FASB PROPOSES CHANGES TO INTANGIBLE ASSET IMPAIRMENT RULES
By Brian Gibney, CPA, PSA, CIRA, Partner

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In an exposure draft issued on January 25, 2012, the Financial Accounting Standards Board (FASB) proposed an amendment to existing generally accepted accounting principles (GAAP) related to testing impairment of intangible assets with indefinite lives.

STAKEHOLDERS IMPACTING YOUR ORGANIZATION WHO MAY BE INTERESTED IN THIS ALERT INCLUDE:

WHAT IS THE ISSUE?

Under existing GAAP an entity with indefinite-lived intangible assets (that is intangible assets that are not written off over a period of time through a charge to operations) are required to perform an annual impairment analysis to determine if the carrying value of the assets are recoverable. If the analysis determines that the carrying value is not recoverable, the intangible assets must be written down to their recoverable value.

Many entities indicated that this impairment analysis requirement is both complicated and costly. Furthermore the current requirement to test impairment of indefinite-lived intangibles annually is at odds with the changes instituted by the FASB last year with respect to testing goodwill impairment.

WHAT ENTITIES ARE AFFECTED AND HOW?

The proposal would affect all entities, both public and private, that have intangible assets deemed to be of indefinite life.

The change the FASB has proposed would give entities the option to first consider qualitative factors to determine whether there are indications that it is more likely than not that an indefinitelived asset has been impaired. Then,

• If, based on the assessment of those qualitative factors, the entity concludes that it is not more likely than not that an asset has been impaired, the entity need not perform any further procedures to determine if the carrying value of the asset is recoverable.
• If the analysis of the qualitative factors indicates that it is more likely than not that a particular long-lived intangible asset has been impaired, then the entity would proceed with the existing impairment analysis.

An entity can elect to perform the existing impairment analysis without assessing qualitative factors (as under current GAAP). Furthermore, an entity can change its election to assess qualitative factors or proceed directly to an impairment analysis annually on each long-lived intangible asset.

Examples of the types of qualitative factors to be considered include:

• General economic conditions
• Specific industry and market conditions in which the entity operates
• Cost factors (raw materials, labor, etc.)
• The entity’s overall financial performance
• Entity specific events including changes in management, key personnel or customers.
• Other events affecting a reporting unit such as a change in the carrying amount of its net
assets, an expectation of selling all or a portion of a reporting unit, or the impairment of goodwill in the financial statements of a subsidiary that forms a part of the reporting unit.
• Sustained decrease in share price compared to an entity’s peers (in either absolute and relative terms).

WHAT IS THE EFFECTIVE DATE?

This is an exposure draft open to public comment through April 24, 2012. The proposal indicates an effective date for fiscal years beginning after June 15, 2012, with early adoption permitted.

Copies of the exposure draft can be obtained from the FASB website. Entities are encouraged to review the exposure draft and respond to the FASB as appropriate. One important note: If enacted as written, the change in U.S. GAAP would increase the divergence with IFRS.