With the continued increased focus on fair value measurement, companies must understand the nuances of impairment testing for different types of balance sheet assets to ensure timely and accurate reporting of financial statement information to stakeholders.
Order of testing for assets held and used
- Test indefinite-lived intangible assets under ASC 350.
- Then test long-lived assets (asset group) under ASC 360, if trigger event occurred.
- Finally, test goodwill of a reporting unit (RU) under ASC 350.
Impairment charges are recorded after each test above before moving to the subsequent test.
Key items related to impairment testing
- The sole purpose of assigning and tracking goodwill (and other assets and liabilities) by RU is for goodwill impairment testing.
- Goodwill recognized for each business combination must be assigned to one or more RUs.
- Once the goodwill is assigned to RUs, there is no requirement to keep track of goodwill by acquisition.
- Entities must keep track of total goodwill by RU.
- Goodwill can only be included in an ASC 360 asset group if the asset group is a RU or includes a RU.
When is an impairment test performed under ASC 360?
Finite-lived, long-lived assets are tested for impairment when a triggering event occurs. Triggering events include but are not limited to the following:
- Significant decrease in the market price of a long-lived asset (asset group)
- Significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition
- Significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator
- Accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group)
- Current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of the long-lived asset (asset group)
- Current expectation that, more likely than not (> 50%), a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
When is an impairment test performed under ASC 350?
Non-amortizable intangibles are tested for impairment at least annually or when a triggering event occurs. Triggering events include but are not limited to the following:
- Macroeconomic conditions: deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, etc.
- Industry and market considerations: deterioration in the entity’s environment, increased competition, change in the market for an entity’s products or services, etc.
- Cost factors: increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows, etc.
- Overall financial performance: 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, etc.
- Other relevant entity-specific events: contemplation of bankruptcy, litigation, changes in management, key personnel, strategy/customers, etc.
- Events affecting a RU: change in the composition or carrying amount of its net assets, an expectation of divestiture, etc.
- Sustained decrease in share price: consider in both absolute terms and relative to peers.
It should be noted that there are other events not captured within these lists that may be considered as impairment triggers. Companies should be mindful of, and ready to identify, potential impairment indicators as they may occur at any time.
MorganFranklin has the experience and expertise to assist both public and private companies with impairment testing related to goodwill, other non-amortizable intangible assets, and long-lived assets. We work with management to ensure a smooth and efficient process through project completion and provide an analysis that will stand up to auditor review and the scrutiny of third-party regulators. Learn more about MorganFranklin’s technical accounting and financial reporting service line.