

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Goodwill

g. Reporting Unit Considerations

1) Definition

a) The level of reporting at which goodwill is tested

for impairment.

b) A reporting unit is an operating segment or one

level below an operating segment (a component).

c) A component of an operating segment is a

reporting unit if:

i. the component constitutes a business or

nonprofit activity for which discrete financial

information is available, and

ii. segment management regularly reviews the

operating results of that component.1

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37


Goodwill

2) Aggregating Reporting Units

Two or more components of an operating segment

shall be aggregated into a single reporting unit if the

components have similar economic characteristics.1

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EXAMPLE

Corporation XYZ has five operating segments, A through E, each of which constitutes a

business. Discrete financial information is available for each of the five segments, and

management regularly reviews the operating results of each segment. Segments A and C

have similar economic characteristics. They share assets and other resources, and they

benefit from common research and development projects.

Corporation XYZ may aggregate Segments A and C for purposes of goodwill

impairment testing.


38


Goodwill

3) Assigning Goodwill to Reporting Units

For the purpose of testing goodwill for impairment,

acquired assets and assumed liabilities shall be

assigned to a reporting unit as of the acquisition

date if:

a) the asset will be employed in or the liability relates

to the operations of the unit, and

b) the asset or liability will be considered in

determining the fair value of the reporting unit.1

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EXAMPLE

• Environmental liabilities that relate to an existing facility

• A pension obligation


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Goodwill

4) Allocating Goodwill to Reporting Units

Some assets and liabilities may relate to multiple

reporting units, in which case they should be allocated

using a reasonable and supportable methodology that

is applied consistently.

5) Carrying Value of a Reporting Unit

In determining the carrying value of a reporting unit,

deferred income taxes should be considered

regardless of whether the fair value is determined

using a taxable or nontaxable transaction

assumption.1

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Goodwill

6) Reorganizing Reporting Units

When reporting units are reorganized, assets and

liabilities may be reassigned in the affected reporting

units using the same guidance.

7) Disposing of Reporting Units

a) When a reporting unit is to be disposed of in its

entirety, goodwill of that reporting unit shall be

included in the carrying amount of the reporting

unit in determining the gain or loss on disposal.1

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41


Goodwill

b) When a portion of a reporting unit that constitutes

a business is to be disposed of, goodwill

associated with that business shall be included in

the carrying amount of the business in

determining the gain or loss on disposal.

i. The amount of goodwill to be included shall

be based on relative fair values of the

business to be disposed of and the portion of

the reporting unit that will be retained.1

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EXAMPLE (ASC 350-20-35-53)

If a business is being sold for $100 and the fair value of the reporting unit excluding the

business being sold is $300, 25 percent of the goodwill residing in the reporting unit would be

included in the carrying amount of the business to be sold.


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EXAMPLE: ASSETS TO BE HELD AND USED

There is a significant adverse change in the business climate of one of the industries in

which Company X operates. The company believes this change could impair some of its

long-lived assets. The company groups assets at the lowest level with identifiable cash

flows and tests them for impairment.

Facts: Current conditions have reduced the fair value of inventory, which has a carrying

value of $175,000. Using applicable GAAP (lower of cost or market rule), Company X

determines that the inventory's fair value is $150,000.

A nonreporting entity's long-lived assets consist of A, B, C, D (primary assets), and E.

Asset D has a remaining life of eight years. Assume future cash flows for the next eight

years are $1,700,000 with an additional $75,000 realized from disposing of the group at

the end of the period. The group's carrying value is $2,200,000 and its fair value is

$1,450,000. In addition, Asset B's fair value is $160,000.

Goodwill

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EXAMPLE (continued)

Approach:

1. The company must make inventory adjustments before testing for long-lived asset

impairment. It adjusts inventory down by $25,000 and reports this amount in the

income statement.

2. Asset D, the primary asset, has a remaining life of eight years. This determines the

period over which the company will estimate cash flows to see if the carrying amount

is recoverable.

3. Since the $1,775,000 cumulative undiscounted cash flow is less than the $2,200,000

carrying amount and the group's fair value is $1,450,000—also less than the carrying

amount—the company should recognize a $750,000 impairment loss in income from

continuing operations before taxes on its income statement. On the next slide, the

$750,000 impairment loss is allocated pro rata to assets A, B, C, D, and E.

Goodwill

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EXAMPLE (continued)

Exhibit 1: Asset Carrying Values and Remaining Lives

Long-lived Asset Carrying Value Remaining Life

Asset A $100,000 6 years

Asset B $200,000 10 years

Asset C $600,000 9 years

Asset D (primary asset) $950,000 8 years

Asset E $350,000 12 years

Total $2,200,000

Goodwill

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EXAMPLE (continued)

Exhibit 2: Loss Allocation

Long-lived

Asset

Adjusted

Carrying Value

Pro Rata

Allocation

Factor

Allocation of

Impairment

Loss

NEW Adjusted

Carrying Value

Asset A $100,000 .05

Asset B $200,000 .09

Asset C $600,000 .27

Asset D

(primary asset) $950,000 .43

Asset E $350,000 .16

Total $2,200,000 1.00 $750,000

Goodwill

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46


EXAMPLE (continued)

Exhibit 2: Loss Allocation

Long-lived

Asset

Adjusted

Carrying Value

Pro Rata

Allocation

Factor

Allocation of

Impairment

Loss

NEW Adjusted

Carrying Value

Asset A $100,000 .05 $ (37,500) $62,500

Asset B $200,000 .09 $ (67,500) $132,500

Asset C $600,000 .27 $ (202,500) $397,500

Asset D

(primary asset) $950,000 .43 $ (322,500) $627,500

Asset E $350,000 .16 $ (120,000) $230,000

Total $2,200,000 1.00 $750,000 $1,450,000

Goodwill

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EXAMPLE (continued)

Approach:

The impairment loss allocated to a long-lived asset should not reduce its carrying value

below fair value. Since Asset B's fair value is $160,000, the pro rata allocation reduces

its carrying value below fair value (carrying value is $132,500, which is $27,500 below

fair value). The company needs to increase B's fair value by $27,500 to $160,000 and

allocate an additional $27,500 loss pro rata to assets A, C, D, and E. The next slide

shows the assets' new cost basis.

Goodwill

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Goodwill

EXAMPLE (continued)

Exhibit 3: New Cost Basis of Assets

Long-lived

Asset

Adjusted

Carrying Value

Pro Rata

Allocation

Factor

Allocation of

Impairment

Loss

NEW Adjusted

Carrying Value

Asset A $62,500 .05

Asset C $397,500 .30

Asset D

(primary asset) $627,500 .48

Asset E $230,000 .17

Subtotal $1,317,500 1.00 $ (27,500)

Asset B $132,500 + $27,500

Total $1,450,000 -0-

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Goodwill

EXAMPLE (continued)

Exhibit 3: New Cost Basis of Assets

Long-lived

Asset

Adjusted

Carrying Value

Pro Rata

Allocation

Factor

Allocation of

Impairment

Loss

NEW Adjusted

Carrying Value

Asset A $62,500 .05 $ (1,375) $61,125

Asset C $397,500 .30 $ (8,250) $389,250

Asset D

(primary asset) $627,500 .48 $ (13,200) $614,300

Asset E $230,000 .17 $ (4,675) $225,325

Subtotal $1,317,500 1.00 $ (27,500) $1,290,000

Asset B $132,500 + $27,500 $160,000

Total $1,450,000 -0- $1,450,000

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Goodwill

h. Financial Statement Disclosures

1) The aggregate amount of goodwill shall be presented

as a separate line item in the statement of financial

position.

2) The aggregate amount of goodwill impairment losses

shall be presented as a separate line item in the

income statement from continued operations.

3) A goodwill impairment loss associated with a

discontinued operation shall be included, net of taxes,

within the results of discontinued operations.1

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51


Goodwill

i. Changes in the carrying amount of goodwill during the period

shall be disclosed, showing separately:

1) The gross amount and accumulated impairment loss at

the beginning of the period.

2) Additional goodwill recognized during the period.

3) Adjustments resulting from the subsequent recognition of

deferred tax assets.

4) Goodwill in a disposal group classified as held for sale.

5) Impairment losses recognized during the period.

6) Net exchange differences arising during the period.

7) Any other changes in the carrying amount during

the period.

8) The gross amount and accumulated impairment loss at

the end of the period.1

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52


Goodwill

j. For each goodwill impairment loss recognized, all of the

following must be disclosed in the notes:

1) A description of the facts and circumstances leading to

impairment;

2) The amount of the impairment loss and the method of

determining fair value of the associated reporting

unit; and

3) If a recognized impairment loss is an estimate that has

not yet been finalized, that fact and the reasons

therefore and, in subsequent periods, the nature and

amount of any significant adjustments made to the

initial estimate.1

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© 2013 DeVry / Becker Educational Development Corp. All rights reserved. 53

EXAMPLE (ASC 350-20-55-24)1

Theta entity has two reporting units with goodwill—Technology and Communications—which

are also reportable segments.

Note C: Goodwill

The changes in the carrying amount of goodwill for the year ended December 31, 2003, are

as follows.

($000s) Technology

Segment

Communications

Segment Total

Balance as of January 1,

2003:

Goodwill $1,413 $1,104 $2,517

Accumulated

impairment losses 0 (200) (200)

Total $1,413 $904 $2,317

Goodwill


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EXAMPLE (ASC 350-20-55-24)1 (continued)

($000s) Technology

Segment

Communications

Segment Total

Goodwill acquired during

the year 189 115 304

Impairment losses 0 (46) (46)

Goodwill written off related

to sale of business unit (484) 0 (484)

Balance as of December

31, 2003

Goodwill $1,118 $1,219 $2,337

Accumulated

impairment losses 0 (246) (246)

Total $1,118 $973 $2,091

Goodwill


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EXAMPLE (ASC 350-20-55-24)1 (continued)

The Communications segment is tested for impairment in the third quarter, after the

annual forecasting process. Due to an increase in competition in the Texas and

Louisiana cable industry, operating profits and cash flows were lower than expected in

the fourth quarter of 20X2 and the first and second quarters of 20X3. Based on this

trend, the earnings forecast for the next five years was revised. In September 20X3, a

goodwill impairment loss of $46 was recognized in the Communications reporting unit.

The fair value of that reporting unit was estimated using the expected present value of

future cash flows.

Goodwill


56


Goodwill

C. Accounting Standards Update 2011-08, Intangibles Goodwill and

Other (Topic 350), also known as "Step 0"

1. When Issued and Effective

a. Issued September 2011.

b. Effective for annual and interim goodwill impairment tests

performed for fiscal years beginning after December 15,

2011.

c. Early adoption is permitted.1

2. Reasons for Issuance

a. To simplify the annual goodwill impairment test.

b. To reduce the cost and complexity of the test.

c. To expand upon examples of events and circumstances an

entity should consider.1

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57


Goodwill

3. Entities Subject to ASU 2011-08

a. Public and nonpublic entities with goodwill in financial

statements.

b. Optional

Entities may perform the two-step analysis in ASC 350-20

without ASU 2011-08 if they wish.1

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KEY POINT

ASU 2011-08 creates an optional "Step 0" for entities to use before performing Steps 1

and 2 in Topic 350 to test for impairment.

58


Goodwill

4. Effect of Step 0

a. Prior to a two-step impairment test, an entity may first

assess qualitative factors to determine if goodwill

impairment is "more likely than not."

b. Step 0 is not specifically required but represents an option.

c. Reminder

ASC 350-20 requires an annual quantitative test for

impairment by comparing fair value to carrying value

without considering qualitative factors.1

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Goodwill

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Events and Circumstances to Consider1

Events and circumstances Examples

Macroeconomic conditions

• A deterioration in general economic conditions

• Limitations on accessing capital

• Fluctuations in foreign exchange rates

• Other developments in equity and credit markets

Industry and market considerations

• A deterioration in the environment in which an

entity operates or in the market for an entity's

products or services

• An increased competitive environment

• A decline in market-dependent multiples or metrics

• A regulatory or political development

1ASC 350-20-35-3C: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

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Cost factors • Increases in raw materials, labor, or other costs that

have a negative effect on earnings and cash flows

Overall financial performance

• Negative or declining cash flows

• A decline in actual or planned revenue or earnings

compared with actual and projected results of

relevant prior periods

Entity-specific events

• Changes in management, key personnel, strategy,

or customers

• Contemplation of bankruptcy

• Litigation


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Goodwill

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Reporting unit-specific events

• Change in the composition or carrying amount of

net assets

• A more-likely-than-not expectation of selling or

disposing of all or a portion of a reporting unit

• The testing for recoverability of a significant asset

group within a reporting unit

• Recognition of a goodwill impairment loss in the

financial statements of a subsidiary that is a

component of a reporting unit

Sustained decrease in share price • Consider in both absolute terms and relative to an

entity's peers


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Goodwill

d. Comparison Issues to Consider

The entity should consider the extent to which each of the

adverse events or circumstances identified could affect the

comparison of a reporting unit's fair value with its carrying

amount.1

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1ASC 350-20-35-3F: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

5. Other Step 0 Considerations

a. Priority (weighting) of Events and Circumstances

Entities should place more weight on events and

circumstances that most affect a reporting unit's fair value

or the carrying amount of its net assets.

b. Mitigating Events or Circumstances

Entities should consider positive or mitigating events and

circumstances as well.1

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1ASC 350-20-35-3F: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

c. Recent Fair Value Estimates

If an entity has a recent fair value calculation of the

reporting unit it should consider the difference between it

and the reporting unit's carrying value to determine if the

more-likely-than-not threshold is met.

d. "More-Likely-Than-Not" Threshold

Defined as a greater than 50 percent likelihood that

impairment has occurred.1

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1ASC 350-20-35-3G: FASB Accounting Standards Codification, https://asc.fasb.org/

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Goodwill

6. Result of Step 0

a. Actual calculation of fair value isn't necessary under ASU

2011-08 unless it is more likely than not that there is

impairment of the reporting unit.

b. An entity is no longer permitted to carry forward its

detailed calculation of a reporting unit's fair value from the

prior year.

c. ASU 2011-08 does not change current guidance for testing

other identified intangible assets for impairment (such as

patents, copyrights, customer lists, trade names, brands,

and internally developed software).1

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66


Goodwill

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ALERT1

Even though ASU 2011-08 does not change the current impairment testing

guidance for other general intangibles, the FASB chairman added a separate

project to the Board's short-term agenda to explore alternative approaches to

the manner in which an entity tests other indefinite-lived intangible assets for

impairment (9/7/11). Stay tuned.



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Goodwill

D. International Accounting Standard 36 Impairment of Assets

1. IAS Requirement

a. Requires an entity to test for impairment using a single-

step quantitative test performed at the level of a cash-

generating unit (or group of cash-generating units).

b. IFRS for small- and medium-sized entities requires

goodwill to be amortized over its useful life or 10 years if a

reasonable estimate of the useful life cannot be made.

c. Small- and medium-sized entities are also required to

assess on the basis of qualitative factors whether there

is any indication goodwill may be impaired at each

reporting date.1,2

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January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168 2"IAS 36 Impairment of Assets." The website of the IFRS. As issued January 1, 2009. Accessed January 2012. http://www.ifrs.org/NR/rdonlyres/715CDD70-96A4-4D37-

B53A-A0E4E61FB828/0/IAS36.pdf

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Goodwill

2. Measurement of Loss

a. Entities compare the carrying amount of a cash-generating

unit with its recoverable amount.

b. The excess carrying amount over recoverable amount is

the impairment loss.

3. Timing of IAS Requirement

a. Annually.

b. Between annual tests if there is an indication of

impairment.1,2

68


January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168 2"IAS 36 Impairment of Assets." The website of the IFRS. As issued January 1, 2009. Accessed January 2012. http://www.ifrs.org/NR/rdonlyres/715CDD70-96A4-4D37-

B53A-A0E4E61FB828/0/IAS36.pdf

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Goodwill

4. Convergence

a. ASU 2011-08 does not advance convergence of IAS 36

and Topic 350.

b. The Board deemed such convergence efforts were

beyond the scope of the update and best addressed

more broadly.1

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70


Overview

Goodwill



Tangible Assets


Resources

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III. Intangibles With Finite Useful Lives

A. Initial Creation and Valuation

1. Definition

a. A general intangible asset (other than goodwill) that is

created or acquired either individually or with a group of

assets.

b. The cost of a group of assets acquired in a transaction

other than a business combination shall be allocated to

assets acquired based on relative fair values.

c. Costs of internally developing, maintaining, or restoring

intangible assets shall be recognized as expensed as

incurred.1

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1ASC 350-30-25-1 through 25-3 and ASC 805-50-30-3: FASB Accounting Standards Codification, https://asc.fasb.org/

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B. Accounting Treatment

1. Subject to Amortization

a. An intangible asset is subject to amortization over its

useful life.

b. Assets subject to amortization shall be reviewed for

impairment in accordance with the Impairment or Disposal

of Long-Lived Assets Subsections of Subtopic 360-10

(specifically 360-10-35-17 through 35-35).

2. "Useful Life"

a. The period over which the asset is expected to contribute

directly or indirectly to future cash flows of that entity.1,2

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1ASC 350-30-35-1, 35-2, and 35-14: FASB Accounting Standards Codification, https://asc.fasb.org/ 2ASC 360-10-35-17 through 35-35: FASB Accounting Standards Codification, https://asc.fasb.org/

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b. An analysis of an asset's useful life shall be based on:

1) The expected use of the asset by the entity.

2) The expected useful life of another asset to which the

useful life of the intangible asset may relate.

3) Any legal, regulatory, or contractual provisions that

may limit the useful life.

4) The entity's own historical experience in renewing or

extending similar arrangements, consistent with the

intended use of the asset by the entity, regardless of

whether those arrangements have explicit renewal or

extension provisions.1

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5) The effects of obsolescence, demand, competition,

and other economic factors (such as the stability of the

industry, known technical advances, or legislative

actions).

6) The level of maintenance expenditures required to

obtain the expected future cash flows from the asset.1

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NOTE

An entity must consider all of the aforementioned factors, with no factor being

more presumptive than the other.


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3. Determination of Life for Intangibles

a. Factors to consider in determining life include:

1) The ability to renew/extend without substantial cost.

2) The ability to renew without substantial modification.

3) Legal, regulatory, or contractual provisions.

4) Economic factors such as obsolescence and demand.

5) The expected use of the intangible.

b. If management determines that an intangible has an

indefinite life and will not be amortized, management

should document the basis of the conclusion and be

prepared for scrutiny from the SEC.

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4. Summary of ASU 2010-28

a. Effective Date

1) December 15, 2010, for public entities.

2) December 15, 2011, for nonpublic entities.

b. Effect

1) Under "normal" circumstances, an entity must test

goodwill for impairment annually, or at interim points

during the year if certain events and circumstances

exist.

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2) Under ASU 2010-28, an additional interim test is

required if:

a) the carrying value of a reporting unit is zero or

negative, and

b) the entity determines that it is more likely than not

that the goodwill of one or more of its reporting units

is impaired.

3) If both conditions are met, entities must perform Step 2,

i.e., calculate the amount of goodwill impairment.

4) Entities are not required to perform the impairment

calculation for all reporting units. Rather, entities must

only perform Step 2 at this interim point of the reporting

units affected by the two conditions above (zero or

negative carrying value and more likely than not that

goodwill is impaired).

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c. Recognition of Impairment loss

1) In the period of adoption, any goodwill impairment

should be recorded as a cumulative-effect adjustment

to beginning retained earnings.

2) Subsequent goodwill impairment losses should be

reported as a separate line item in the income

statement from continued operations.

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5. Impairment Recognition and Impairment

a. Impairment of the intangible asset occurs if the carrying

amount:

1) is not recoverable, and

2) exceeds the fair value of the intangible asset.1,2

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1ASC 350-30-35-14: FASB Accounting Standards Codification, https://asc.fasb.org/ 2ASC 360-10-35-17: FASB Accounting Standards Codification, https://asc.fasb.org/

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b. "Not Recoverable"

The carrying amount is "not recoverable" if it exceeds the

sum of the undiscounted cash flows expected to result

from the use and eventual disposition of the asset.

1) Future Cash Flows

a) Estimates of future cash flows used to test the

recoverability of an intangible asset shall include

only the future cash flows (cash inflows less

associated cash outflows) that are directly

associated with and that are expected to arise as

a direct result of the use and eventual disposal of

the asset.1

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b) Estimates of future cash flows used to test the

recoverability of an intangible asset shall

incorporate the entity's own assumptions about its

use of the asset and shall consider all available

evidence.

c) Estimates of future cash flows used to test the

recoverability of an intangible shall be made for

the remaining useful life of the asset.

2) When an intangible asset is tested for recoverability, it

also may be necessary to review the amortization

periods as required under Topic 350.1

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1ASC 360-10-35-30, 35-31 and 35-22: FASB Accounting Standards Codification, https://asc.fasb.org/

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c. Exceeds Fair Value

The impairment loss shall be measured as the amount by

which the carrying amount of the long-lived asset exceeds

its fair value.1

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d. Assessment of future cash flows at the date the asset is

tested for recoverability, whether the asset is:

1) In Use or Substantially Complete

a) Estimates of future cash flows shall be based on

the existing service potential of the asset.

b) Service potential encompasses the asset's

remaining useful life and cash-flow-generating

capacity.

c) Estimates shall include cash flows associated with

future expenditures necessary to maintain the

existing service potential of the asset.

d) Estimates shall exclude cash flows associated with

future capital expenditures that would increase the

service potential of an intangible asset.1

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2) Under Development

a) Estimates of future cash flows shall be based on

the expected service potential of the asset when

development is substantially complete.

b) Estimates shall include cash flows associated with

all future expenditures necessary to develop an

intangible asset.

c) The capitalization period ends when the asset

is substantially complete and ready for its

intended use.1

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1ASC 360-10-35-34 and ASC 835-20: FASB Accounting Standards Codification, https://asc.fasb.org/

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e. The carrying amount of the intangible asset being tested

for impairment shall include amounts of capitalized asset

retirement costs.

1) However, estimated future cash flows related to the

liability of an asset retirement obligation shall be

excluded from both of the following:

a) Undiscounted cash flows used to test the asset for

recoverability, and

b) Discounted cash flows used to measure the

asset's fair value.1

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f. The impairment loss shall be measured as the amount by

which the carrying amount of the intangible asset exceeds

its fair value.

g. Loss Recognized on the Income Statement

The resulting impairment loss for an intangible asset is

treated as a change in accounting estimate rather than a

change in accounting principles.1,2

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1ASC 360-10-35-17: FASB Accounting Standards Codification, https://asc.fasb.org/ 2ASC 350-30-35-11: FASB Accounting Standards Codification, https://asc.fasb.org/

87


Step #1

• Tangible Assets

• Identifiable

Intangible Assets

(Finite Life)

Step #2

• Step #1 "Negative

Results"

&

• Intangible Assets

(Indefinite Life)


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Assets held for disposal

Assets held for use

FV / PV net cash flows < Net carrying value > Impairment loss + Cost of disposal

Total Impairment Loss

1. Write asset down 2. No depreciation taken 3. Restoration is permitted

FV / PV net cash flows < Net carrying value > Impairment loss

1. Write asset down 2. Depreciate new cost 3. Restoration not permitted

Undiscounted future net cash flows

< Net carrying value >

Negative Positive

Impairment No impairment loss

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h. New Accounting Basis

After an impairment loss is recognized, the adjusted

carrying amount of the intangible asset shall be its new

accounting basis.

i. Subsequent Reversals


impairment loss is prohibited.1

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C. Disposals

1. Sales

a. Costs to sell are the incremental direct costs to transact a

sale; that is, the costs that result directly from and are

essential to a sale transaction that would not have been

incurred had the decision to sell not been made.

b. These costs exclude the expected future losses

associated with the operations of an asset while it is held

for sale.

c. A loss shall be recognized for any initial or subsequent

write-down to fair value less cost to sell.

d. A gain may be recognized for any subsequent increase in

fair value less cost to sell, but not in excess of the

cumulative loss previously recognized.1

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90

e. An asset is deemed held for sale in the period in which all

the following criteria are met:

1) Management commits to a plan to sell the asset.

2) The asset is available for immediate sale in its present

condition subject to terms that are usual and

customary for sales of such assets.

3) An active program to locate a buyer and other actions

required to complete the plan of sale have been

initiated.

4) It is probable that the sale of the asset will be

completed within one year.1


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5) The asset is being actively marketed at a price that is

reasonable in relation to its fair value.

6) Actions required to complete the plan indicate that it is

unlikely that significant changes to the plan will be

made or that the plan will be withdrawn.1

EXAMPLE (ASC 360-10-55-45)

An entity commits to a plan to sell an intangible asset that represents a significant portion of its

regulated operations. The sale will require regulatory approval, which could extend the period

required to complete the sale beyond one year. If a firm purchase commitment is probable

within one year, the conditions to allow an exception to the one-year requirement would be

met.


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2. Disposals Other Than Sales

a. Includes disposal by abandonment, exchange for a similar

asset, or a distribution to owners in a spin-off.

b. Asset previously classified as held and used will continue

to be classified as held and used until it is disposed of.

c. Abandoned

Asset to be abandoned is considered disposed of when it

ceases to be used. If entity commits to a plan to abandon

an asset before the end of its previously estimated useful

life, depreciation estimates should be revised to reflect the

shortened useful life.1

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1ASC 360-10-35-47 and 35-48: FASB Accounting Standards Codification, https://asc.fasb.org/

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d. Exchanged

Asset to be exchanged or distributed to owners in a spin-

off is considered disposed of when it is exchanged or

distributed.

e. Used

In addition to impairment losses recognized when the

asset is held and used, an impairment loss, if any, should

be recognized when the asset is disposed of, if the

carrying amount exceeds its fair value.1

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94

D. Financial Statement Presentation and Disclosures

1. Assets Held and Used

a. Impairment losses recognized from assets classified as

held and used shall be included as income from continuing

operations before taxes in the income statement of a

business entity.

b. A subtotal, such as income from operations (if it is

presented), shall include the loss.

2. Assets Held for Sale

a. An asset classified as held for sale shall be presented

separately in the statement of financial position.1

1ASC 360-10-45-4, ASC 360-10-45-14, and ASC 205-20-45-10: FASB Accounting Standards Codification, https://asc.fasb.org/

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95

E. Internal-Use Software Development

1. Definition

a. Internal-use software has both of the following

characteristics:

1) The software is acquired, internally developed, or

modified solely to meet the entity's internal needs.

2) During the software's development or modification, no

substantive plan exists or is being developed to

market the software externally.1


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96

EXAMPLE (ASC 350-40-55-1)1

Software for Internal Use

An entity is in the process of developing an accounts receivable system. The software

specifications meet the entity's internal needs and the entity had no marketing plan

before or during the development of the software. In addition, the entity has sold no

internal-use software in the past. Two years after completion of the project, the entity

decides to market the product to recoup some or all of the costs.


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97

EXAMPLE (ASC 350-40-55-2)1

Software That Is Not for Internal Use

A software entity develops an operating system for sale and for internal use. Though the

specifications of the software meet the entity's internal needs, the entity had a marketing

plan before the project was complete. In addition, the entity has a history of selling

software that it also uses internally and the plan has a reasonable possibility of being

implemented.


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98

2. Recognition

a. Three Stages of Development and Operation

1) Preliminary Project Stage

Internal and external costs shall be expensed as they

are incurred.1


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99

2) Application Development Stage

a) Internal and external costs shall be capitalized.

b) Costs to develop or obtain software that allows for

access or conversion of old data by new systems

shall also be capitalized.

c) Training costs are not internal-use software

development costs and (if incurred) shall be

expensed.

d) Data conversion costs (with limited exceptions)

shall be expensed as incurred.1


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100

3) Post Implementation-Operation Stage

Internal and external training costs and maintenance

costs shall be expensed as incurred.1

EXAMPLE

An entity properly accounts for costs associated with internal-use software developed for

the entity's use and not marketed externally in 20X3. In 20X5 management hires a

consultant to perform general maintenance on the software to bring it up-to-date with

updated operating systems. In 20X6 management hires the same consultant to lead a

training session for all employees to enhance the staff's understanding of the software

and its functionalities.

The maintenance and training expenses in 20X5 and 20X6, respectively, should be

expensed by the entity as the costs are incurred.


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101

b. Upgrades and Enhancements

1) Costs of specific upgrades and enhancements to

internal-use computer software may be capitalized if it

is probable that those expenditures will result in

additional functionality.

2) Internal costs for maintenance shall be expensed as

incurred.

3) Entities that cannot separate internal costs on a

reasonably cost-effective basis between maintenance

and minor upgrades or enhancements shall expense

such costs as incurred.1


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102

3. Measurement

a. Capitalized Costs

1) Capitalization shall occur when both of the following

occur:

a) The preliminary project stage is complete.

b) Management authorizes and commits to funding a

computer software project and it is probable that

the project will be completed and that the software

will be used to perform the function intended.

2) When it is no longer probable that the project will be

completed and placed in service, no further costs shall

be capitalized and impairment guidance shall be

applied to existing balances.1


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103

3) Capitalization shall cease no later than the point at

which a computer software project is substantially

complete and ready for its intended use; that is, after

all substantial testing is complete.

4) When an entity replaces existing software with new

software, unamortized costs of the old software shall

be expensed when the new software is ready for its

intended use.1


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104

5) Capitalized Costs Include

a) External direct costs of materials and services:

i. Fees paid to third parties for development

services;

ii. Costs incurred to obtain software from third

parties; and

iii. Travel expenses of employees in their duties

directly associated with developing software.

b) Payroll and payroll-related costs

c) Interest costs incurred while developing internal-

use software.1


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105

6) General and administrative costs and overhead costs

shall not be capitalized as costs of internal-use

software.

b. Purchase Price Considerations

1) If the purchase price of software includes multiple

elements, such as training for software, maintenance

fees for routine maintenance work, data conversion

costs, and rights to future upgrades, entities shall

allocate the purchase price among all the individual

elements.1


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106

4. Impairment

a. An impairment loss is recognized if the carrying amount of

the internal-use software is (a) not recoverable and

(b) exceeds fair value.

b. Assets should be grouped at the lowest level for which

there are identifiable cash flows that are largely

independent of cash flows from other groups of assets.1

NOTE

These are the same rules as those for intangible assets with finite lives.


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107

c. Grouping assets is applicable when the cost may not be

recoverable. For example:

1) Internal-use software is not expected to provide

substantive service potential.

2) A significant change occurs in the extent or manner in

which software is expected to be used.

3) A significant change is made or will be made to the

software program.

4) The cost of developing or modifying the software

significantly exceeds original expectations.1


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108

d. New Accounting Basis

After an impairment loss is recognized, the adjusted

carrying amount of the intangible asset shall be its new

accounting basis.

e. Subsequent Reversals


impairment loss is prohibited.1


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109

5. Presentation and Disclosure

a. Disclosure rules for intangible assets subject to finite

lives apply.

b. Impairment losses recognized from assets classified as

held and used shall be included as income from continuing

operations before taxes in the income statement of a

business entity.

c. A subtotal, such as income from operations (if it is

presented), shall include the loss.

d. No additional disclosures are required for internal-use

software assets impairment.1


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F. Website Development Costs

1. Definition

Costs incurred associated with the development of a website,

including costs during the planning, development, and

operating stages and costs to acquire or develop content

and graphics.

2. Five Stages of Development and Operation

a. Planning Stage

Regardless of whether the website planning activities

specifically relate to software, all costs incurred in the

planning stage should be expensed as incurred.1

1ASC 350-50-15-2 and 15-3 and ASC 350-50-55-2 through 55-9: FASB Accounting Standards Codification, https://asc.fasb.org/

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1ASC 350-50-55-2 through 55-9 and ASC 350-50-15-3: FASB Accounting Standards Codification, https://asc.fasb.org/

EXAMPLE

Costs included in this discussion (ASC 350-50-55-2 through 55-9):

• Software development costs

• Web hosting costs

• Costs to obtain and register an Internet domain name

• Graphics development costs

Costs excluded from this discussion (ASC 350-50-15-3):

• The cost of hardware

• Acquisitions of servers and related hardware infrastructure

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112

b. Website Application and Infrastructure

Development Stage

1) Assumption

Any software developed during this stage is for the

entity's internal needs and no plan exists or is being

developed to market the software externally.

2) Generally, all costs relating to software used to

operate a website are treated as discussed previously

in the section on internal-use software development.

3) Web hosting costs are expensed over the period

of benefit.1


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4) Costs to purchase or develop software tools shall be

capitalized unless the tools are used in research and

development and meet one of the following:

a) They do not have any alternative future uses.

b) They are internally developed and represent a

pilot project or are being used in a specific

research and development project.

5) Costs to obtain and register an Internet domain name

shall be capitalized.1

1ASC 350-50-25-3 through 25-7 and ASC 350-30-25: FASB Accounting Standards Codification, https://asc.fasb.org/

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114

c. Graphics Development Stage

1) For accounting purposes, graphics are considered to

be a component of software, and thus shall be treated

under the previously discussed section on internal-use

software development.

2) Modifications to graphics after a website is launched

shall be evaluated to determine whether the

modification represents enhancements or

maintenance of the website.1


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d. Content Development Stage

1) Costs to input content into a website shall be

expensed as incurred.

2) Software used to integrate a database with a website

shall be capitalized (as under the internal-use

software development rules).

3) Data conversion costs shall be expensed as incurred.1

1ASC 350-50-25-10 through 25-13, ASC 350-40-25-2 through 25-4 and ASC 350-40-25-5: FASB Accounting Standards Codification, https://asc.fasb.org/

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e. Operating Stage

1) Costs to operate a website shall be expensed as

incurred.

2) Costs that involve providing additional functions or

features shall be accounted for as, in effect, new software

(governed by internal-use software rules).

a) Costs related to upgrades and enhancements shall

be capitalized if it is probable that they will result in

added functionality.

b) Costs that cannot be split between maintenance and

relatively minor upgrades or enhancements shall be

expensed.

3) Costs to register the website with search engines

represent advertising costs and shall be expensed as

incurred.1

1ASC 350-50-25-14 through 25-17, and ASC 350-40-25-10: FASB Accounting Standards Codification, https://asc.fasb.org/

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Overview

Goodwill



Tangible Assets


Resources

117

Tangible and Intangible Asset Impairment, Part 2

118


Thank You!

118

cpe accounting 95403 (1 slide) (2)

Documents

impairment impairment

overview goodwill intangibles

testing goodwill

intangible asset impairment

related impairment testing

intangible assets

general intangibles

time asc