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Under generally accepted accounting principles (GAAP), the acquirer in the purchase of a business is required to allocate the purchase price to the identified assets acquired as part of the transaction. After the initial purchase price allocation, GAAP provides guidance from the subsequent measurement. The accounting for intangible asset impairment is outlined under ASC 350 – Intangibles – Goodwill and Other.
ASC 350 indicates that goodwill shall be tested at least annually for impairment, with impairment being the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
The goodwill impairment test is a comprehensive and multi-step process that begins with an optional qualitative assessment. Many factors can lead to an impairment (or possible impairment) including but not necessarily limited to a material deterioration in general economic conditions, a deterioration in the subject company’s industry, lackluster financial performance (actual or relative to plan), and other entity-specific events such as major changes in management, strategy, or customers. A detailed review of the impairment test process may be found here.
GAAP outlines separate rules for the subsequent measurement of finite-lived intangible assets. Such assets — those that are subject to amortization — shall be reviewed for impairment in accordance with the impairment or disposal of long-lived assets subsections of ASC 360. As such, an impairment loss shall be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value.
In summary, the accounting rules relative to the impairment of intangible assets are complex and require multi-step analyses. In addition to initial assessments, supportable valuations of the subject company (reporting unit) and certain intangible assets are highly important. MPI has the expertise to provide you with valuation guidance regarding both the initial assessment and the valuations. Our analyses are thorough and well supported and will satisfy the rigors of the audit process. More importantly, we will save you time and enable a much smoother overall financial statement audit.
