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Testing Indefinite-Lived Intangible Assets for Impairment

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, which gave an entity the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount.  If, after considering all relevant events and circumstances, an entity determines that it is NOT more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test will not be necessary.

On January 25, 2012, the FASB issued a proposed corollary to this guidance, which would allow companies to perform a qualitative assessment to determine whether impairment testing of indefinite-lived intangible assets is necessary.  An entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not (again, a likelihood of more than 50%) that the asset is impaired. 

As in ASU No. 2011-08, an entity may first perform a qualitative assessment to determine whether it is necessary to calculate the fair value of an indefinite-lived intangible asset.  An entity has an unconditional option to bypass that qualitative assessment for any indefinite-lived intangible asset and proceed directly to performing the existing quantitative impairment test.  An entity may resume performing the qualitative assessment in any subsequent period.

The proposed guidance gives five examples of events and circumstances an entity should consider in its qualitative assessment:

  1. Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets.
  2. Industry and market conditions such as a deterioration in the environment in which the entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development.
  3. Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flow.
  4. Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods.
  5. Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation.

The proposed changes would be effective for annual and interim impairment tests performed for fiscal years beginning after June 15, 2012, and early adoption would be permitted.

Comments on the proposed guidance are due by April 24, 2012, and a final standard is expected in the second quarter of 2012.