Intangible Asset Impairment



Limited-Life Impairment

Limited-life intangibles are amortized throughout the useful life of the intangible asset using either the units of activity or the straight-line method.

Learning Objectives

Summarize how to calculate the impairment on a limited life asset

Key Takeaways

Key Points

  • Limited-life intangibles are intangible assets with a limited useful life, such as copyrights, patents and trademarks.
  • Intangible assets are non-monetary assets that cannot be seen, touched or physically measured. Intangible assets are created through time and effort, and are identifiable as separate assets.
  • Non-physical or “intangible” assets are amortized to reflect the change in their value due to use, expiration or obsolescence over time.

Key Terms

  • intangible: Incapable of being perceived by the senses; incorporeal.
  • amortization: The distribution of the cost of an intangible asset, such as an intellectual property right, over the projected useful life of the asset.
  • straight-line method of amortization: debt paid off with regular, equal sized payments
  • asset: Items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable; securities and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (as opposed to liabilities).
  • straight-line method: the company charges the same amount to depreciation each year over that period until the value shown for the asset has reduced from the original cost to the salvage value

Limited-Life Impairment

Intangible assets are non-monetary assets that cannot be seen, touched, or physically measured. Intangible assets are created through time and effort, and are identifiable as separate assets. They are classified into categories: either purchased vs. internally created intangible assets; and limited-life or indefinite -life intangible assets.

The two primary forms of intangibles are legal intangibles, which includes trade secrets, copyrights, patents, and trademarks (also referred to as Intellectual Property) and competitive intangibles, which includes knowledge activities, collaboration activities, leverage activities, and structural activities. Limited-life intangibles are intangible assets with a limited useful life, such as copyrights, patents and trademarks

Intangible assets are amortized to reflect their consumption, expiry, obsolescence or other decline in value as a result of use or the passage of time, process which is similar to the deprecation process for tangible assets. Intangible assets can have either a limited or an indefinite useful life. Intangible assets with a limited-life are amortized on a straight-line basis over their economic or legal life, based on whichever is shorter. Examples of intangible assets with a limited-life include copyrights and patents. Only intangible assets with an indefinite life are reassessed each year for impairment.

Limited-life intangibles are systemically amortized throughout the useful life of the intangible asset using either units of activity method or straight-line method. The amortization amount is equal to the difference between the intangible asset cost and the asset residual value. That calculated amount is credited to either the appropriate intangible asset account or accumulated amortization account.

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Amortization & depreciation in the accounting cycle: A bond’s discount amount must be amortized over the term of the bond.

Reversal of Impairment Loss

When an intangible asset’s impairment reverses and value is regained, the increase in value is recorded as a gain on the income statement and reduction to accumulated impairment loss on the balance sheet, up to the amount of impairment loss recorded in prior periods. Increases in value in excess of prior impairment loss are debited directly to the asset and credited to a revaluation reserve account in the equity section of the balance sheet. Asset amortization for future periods should be adjusted due to the increase in value.

Indefinite-Life Impairment

Because Indefinite-life tangibles continue to generate cash they can’t be amortized; they must be evaluated for impairment yearly.

Learning Objectives

Summarize how to impair indefinite life intangibles

Key Takeaways

Key Points

  • Examples of Indefinite -life intangibles are goodwill, trademarks, and perpetual franchises.
  • Instead of amortization, indefinite-life assets are evaluated for impairment yearly.
  • The Impairment cost is calculated as: Carrying value – Recoverable amount.

Key Terms

  • intangible: Incapable of being perceived by the senses; incorporeal.
  • impairment: When the carrying value exceeds the fair value.
  • Indefinite: Without limit; forever, or until further notice; not definite

Indefinite-Life Impairment

In accounting, intangible assets are defined as non-monetary assets that cannot be seen, touched or physically measured.

Under US GAAP, intangible assets are classified into: Purchased vs. internally created intangibles, and Limited-life vs. indefinite-life intangibles.

Since intangible assets are typically expensed according to their respective life expectancy, it is important to understand the difference between limited-life intangible assets and indefinite-life intangible assets. Intangible assets with identifiable useful lives (limited-life) include copyrights and patents. These items are amortized on a straight-line basis over their economic or legal life, whichever is shorter.

Some examples of indefinite-life intangibles are goodwill, trademarks, and perpetual franchises. Indefinite-life tangibles are not amortized because there is no foreseeable limit to the cash flows generated by those intangible assets. Instead of amortization, indefinite-life assets are evaluated for impairment yearly. If an impairment has occurred, then a loss must be recognized.

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The purpose of the accounting cycle: Properly reporting items is important to the accounting cycle.

An Impairment cost must be included under expenses when the carrying value of a non-current asset exceeds the recoverable amount. The Impairment cost is calculated as:

Carrying value – Recoverable amount

The carrying amount is defined as the value of the asset as displayed on the balance sheet. The recoverable amount is the higher of either the asset’s future value for the company or the amount it can be sold for, minus any transaction cost.

Intangibles can also be classified as: legal intangibles or competitive intangibles. Legal intangibles are also known as Intellectual Property. They include trade secrets, copyrights, patents, and trademarks. Competitive intangibles comprise knowledge activities, know-how, collaboration activities, leverage activities, and structural activities.

Reversal of Impairment Loss

When an intangible asset’s impairment reverses and value is regained, the increase in value is recorded as a gain on the income statement and reduction to accumulated impairment loss on the balance sheet, up to the amount of impairment loss recorded in prior periods. Increases in value in excess of prior impairment loss is debited directly to the asset and credited to a revaluation reserve account in the equity section of the balance sheet. According to IAS 36, reversal of impairment losses for goodwill are not allowed.

Goodwill Impairment

Goodwill is an intangible asset that is tested yearly for impairment; it is not amortized.

Learning Objectives

Explain how to calculate impairment on goodwill

Key Takeaways

Key Points

  • Goodwill is the value of an asset that is considered intangible but has a quantifiable “prudent value” in a business.
  • A firm’s reputation with its clients is an example of goodwill.
  • If the fair value is less than carrying value (impaired), the goodwill value will need to be reduced so that the fair value is equal to the carrying value.

Key Terms

  • asset: Items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable; securities and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (as opposed to liabilities).
  • impairment: When the carrying value exceeds the fair value.
  • goodwill: The value of an asset that is considered intangible but has a quantifiable “value” in a business. For example, a reputation the firm enjoys with its clients.

Business Goodwill

In accounting, goodwill is the value of an asset that is considered intangible but has a quantifiable “prudent value” in a business. For example, goodwill could be the reputation the firm enjoys with its clients. While goodwill is technically an intangible asset, it is usually listed as a separate item on a company’s balance sheet.

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The Accounting Cycle: Correctly reporting intangible assets is important to the accounting cycle.

Accounting for Goodwill

Instead of deducting the value of goodwill annually over a period of maximal 40 years ( amortization ), companies are now required to determine the fair value of the reporting units, using the present value of future cash flow, and compare it to their carrying value ( book value of assets + goodwill – liabilities. ).

If the fair value is less than carrying value (impaired), the goodwill value will need to be reduced so that the fair value is equal to carrying value. The impairment loss is reported as a separate line item on the income statement, and new adjusted value of goodwill is reported in the balance sheet.

Impairment of Goodwill

If there is an indication that the book value of goodwill is greater than the recoverable value of net assets, an assessment of the recoverable value is made, and if the suspicion is correct, then an impairment expense is recorded. Goodwill’s value on the balance sheet is reported at net of accumulated impairment loss, a contra asset account; the current impairment loss is reported on the income statement.

An impairment cost must be included under expenses when the carrying value of a non-current asset on the balance sheet exceeds the asset’s market value subtracted by any transaction costs (recoverable amount). The impairment cost is calculated as follows: carrying value – recoverable amount.

The carrying amount is defined as the value of the asset as it is displayed on the balance sheet. The recoverable amount is the higher of either the asset’s future value for the company or the amount it can be sold for, minus any transaction cost.

According IAS 36, reversal of goodwill impairment losses are not allowed.