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Tangible and Intangible Asset Impairment, Part 1

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Major Topic / Concept Index


Course Section Slide Number Major Topics/Concepts Initial valuation, creation, and measurement Testing for impairment over time ASC 350-20 and ASU 2011-08 Treatment under IAS 36 Initial creation and valuation Amortization over time Intangibles With Finite Useful Lives 70116 Testing for impairment Disposals Internal use software Website development costs

Goodwill

1369

Overview

512

Assets covered Guidance addressed

2013 DeVry / Becker Educational Development Corp. All rights reserved.

Learning Objective / Program Content


Learning Objective: During the first of this two-part course, participants will gain a practical overview of the wide variety of rules affecting goodwill, tangible assets, and intangible assets. After completing this session you will be able to: Outline the general rules to account for asset impairment to both tangible and intangible assets. Explain the two-step process for testing goodwill for impairment as outlined in ASC 350 and the change to ASC 350 created by ASU 2011-08. Summarize the financial accounting treatment and related impairment testing for general intangibles other than goodwill, including internal-use software and website development.

Program Prerequisites: 2 to 3 years of Public or Corporate accounting experience


Program Level: Intermediate Program Content: No matter whether assets are tangible (including buildings and equipment) or intangible (such as copyrights, computer software, and customer lists), complex rules are in place to account for asset impairment. Compliance today means knowing the process for testing goodwill for impairment, how ASU 2011-08 changed ASC 350, financial statement presentation guidelines, and disclosure requirements. Additionally, participants also will understand how U.S. GAAP, IFRS, and convergence efforts are impacting the treatment of goodwill impairment. Advance Preparation: None Field of Study: Accounting
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2013 DeVry / Becker Educational Development Corp. All rights reserved.

Overview Goodwill Intangibles With Finite Useful Lives Intangibles Without Finite Useful Lives Tangible Assets Applying EITF 03-13: Applying Paragraph 42 (ASC 205) Resources

2013 DeVry / Becker Educational Development Corp. All rights reserved.

Overview Goodwill Intangibles With Finite Useful Lives Intangibles Without Finite Useful Lives Tangible Assets Applying EITF 03-13: Applying Paragraph 42 (ASC 205) Resources

2013 DeVry / Becker Educational Development Corp. All rights reserved.

Overview
I. Overview A. Impairment

Impairment is the condition that exists when the carrying value of an asset (goodwill, other general intangibles, or long-lived tangible assets) exceeds its fair value.
B. Goodwill An asset representing the future economic benefit arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified or separately reported.

2013 DeVry / Becker Educational Development Corp. All rights reserved.

Overview
C. Other General Intangibles 1. 2. 3. Assets (not including financial assets) that lack physical substance. The term "intangible assets" is used to refer to intangible assets other than goodwill. Internal-use software and website development costs are covered in this section.
EXAMPLE

Intangible assets can include (but are not limited to) customer lists, copyrights, trademarks, or patents.

2013 DeVry / Becker Educational Development Corp. All rights reserved.

Overview
D. Long-lived Tangible Assets 1. Property, plant, and equipment consist of long-lived tangible assets used to create and distribute an entity's products or services, including: a. b. c. d. 2. a. b. c. d. Land and land improvements Buildings Machinery and equipment Furniture and fixtures Goodwill Intangible assets not being amortized that are to be held and used Servicing assets Financial instruments
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Long-lived tangible assets exclude:

2013 DeVry / Becker Educational Development Corp. All rights reserved.

Overview
e. Unproved oil and gas properties that are being accounted for using the successful-efforts method of accounting or oil and gas properties that are being accounted for using the full-cost method of accounting Certain industry-specific long-lived assets

f. 1. 2. 3. 4.

E. Guidance to Consider Topic 350, IntangiblesGoodwill and Other ASU 2011-08, IntangiblesGoodwill and Other (Topic 350) IAS 36 Impairment of Assets Topic 360 Property, Plant, and Equipment
KEY POINT The guidance referenced above may be accessed directly through the FASB's website using codification designations, or the IFRS website.

2013 DeVry / Becker Educational Development Corp. All rights reserved.

Overview
F. Illustrative List of Identifiable Intangible Assets 1. 2. 3. 4. 5. 6. 7. 8. 9. Agreements and contracts Rights Permits Patents Copyrights Trademarks and trade names Franchises Computer software and licenses Technical drawings and manuals

10. Customer lists 11. Unpatented technology 12. Research and development 13. Noncompetes
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Overview
(continued)

14. Assembled workforce 15. Distribution channels 16. Technical expertise 17. Training and recruiting 18. Product/service support 19. Advertising programs 20. Geographic presence 21. Technological know-how 22. Government relations

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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Overview
Guidance to Consider Asset Category Goodwill General Intangibles Other than Goodwill Internal-Use Software Website Development Costs Tangible Assets Intangibles Overall Tangible Assets Overall ASC Guidance ASC 350-20 ASC 350-30 ASC 350-40 ASC 350-50 ASC 360-10 ASC 350-10 ASC 360-10 Impairment Rules ASC 350-35 ASC 360-10-35-17 to 35-35 ASC 360-10-35-17 to 35-35 ASC 360-10-35-17 to 35-35 ASC 360-10-35-17 to 35-35

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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Overview Goodwill Intangibles With Finite Useful Lives Intangibles Without Finite Useful Lives Tangible Assets Applying EITF 03-13: Applying Paragraph 42 (ASC 205) Resources

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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II. Goodwill A. Initial Valuation, Creation, and Measurement

1.

Goodwill arises out of a business combination under the acquisition method of accounting.
a. Definition An asset representing the future economic benefit arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified or separately reported. b. Date Acquirer shall recognize goodwill as of the acquisition date.1

1ASC

350-20-20 and ASC 805-30-30-1: FASB Accounting Standards Codification, https://asc.fasb.org/

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c. Measurement Goodwill is the excess of the aggregate of 1), 2), and 3) over 4) below. 1) 2) 3) Consideration transferred (usually acquisition date fair value); Fair value of non-controlling interest in the acquiree; and Acquisition date fair value of acquirer's previously held equity interest in the acquiree (for combinations achieved in stages), over Net amounts of identifiable assets acquired and liabilities assumed.1
KEY POINT The difference between an entity's purchase price and the fair value of identifiable assets and liabilities assumed is goodwill.
1ASC

4)

805-30-30-1: FASB Accounting Standards Codification, https://asc.fasb.org/

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B. Topic 350 Goodwill Intangibles and Other 1. 2. Tax Treatment of Goodwill

Amortized on a straight-line basis over 15 years.


Accounting Treatment of Goodwill a. b. Not amortized. Tested for impairment at the reporting unit level.1,2

1IRC

2ASC

Sec. 197. The website of the Internal Revenue Service. Accessed January 2012. http://www.irs.gov 350-20-35-1: FASB Accounting Standards Codification, https://asc.fasb.org/

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Example of Tax vs. Accounting Treatment of Goodwill1,2 Year Year 0 Year 1 Year 5 Year 10* *Impairment of $20k Year 15 Tax Basis $150,000 $140,000 $100,000 $50,000 $0 Accounting Basis $150,000 $150,000 $150,000 $130,000 $130,000

1IRC

2ASC

Sec. 197. The website of the Internal Revenue Service. Accessed January 2012. http://www.irs.gov 350-20-35-1: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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3. Subsequent Measurement of Goodwill a. Impairment occurs when the carrying amount of an asset (in this case, goodwill) exceeds its fair value.1
EXAMPLE Goodwill may be impaired for a number of reasons, including major changes in a company's personnel, unexpected competition, or changes in the regulatory environment.

1ASC

350-20-35-2: FASB Accounting Standards Codification, https://asc.fasb.org/

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b. Total Impairment 1) The obsolete intangible assets and related accumulated amortization are removed entirely from financial statements and a loss is recognized for the difference. The loss appears in the income statement as a component of income from continuing operations before taxes.1
JOURNAL ENTRY EXAMPLE DR: Amortization DR: Loss CR: Intangible Asset

2)

1ASC

350-20-35: FASB Accounting Standards Codification, https://asc.fasb.org/

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c. Partial Impairment 1) The asset should be written down to a new cost basis through the amortization account, and the remaining cost is then amortized over the remaining useful life.1
JOURNAL ENTRY EXAMPLE DR: Loss CR: Accumulated amortization

1ASC

350-20-35: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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4. Impairment Measurement a. Impairment is the condition that exists when the carrying value of goodwill exceeds its implied fair value. 1) "Implied fair value" is the estimate of fair value because the actual value of goodwill cannot be measured directly. 2) A specific methodology is used to determine an amount that achieves a reasonable estimate of the value of goodwill for purposes of measuring an impairment loss.1

1ASC

350-20-35-2: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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5. Two-Step Impairment Testing Process a. Step 1

Compare the carrying value of goodwill to its implied fair value.


1) Key Question How does an entity determine fair value? b. Step 2 Measure the amount of impairment loss. 1) Key Question

What accounting issues arise after the impairment?1

1ASC

350-20-35-4 through 35-8 and ASC 350-20-35-9 through 35-13: FASB Accounting Standards Codification, https://asc.fasb.org/

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c. Step 1 Compare the carrying value of goodwill to its implied fair value. 1) "Fair value" of a reporting unit refers to a price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. The best evidence of fair value is quoted market prices in active markets (although these may not be representative of the reporting unit as a whole).1

2)

1ASC

350-20-35-22: FASB Accounting Standards Codification, https://asc.fasb.org/

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3) Quoted market prices need not be the sole measurement basis since synergies may arise from control over another entity. Valuation techniques based on multiples of earnings or revenue (or similar performance measurement) may be used if that technique is consistent with the objectives of measuring fair value.1
KEY POINT A technique would be "consistent with the objectives of measuring fair value" when the fair value of an entity with comparable operations and economic characteristics is observable and the relevant multiples of the comparing entity are known (ASC 350-2035-24).

4)

1ASC

350-20-35-22 through 35-24: FASB Accounting Standards Codification, https://asc.fasb.org/

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5) The entity must decide whether the estimate of fair value should be based on an assumption that the reporting unit could be bought or sold in a taxable or nontaxable transaction. a) Judgment depends on facts and circumstances and must be evaluated carefully on a case-bycase basis.1

1ASC

350-20-35-25: FASB Accounting Standards Codification, https://asc.fasb.org/

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b) The entity must consider the following three criteria in making such a determination:

i.

Whether the assumption is consistent with those that market participants would incorporate into their estimates of fair value;
The feasibility of the assumed structure; and

ii.

iii. Whether the assumed structure results in the highest economic value to the seller for the reporting unit, including considerations of related tax implications.1

1ASC

350-20-35-26: FASB Accounting Standards Codification, https://asc.fasb.org/

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c) In determining the feasibility of a nontaxable structure, the entity shall consider:

i.
ii.

Whether the reporting unit could be sold in a nontaxable transaction; and


Whether there are any income tax laws or regulations or other corporate governance requirements that could limit an entity's ability to treat the sale of the unit as a nontaxable transaction.1

1ASC

350-20-35-27: FASB Accounting Standards Codification, https://asc.fasb.org/

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6) If the carrying value of a reporting unit is greater than zero and its fair value exceeds its carrying amount, the goodwill of the reporting unit is considered not impaired; thus the second step of the impairment test is unnecessary.1
KEY POINT
In many cases, Step 2 may be unnecessary if fair value exceeds carrying amount.

1ASC

350-20-35-6 (transitional guidance after December 15, 2011 is 350-10-65-2) : FASB Accounting Standards Codification, https://asc.fasb.org/

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d. Step 2 Measure the amount of impairment loss.

1)

Loss Amount and Limitation


a) b) The loss is equal to the excess of carrying amount over implied fair value of the reporting unit. The impairment loss recognized cannot exceed the carrying amount.1

1ASC

350-20-35-9 and ASC 350-20-35-11: FASB Accounting Standards Codification, https://asc.fasb.org/

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2) New Accounting Basis After the loss is recognized, the new (adjusted) carrying amount shall be its new accounting basis. 3) Subsequent Reversals Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is recognized.1
KEY POINT

Key question: What accounting issues arise after the impairment?


The new (post-impairment) carrying amount is the new accounting basis, and Impairment cannot be "undone" once the loss is recognized.

1ASC

350-20-35-12 and 1ASC 350-20-35-13: FASB Accounting Standards Codification, https://asc.fasb.org/

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e. When to Test Goodwill for Impairment 1) Annually

a)

A test may be performed at any point during the fiscal year (although the test should be performed at the same time each year).
Different reporting units may test for impairment at different points during the year.

b) 2)

Between Annual Tests if Certain "Triggering Events" Occur a) "Triggering events" are events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying value.1

1ASC

350-20-35-28 and ASC 350-20-35-30: FASB Accounting Standards Codification, https://asc.fasb.org/

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b) Examples of Triggering Events i. ii. A significant adverse change in legal factors or the business climate. An adverse action or assessment by a regulator.

iii. Unanticipated competition. iv. A loss of key personnel. v. A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of.1

1ASC

350-20-35-30: FASB Accounting Standards Codification, https://asc.fasb.org/

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vi. The testing for recoverability of a significant asset group within the reporting unit.

vii. Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
viii. Also, after a portion of goodwill has been allocated to a business that has been disposed of.1

1ASC

350-20-35-30 and ASC 350-20-35-57 (for point h): FASB Accounting Standards Codification, https://asc.fasb.org/

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f. Fair Value Carry-Forward from Year to Year 1) Previously, entities were permitted to carry forward a detailed determination of the fair value of a reporting unit from one year to the next if all the following criteria were met: a) Assets and liabilities that make up the reporting unit did not change significantly since the most recent fair value determination. The most recent fair value determination resulted in an amount that exceeded the carrying value by a substantial margin. The likelihood that a current fair value determination would be less than the current carrying value of the reporting unit was remote.1
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b)

c)

1ASC

350-20-35-29: FASB Accounting Standards Codification, https://asc.fasb.org/

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2) Since the issuance of ASU 2011-08 (discussed shortly), an entity is no longer permitted to carry forward its detailed fair value determination from year to year.1
ALERT

"Step 0" under ASU 2011-08 replaces an entity's fair value determination carry-forward from year to year.

1"IntangiblesGoodwill

and Other (Topic 350)." Financial Accounting Standards Board of the Financial Accounting Foundation. No. 2011-08, September 2011. Accessed January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168

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g. Reporting Unit Considerations 1) Definition

a)
b) c)

The level of reporting at which goodwill is tested for impairment.


A reporting unit is an operating segment or one level below an operating segment (a component). A component of an operating segment is a reporting unit if: i. the component constitutes a business or nonprofit activity for which discrete financial information is available, and segment management regularly reviews the operating results of that component.1

ii.

1ASC

350-20-35-34: FASB Accounting Standards Codification, https://asc.fasb.org/

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2) Aggregating Reporting Units Two or more components of an operating segment shall be aggregated into a single reporting unit if the components have similar economic characteristics.1
EXAMPLE Corporation XYZ has five operating segments, A through E, each of which constitutes a business. Discrete financial information is available for each of the five segments, and management regularly reviews the operating results of each segment. Segments A and C have similar economic characteristics. They share assets and other resources, and they benefit from common research and development projects. Corporation XYZ may aggregate Segments A and C for purposes of goodwill impairment testing.

1ASC

350-20-35-35: FASB Accounting Standards Codification, https://asc.fasb.org/

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3) Assigning Goodwill to Reporting Units For the purpose of testing goodwill for impairment, acquired assets and assumed liabilities shall be assigned to a reporting unit as of the acquisition date if: a) b) the asset will be employed in or the liability relates to the operations of the unit, and the asset or liability will be considered in determining the fair value of the reporting unit.1
EXAMPLE Environmental liabilities that relate to an existing facility A pension obligation

1ASC

350-20-35-39: FASB Accounting Standards Codification, https://asc.fasb.org/

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4) Allocating Goodwill to Reporting Units Some assets and liabilities may relate to multiple reporting units, in which case they should be allocated using a reasonable and supportable methodology that is applied consistently. 5) Carrying Value of a Reporting Unit In determining the carrying value of a reporting unit, deferred income taxes should be considered regardless of whether the fair value is determined using a taxable or nontaxable transaction assumption.1

1ASC

350-20-35-40 and ASC 350-20-35-7: FASB Accounting Standards Codification, https://asc.fasb.org/

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6) Reorganizing Reporting Units When reporting units are reorganized, assets and liabilities may be reassigned in the affected reporting units using the same guidance. 7) Disposing of Reporting Units a) When a reporting unit is to be disposed of in its entirety, goodwill of that reporting unit shall be included in the carrying amount of the reporting unit in determining the gain or loss on disposal.1

1ASC

350-20-35-45 and ASC 350-20-35-51: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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b) When a portion of a reporting unit that constitutes a business is to be disposed of, goodwill associated with that business shall be included in the carrying amount of the business in determining the gain or loss on disposal. i. The amount of goodwill to be included shall be based on relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained.1

EXAMPLE (ASC 350-20-35-53) If a business is being sold for $100 and the fair value of the reporting unit excluding the business being sold is $300, 25 percent of the goodwill residing in the reporting unit would be included in the carrying amount of the business to be sold.

1ASC

350-20-35-52 and ASC 350-20-35-53: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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EXAMPLE: ASSETS TO BE HELD AND USED There is a significant adverse change in the business climate of one of the industries in which Company X operates. The company believes this change could impair some of its long-lived assets. The company groups assets at the lowest level with identifiable cash flows and tests them for impairment. Facts: Current conditions have reduced the fair value of inventory, which has a carrying value of $175,000. Using applicable GAAP (lower of cost or market rule), Company X determines that the inventory's fair value is $150,000. A nonreporting entity's long-lived assets consist of A, B, C, D (primary assets), and E. Asset D has a remaining life of eight years. Assume future cash flows for the next eight years are $1,700,000 with an additional $75,000 realized from disposing of the group at the end of the period. The group's carrying value is $2,200,000 and its fair value is $1,450,000. In addition, Asset B's fair value is $160,000.

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EXAMPLE (continued) Approach: 1. The company must make inventory adjustments before testing for long-lived asset impairment. It adjusts inventory down by $25,000 and reports this amount in the income statement. 2. Asset D, the primary asset, has a remaining life of eight years. This determines the period over which the company will estimate cash flows to see if the carrying amount is recoverable. 3. Since the $1,775,000 cumulative undiscounted cash flow is less than the $2,200,000 carrying amount and the group's fair value is $1,450,000also less than the carrying amountthe company should recognize a $750,000 impairment loss in income from continuing operations before taxes on its income statement. On the next slide, the $750,000 impairment loss is allocated pro rata to assets A, B, C, D, and E.

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EXAMPLE (continued) Exhibit 1: Asset Carrying Values and Remaining Lives Long-lived Asset Asset A Asset B Asset C Asset D (primary asset) Asset E Total Carrying Value $100,000 $200,000 $600,000 $950,000 $350,000 $2,200,000 Remaining Life 6 years 10 years 9 years 8 years 12 years

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EXAMPLE (continued) Exhibit 2: Loss Allocation Long-lived Asset Asset A Asset B Asset C Asset D (primary asset) Adjusted Carrying Value $100,000 $200,000 $600,000 $950,000 Pro Rata Allocation Factor .05 .09 .27 .43 Allocation of Impairment Loss NEW Adjusted Carrying Value

Asset E
Total

$350,000
$2,200,000

.16
1.00 $750,000

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EXAMPLE (continued) Exhibit 2: Loss Allocation Long-lived Asset Asset A Asset B Asset C Asset D (primary asset) Asset E Total Adjusted Carrying Value $100,000 $200,000 $600,000 $950,000 $350,000 $2,200,000 Pro Rata Allocation Factor .05 .09 .27 .43 .16 1.00 Allocation of Impairment Loss $ (37,500) $ (67,500) $ (202,500) $ (322,500) $ (120,000) $750,000 NEW Adjusted Carrying Value $62,500 $132,500 $397,500 $627,500 $230,000 $1,450,000

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EXAMPLE (continued) Approach: The impairment loss allocated to a long-lived asset should not reduce its carrying value below fair value. Since Asset B's fair value is $160,000, the pro rata allocation reduces its carrying value below fair value (carrying value is $132,500, which is $27,500 below fair value). The company needs to increase B's fair value by $27,500 to $160,000 and allocate an additional $27,500 loss pro rata to assets A, C, D, and E. The next slide shows the assets' new cost basis.

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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EXAMPLE (continued) Exhibit 3: New Cost Basis of Assets Long-lived Asset Asset A Asset C Asset D (primary asset) Asset E Subtotal Asset B Total Adjusted Carrying Value $62,500 $397,500 $627,500 $230,000 $1,317,500 $132,500 $1,450,000 Pro Rata Allocation Factor .05 .30 .48 .17 1.00 + $ (27,500) $27,500 -0Allocation of Impairment Loss NEW Adjusted Carrying Value

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EXAMPLE (continued) Exhibit 3: New Cost Basis of Assets Long-lived Asset Asset A Asset C Asset D (primary asset) Asset E Subtotal Asset B Total Adjusted Carrying Value $62,500 $397,500 $627,500 $230,000 $1,317,500 $132,500 $1,450,000 Pro Rata Allocation Factor .05 .30 .48 .17 1.00 + Allocation of Impairment Loss $ (1,375) $ (8,250) $ (13,200) $ (4,675) $ (27,500) $27,500 -0NEW Adjusted Carrying Value $61,125 $389,250 $614,300 $225,325 $1,290,000 $160,000 $1,450,000

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h. Financial Statement Disclosures 1) The aggregate amount of goodwill shall be presented as a separate line item in the statement of financial position. The aggregate amount of goodwill impairment losses shall be presented as a separate line item in the income statement from continued operations. A goodwill impairment loss associated with a discontinued operation shall be included, net of taxes, within the results of discontinued operations.1

2)

3)

1ASC

350-20-45-1 through 45-3: FASB Accounting Standards Codification, https://asc.fasb.org/

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i. Changes in the carrying amount of goodwill during the period shall be disclosed, showing separately: 1) 2) 3) The gross amount and accumulated impairment loss at the beginning of the period. Additional goodwill recognized during the period. Adjustments resulting from the subsequent recognition of deferred tax assets.

4)
5) 6) 7) 8)

Goodwill in a disposal group classified as held for sale.


Impairment losses recognized during the period. Net exchange differences arising during the period. Any other changes in the carrying amount during the period. The gross amount and accumulated impairment loss at the end of the period.1
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1ASC

350-20-50-1: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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j. For each goodwill impairment loss recognized, all of the following must be disclosed in the notes:

1) A description of the facts and circumstances leading to impairment;


2) The amount of the impairment loss and the method of determining fair value of the associated reporting unit; and 3) If a recognized impairment loss is an estimate that has not yet been finalized, that fact and the reasons therefore and, in subsequent periods, the nature and amount of any significant adjustments made to the initial estimate.1

1ASC

350-20-50-2: FASB Accounting Standards Codification, https://asc.fasb.org/

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EXAMPLE (ASC 350-20-55-24)1 Theta entity has two reporting units with goodwill Technology and Communicationswhich are also reportable segments. Note C: Goodwill

The changes in the carrying amount of goodwill for the year ended December 31, 2003, are as follows.
($000s) Balance as of January 1, 2003: Goodwill Accumulated impairment losses Total $1,413 0 $1,413 $1,104 (200) $904 $2,517 (200) $2,317

Technology Segment

Communications Segment

Total

1ASC

350-20-55-24: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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EXAMPLE (ASC 350-20-55-24)1 (continued) ($000s) Goodwill acquired during the year Impairment losses Goodwill written off related to sale of business unit Balance as of December 31, 2003 Goodwill Accumulated impairment losses Total $1,118 0 $1,118 $1,219 (246) $973 $2,337 (246) $2,091 Technology Segment 189 0 (484) Communications Segment 115 (46) 0 Total 304 (46) (484)

1ASC

350-20-55-24: FASB Accounting Standards Codification, https://asc.fasb.org/

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EXAMPLE (ASC 350-20-55-24)1 (continued) The Communications segment is tested for impairment in the third quarter, after the annual forecasting process. Due to an increase in competition in the Texas and Louisiana cable industry, operating profits and cash flows were lower than expected in the fourth quarter of 20X2 and the first and second quarters of 20X3. Based on this trend, the earnings forecast for the next five years was revised. In September 20X3, a goodwill impairment loss of $46 was recognized in the Communications reporting unit. The fair value of that reporting unit was estimated using the expected present value of future cash flows.

1ASC

350-20-55-24: FASB Accounting Standards Codification, https://asc.fasb.org/

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C. Accounting Standards Update 2011-08, Intangibles Goodwill and Other (Topic 350), also known as "Step 0"

1.

When Issued and Effective


a. b. Issued September 2011. Effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted.1 To simplify the annual goodwill impairment test. To reduce the cost and complexity of the test. To expand upon examples of events and circumstances an entity should consider.1
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c. 2. a. b. c.

Reasons for Issuance

1"IntangiblesGoodwill

and Other (Topic 350)." Financial Accounting Standards Board of the Financial Accounting Foundation. No. 2011-08, September 2011. Accessed January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168

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3. Entities Subject to ASU 2011-08 a. b. Public and nonpublic entities with goodwill in financial statements. Optional Entities may perform the two-step analysis in ASC 350-20 without ASU 2011-08 if they wish.1
KEY POINT ASU 2011-08 creates an optional "Step 0" for entities to use before performing Steps 1 and 2 in Topic 350 to test for impairment.

1"IntangiblesGoodwill

and Other (Topic 350)." Financial Accounting Standards Board of the Financial Accounting Foundation. No. 2011-08, September 2011. Accessed January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168

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4. Effect of Step 0 a. Prior to a two-step impairment test, an entity may first assess qualitative factors to determine if goodwill impairment is "more likely than not." Step 0 is not specifically required but represents an option. Reminder ASC 350-20 requires an annual quantitative test for impairment by comparing fair value to carrying value without considering qualitative factors.1

b. c.

1"IntangiblesGoodwill

and Other (Topic 350)." Financial Accounting Standards Board of the Financial Accounting Foundation. No. 2011-08, September 2011. Accessed January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168

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Events and Circumstances to Consider1 Events and circumstances Examples A deterioration in general economic conditions Limitations on accessing capital Fluctuations in foreign exchange rates Other developments in equity and credit markets

Macroeconomic conditions

Industry and market considerations

A deterioration in the environment in which an entity operates or in the market for an entity's products or services An increased competitive environment A decline in market-dependent multiples or metrics A regulatory or political development

1ASC

350-20-35-3C: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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Events and Circumstances to Consider1 Events and circumstances Cost factors Examples Increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows Negative or declining cash flows A decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods Changes in management, key personnel, strategy, or customers Contemplation of bankruptcy Litigation

Overall financial performance

Entity-specific events

1ASC

350-20-35-3C: FASB Accounting Standards Codification, https://asc.fasb.org/

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Events and Circumstances to Consider1 Events and circumstances Examples Change in the composition or carrying amount of net assets A more-likely-than-not expectation of selling or disposing of all or a portion of a reporting unit The testing for recoverability of a significant asset group within a reporting unit Recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit Consider in both absolute terms and relative to an entity's peers

Reporting unit-specific events

Sustained decrease in share price

1ASC

350-20-35-3C: FASB Accounting Standards Codification, https://asc.fasb.org/

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d. Comparison Issues to Consider The entity should consider the extent to which each of the adverse events or circumstances identified could affect the comparison of a reporting unit's fair value with its carrying amount.1

1ASC

350-20-35-3F: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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5. Other Step 0 Considerations a. Priority (weighting) of Events and Circumstances

Entities should place more weight on events and circumstances that most affect a reporting unit's fair value or the carrying amount of its net assets.
b. Mitigating Events or Circumstances Entities should consider positive or mitigating events and circumstances as well.1

1ASC

350-20-35-3F: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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c. Recent Fair Value Estimates If an entity has a recent fair value calculation of the reporting unit it should consider the difference between it and the reporting unit's carrying value to determine if the more-likely-than-not threshold is met. d. "More-Likely-Than-Not" Threshold Defined as a greater than 50 percent likelihood that impairment has occurred.1

1ASC

350-20-35-3G: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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6. Result of Step 0 a. Actual calculation of fair value isn't necessary under ASU 2011-08 unless it is more likely than not that there is impairment of the reporting unit. An entity is no longer permitted to carry forward its detailed calculation of a reporting unit's fair value from the prior year. ASU 2011-08 does not change current guidance for testing other identified intangible assets for impairment (such as patents, copyrights, customer lists, trade names, brands, and internally developed software).1

b.

c.

1"IntangiblesGoodwill

and Other (Topic 350)." Financial Accounting Standards Board of the Financial Accounting Foundation. No. 2011-08, September 2011. Accessed January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168

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ALERT1 Even though ASU 2011-08 does not change the current impairment testing guidance for other general intangibles, the FASB chairman added a separate project to the Board's short-term agenda to explore alternative approaches to the manner in which an entity tests other indefinite-lived intangible assets for impairment (9/7/11). Stay tuned.

1"IntangiblesGoodwill

and Other (Topic 350)." Financial Accounting Standards Board of the Financial Accounting Foundation. No. 2011-08, September 2011. Accessed January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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D. International Accounting Standard 36 Impairment of Assets 1. IAS Requirement

a.

Requires an entity to test for impairment using a singlestep quantitative test performed at the level of a cashgenerating unit (or group of cash-generating units).
IFRS for small- and medium-sized entities requires goodwill to be amortized over its useful life or 10 years if a reasonable estimate of the useful life cannot be made. Small- and medium-sized entities are also required to assess on the basis of qualitative factors whether there is any indication goodwill may be impaired at each reporting date.1,2

b.

c.

1"IntangiblesGoodwill

and Other (Topic 350)." Financial Accounting Standards Board of the Financial Accounting Foundation. No. 2011-08, September 2011. Accessed January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168 2"IAS 36 Impairment of Assets." The website of the IFRS. As issued January 1, 2009. Accessed January 2012. http://www.ifrs.org/NR/rdonlyres/715CDD70-96A4-4D37B53A-A0E4E61FB828/0/IAS36.pdf

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2. Measurement of Loss a. b. 3. Entities compare the carrying amount of a cash-generating unit with its recoverable amount. The excess carrying amount over recoverable amount is the impairment loss. Annually. Between annual tests if there is an indication of impairment.1,2

Timing of IAS Requirement a. b.

1"IntangiblesGoodwill

and Other (Topic 350)." Financial Accounting Standards Board of the Financial Accounting Foundation. No. 2011-08, September 2011. Accessed January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168 2"IAS 36 Impairment of Assets." The website of the IFRS. As issued January 1, 2009. Accessed January 2012. http://www.ifrs.org/NR/rdonlyres/715CDD70-96A4-4D37B53A-A0E4E61FB828/0/IAS36.pdf

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4. Convergence a. b. ASU 2011-08 does not advance convergence of IAS 36 and Topic 350. The Board deemed such convergence efforts were beyond the scope of the update and best addressed more broadly.1

1"IntangiblesGoodwill

and Other (Topic 350)." Financial Accounting Standards Board of the Financial Accounting Foundation. No. 2011-08, September 2011. Accessed January 2012. http://www.fasb.org/cs/ContentServer?site=FASB&c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176158924168

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Overview Goodwill Intangibles With Finite Useful Lives Intangibles Without Finite Useful Lives Tangible Assets Applying EITF 03-13: Applying Paragraph 42 (ASC 205) Resources

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III. Intangibles With Finite Useful Lives A. Initial Creation and Valuation

1.

Definition
a. A general intangible asset (other than goodwill) that is created or acquired either individually or with a group of assets. The cost of a group of assets acquired in a transaction other than a business combination shall be allocated to assets acquired based on relative fair values. Costs of internally developing, maintaining, or restoring intangible assets shall be recognized as expensed as incurred.1

b.

c.

1ASC

350-30-25-1 through 25-3 and ASC 805-50-30-3: FASB Accounting Standards Codification, https://asc.fasb.org/

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B. Accounting Treatment 1. Subject to Amortization

a.
b.

An intangible asset is subject to amortization over its useful life.


Assets subject to amortization shall be reviewed for impairment in accordance with the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 (specifically 360-10-35-17 through 35-35). The period over which the asset is expected to contribute directly or indirectly to future cash flows of that entity.1,2

2.

"Useful Life" a.

1ASC 2ASC

350-30-35-1, 35-2, and 35-14: FASB Accounting Standards Codification, https://asc.fasb.org/ 360-10-35-17 through 35-35: FASB Accounting Standards Codification, https://asc.fasb.org/

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b. An analysis of an asset's useful life shall be based on: 1) The expected use of the asset by the entity.

2) The expected useful life of another asset to which the useful life of the intangible asset may relate.
3) Any legal, regulatory, or contractual provisions that may limit the useful life. 4) The entity's own historical experience in renewing or extending similar arrangements, consistent with the intended use of the asset by the entity, regardless of whether those arrangements have explicit renewal or extension provisions.1

1ASC

350-30-35-3: FASB Accounting Standards Codification, https://asc.fasb.org/

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5) The effects of obsolescence, demand, competition, and other economic factors (such as the stability of the industry, known technical advances, or legislative actions). The level of maintenance expenditures required to obtain the expected future cash flows from the asset. 1
NOTE An entity must consider all of the aforementioned factors, with no factor being more presumptive than the other.

6)

1ASC

350-30-35-3: FASB Accounting Standards Codification, https://asc.fasb.org/

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3. Determination of Life for Intangibles a. Factors to consider in determining life include: 1) 2) 3) 4) 5) b. The ability to renew/extend without substantial cost. The ability to renew without substantial modification. Legal, regulatory, or contractual provisions. Economic factors such as obsolescence and demand. The expected use of the intangible.

If management determines that an intangible has an indefinite life and will not be amortized, management should document the basis of the conclusion and be prepared for scrutiny from the SEC.

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4. Summary of ASU 2010-28 a. Effective Date 1) 2) b. 1) December 15, 2010, for public entities. December 15, 2011, for nonpublic entities. Under "normal" circumstances, an entity must test goodwill for impairment annually, or at interim points during the year if certain events and circumstances exist.

Effect

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2) Under ASU 2010-28, an additional interim test is required if: a) b) the carrying value of a reporting unit is zero or negative, and the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired.

3) 4)

If both conditions are met, entities must perform Step 2, i.e., calculate the amount of goodwill impairment. Entities are not required to perform the impairment calculation for all reporting units. Rather, entities must only perform Step 2 at this interim point of the reporting units affected by the two conditions above (zero or negative carrying value and more likely than not that goodwill is impaired).
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2013 DeVry / Becker Educational Development Corp. All rights reserved.

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c. Recognition of Impairment loss 1) In the period of adoption, any goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings. Subsequent goodwill impairment losses should be reported as a separate line item in the income statement from continued operations.

2)

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5. Impairment Recognition and Impairment a. Impairment of the intangible asset occurs if the carrying amount: 1) is not recoverable, and 2) exceeds the fair value of the intangible asset.1,2

1ASC 2ASC

350-30-35-14: FASB Accounting Standards Codification, https://asc.fasb.org/ 360-10-35-17: FASB Accounting Standards Codification, https://asc.fasb.org/

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b. "Not Recoverable" The carrying amount is "not recoverable" if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. 1) Future Cash Flows a) Estimates of future cash flows used to test the recoverability of an intangible asset shall include only the future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposal of the asset.1

1ASC

360-10-35-17 and ASC 360-10-35-29: FASB Accounting Standards Codification, https://asc.fasb.org/

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b) Estimates of future cash flows used to test the recoverability of an intangible asset shall incorporate the entity's own assumptions about its use of the asset and shall consider all available evidence. Estimates of future cash flows used to test the recoverability of an intangible shall be made for the remaining useful life of the asset.

c)

2)

When an intangible asset is tested for recoverability, it also may be necessary to review the amortization periods as required under Topic 350.1

1ASC

360-10-35-30, 35-31 and 35-22: FASB Accounting Standards Codification, https://asc.fasb.org/

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c. Exceeds Fair Value The impairment loss shall be measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.1

1ASC

360-10-35-17: FASB Accounting Standards Codification, https://asc.fasb.org/

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d. Assessment of future cash flows at the date the asset is tested for recoverability, whether the asset is:

1)

In Use or Substantially Complete


a) b) Estimates of future cash flows shall be based on the existing service potential of the asset. Service potential encompasses the asset's remaining useful life and cash-flow-generating capacity. Estimates shall include cash flows associated with future expenditures necessary to maintain the existing service potential of the asset. Estimates shall exclude cash flows associated with future capital expenditures that would increase the service potential of an intangible asset.1
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c)

d)

1ASC

360-10-35-33: FASB Accounting Standards Codification, https://asc.fasb.org/

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2) Under Development a) Estimates of future cash flows shall be based on the expected service potential of the asset when development is substantially complete. Estimates shall include cash flows associated with all future expenditures necessary to develop an intangible asset. The capitalization period ends when the asset is substantially complete and ready for its intended use.1

b)

c)

1ASC

360-10-35-34 and ASC 835-20: FASB Accounting Standards Codification, https://asc.fasb.org/

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e. The carrying amount of the intangible asset being tested for impairment shall include amounts of capitalized asset retirement costs. 1) However, estimated future cash flows related to the liability of an asset retirement obligation shall be excluded from both of the following: a) b) Undiscounted cash flows used to test the asset for recoverability, and Discounted cash flows used to measure the asset's fair value.1

1ASC

360-10-35-18: FASB Accounting Standards Codification, https://asc.fasb.org/

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f. The impairment loss shall be measured as the amount by which the carrying amount of the intangible asset exceeds its fair value. Loss Recognized on the Income Statement The resulting impairment loss for an intangible asset is treated as a change in accounting estimate rather than a change in accounting principles.1,2

g.

1ASC 2ASC

360-10-35-17: FASB Accounting Standards Codification, https://asc.fasb.org/ 350-30-35-11: FASB Accounting Standards Codification, https://asc.fasb.org/

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Undiscounted future net cash flows < Net carrying value > Positive Negative

Step #1
Tangible Assets Identifiable Intangible Assets (Finite Life)

No impairment loss

Impairment Assets held for use Assets held for disposal

FV / PV net cash flows < Net carrying value > Impairment loss 1. Write asset down 2. Depreciate new cost 3. Restoration not permitted

FV / PV net cash flows < Net carrying value > Impairment loss + Cost of disposal Total Impairment Loss 1. Write asset down 2. No depreciation taken 3. Restoration is permitted

Step #2
Step #1 "Negative Results" & Intangible Assets (Indefinite Life)

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h. New Accounting Basis After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. i. Subsequent Reversals Subsequent reversal of a previously recognized impairment loss is prohibited.1

1ASC

350-30-35-14: FASB Accounting Standards Codification, https://asc.fasb.org/

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C. Disposals 1. Sales

a.

Costs to sell are the incremental direct costs to transact a sale; that is, the costs that result directly from and are essential to a sale transaction that would not have been incurred had the decision to sell not been made.
These costs exclude the expected future losses associated with the operations of an asset while it is held for sale. A loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain may be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized.1
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b.

c. d.

1ASC

360-10-35-38 through 35-40: FASB Accounting Standards Codification, https://asc.fasb.org/

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e. An asset is deemed held for sale in the period in which all the following criteria are met: 1) Management commits to a plan to sell the asset. 2) The asset is available for immediate sale in its present condition subject to terms that are usual and customary for sales of such assets. 3) An active program to locate a buyer and other actions required to complete the plan of sale have been initiated. 4) It is probable that the sale of the asset will be completed within one year.1

1ASC

360-10-45-9: FASB Accounting Standards Codification, https://asc.fasb.org/

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5) 6) The asset is being actively marketed at a price that is reasonable in relation to its fair value. Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.1
EXAMPLE (ASC 360-10-55-45) An entity commits to a plan to sell an intangible asset that represents a significant portion of its regulated operations. The sale will require regulatory approval, which could extend the period required to complete the sale beyond one year. If a firm purchase commitment is probable within one year, the conditions to allow an exception to the one-year requirement would be met.

1ASC

360-10-45-9: FASB Accounting Standards Codification, https://asc.fasb.org/

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2. Disposals Other Than Sales a. b. c. Includes disposal by abandonment, exchange for a similar asset, or a distribution to owners in a spin-off. Asset previously classified as held and used will continue to be classified as held and used until it is disposed of. Abandoned Asset to be abandoned is considered disposed of when it ceases to be used. If entity commits to a plan to abandon an asset before the end of its previously estimated useful life, depreciation estimates should be revised to reflect the shortened useful life.1

1ASC

360-10-35-47 and 35-48: FASB Accounting Standards Codification, https://asc.fasb.org/

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d. Exchanged Asset to be exchanged or distributed to owners in a spinoff is considered disposed of when it is exchanged or distributed. Used In addition to impairment losses recognized when the asset is held and used, an impairment loss, if any, should be recognized when the asset is disposed of, if the carrying amount exceeds its fair value.1

e.

1ASC

360-10-40-4: FASB Accounting Standards Codification, https://asc.fasb.org/

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D. Financial Statement Presentation and Disclosures 1. Assets Held and Used a. Impairment losses recognized from assets classified as held and used shall be included as income from continuing operations before taxes in the income statement of a business entity. A subtotal, such as income from operations (if it is presented), shall include the loss. An asset classified as held for sale shall be presented separately in the statement of financial position.1

b. 2.

Assets Held for Sale a.

1ASC

360-10-45-4, ASC 360-10-45-14, and ASC 205-20-45-10: FASB Accounting Standards Codification, https://asc.fasb.org/

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E. Internal-Use Software Development 1. Definition a. Internal-use software has both of the following characteristics: 1) 2) The software is acquired, internally developed, or modified solely to meet the entity's internal needs. During the software's development or modification, no substantive plan exists or is being developed to market the software externally.1

1ASC

350-40-05-2: FASB Accounting Standards Codification, https://asc.fasb.org/

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EXAMPLE (ASC 350-40-55-1)1 Software for Internal Use An entity is in the process of developing an accounts receivable system. The software specifications meet the entity's internal needs and the entity had no marketing plan before or during the development of the software. In addition, the entity has sold no internal-use software in the past. Two years after completion of the project, the entity decides to market the product to recoup some or all of the costs.

1ASC

350-40-55-1: FASB Accounting Standards Codification, https://asc.fasb.org/

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EXAMPLE (ASC 350-40-55-2)1 Software That Is Not for Internal Use A software entity develops an operating system for sale and for internal use. Though the specifications of the software meet the entity's internal needs, the entity had a marketing plan before the project was complete. In addition, the entity has a history of selling software that it also uses internally and the plan has a reasonable possibility of being implemented.

1ASC

350-40-55-2: FASB Accounting Standards Codification, https://asc.fasb.org/

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2. Recognition a. Three Stages of Development and Operation 1) Preliminary Project Stage Internal and external costs shall be expensed as they are incurred.1

1ASC

350-40-25-1: FASB Accounting Standards Codification, https://asc.fasb.org/

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2) Application Development Stage a) b) Internal and external costs shall be capitalized. Costs to develop or obtain software that allows for access or conversion of old data by new systems shall also be capitalized. Training costs are not internal-use software development costs and (if incurred) shall be expensed. Data conversion costs (with limited exceptions) shall be expensed as incurred.1

c)

d)

1ASC

350-40-25-2 through 25-5: FASB Accounting Standards Codification, https://asc.fasb.org/

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3) Post Implementation-Operation Stage Internal and external training costs and maintenance costs shall be expensed as incurred.1
EXAMPLE An entity properly accounts for costs associated with internal-use software developed for the entity's use and not marketed externally in 20X3. In 20X5 management hires a consultant to perform general maintenance on the software to bring it up-to-date with updated operating systems. In 20X6 management hires the same consultant to lead a training session for all employees to enhance the staff's understanding of the software and its functionalities. The maintenance and training expenses in 20X5 and 20X6, respectively, should be expensed by the entity as the costs are incurred.

1ASC

350-40-25-6: FASB Accounting Standards Codification, https://asc.fasb.org/

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b. Upgrades and Enhancements 1) Costs of specific upgrades and enhancements to internal-use computer software may be capitalized if it is probable that those expenditures will result in additional functionality. Internal costs for maintenance shall be expensed as incurred.

2)

3)

Entities that cannot separate internal costs on a reasonably cost-effective basis between maintenance and minor upgrades or enhancements shall expense such costs as incurred.1

1ASC

350-40-25-7 through 25-11: FASB Accounting Standards Codification, https://asc.fasb.org/

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3. Measurement a. Capitalized Costs 1) Capitalization shall occur when both of the following occur: a) b) The preliminary project stage is complete. Management authorizes and commits to funding a computer software project and it is probable that the project will be completed and that the software will be used to perform the function intended.

2)

When it is no longer probable that the project will be completed and placed in service, no further costs shall be capitalized and impairment guidance shall be applied to existing balances.1

1ASC

350-40-25-12 and 25-13: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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3) Capitalization shall cease no later than the point at which a computer software project is substantially complete and ready for its intended use; that is, after all substantial testing is complete. When an entity replaces existing software with new software, unamortized costs of the old software shall be expensed when the new software is ready for its intended use.1

4)

1ASC

350-40-25-14 and 25-15: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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5) Capitalized Costs Include a) External direct costs of materials and services: i. ii. Fees paid to third parties for development services; Costs incurred to obtain software from third parties; and

iii. Travel expenses of employees in their duties directly associated with developing software. b) c) Payroll and payroll-related costs Interest costs incurred while developing internaluse software.1

1ASC

350-40-30-1: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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6) General and administrative costs and overhead costs shall not be capitalized as costs of internal-use software. If the purchase price of software includes multiple elements, such as training for software, maintenance fees for routine maintenance work, data conversion costs, and rights to future upgrades, entities shall allocate the purchase price among all the individual elements.1

b.

Purchase Price Considerations 1)

1ASC

350-40-30-3 and 30-4: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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4. Impairment a. An impairment loss is recognized if the carrying amount of the internal-use software is (a) not recoverable and (b) exceeds fair value. Assets should be grouped at the lowest level for which there are identifiable cash flows that are largely independent of cash flows from other groups of assets. 1
NOTE These are the same rules as those for intangible assets with finite lives.

b.

1ASC

350-40-35-1 and ASC 360-10-35-17: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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c. Grouping assets is applicable when the cost may not be recoverable. For example: 1) 2) 3) 4) Internal-use software is not expected to provide substantive service potential. A significant change occurs in the extent or manner in which software is expected to be used. A significant change is made or will be made to the software program. The cost of developing or modifying the software significantly exceeds original expectations.1

1ASC

350-40-35-1: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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d. New Accounting Basis After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. e. Subsequent Reversals Subsequent reversal of a previously recognized impairment loss is prohibited.1

1ASC

360-10-35-20: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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5. Presentation and Disclosure a. b. Disclosure rules for intangible assets subject to finite lives apply. Impairment losses recognized from assets classified as held and used shall be included as income from continuing operations before taxes in the income statement of a business entity.

c.
d.

A subtotal, such as income from operations (if it is presented), shall include the loss.
No additional disclosures are required for internal-use software assets impairment.1

1ASC

360-10-45-4: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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F. Website Development Costs 1. Definition Costs incurred associated with the development of a website, including costs during the planning, development, and operating stages and costs to acquire or develop content and graphics. 2. Five Stages of Development and Operation

a.

Planning Stage
Regardless of whether the website planning activities specifically relate to software, all costs incurred in the planning stage should be expensed as incurred.1

1ASC

350-50-15-2 and 15-3 and ASC 350-50-55-2 through 55-9: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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EXAMPLE Costs included in this discussion (ASC 350-50-55-2 through 55-9): Software development costs Web hosting costs Costs to obtain and register an Internet domain name Graphics development costs Costs excluded from this discussion (ASC 350-50-15-3):

The cost of hardware


Acquisitions of servers and related hardware infrastructure

1ASC

350-50-55-2 through 55-9 and ASC 350-50-15-3: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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b. Website Application and Infrastructure Development Stage 1) Assumption Any software developed during this stage is for the entity's internal needs and no plan exists or is being developed to market the software externally. 2) Generally, all costs relating to software used to operate a website are treated as discussed previously in the section on internal-use software development. Web hosting costs are expensed over the period of benefit.1

3)

1ASC

350-50-25-3 through 25-7: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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4) Costs to purchase or develop software tools shall be capitalized unless the tools are used in research and development and meet one of the following: a) b) They do not have any alternative future uses. They are internally developed and represent a pilot project or are being used in a specific research and development project.

5) Costs to obtain and register an Internet domain name shall be capitalized.1

1ASC

350-50-25-3 through 25-7 and ASC 350-30-25: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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c. Graphics Development Stage 1) For accounting purposes, graphics are considered to be a component of software, and thus shall be treated under the previously discussed section on internal-use software development. 2) Modifications to graphics after a website is launched shall be evaluated to determine whether the modification represents enhancements or maintenance of the website.1

1ASC

350-50-25-8 and 25-9: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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d. Content Development Stage 1) 2) Costs to input content into a website shall be expensed as incurred. Software used to integrate a database with a website shall be capitalized (as under the internal-use software development rules). Data conversion costs shall be expensed as incurred.1

3)

1ASC

350-50-25-10 through 25-13, ASC 350-40-25-2 through 25-4 and ASC 350-40-25-5: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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e. Operating Stage 1) 2) Costs to operate a website shall be expensed as incurred. Costs that involve providing additional functions or features shall be accounted for as, in effect, new software (governed by internal-use software rules). a) Costs related to upgrades and enhancements shall be capitalized if it is probable that they will result in added functionality. Costs that cannot be split between maintenance and relatively minor upgrades or enhancements shall be expensed.

b)

3)

Costs to register the website with search engines represent advertising costs and shall be expensed as incurred.1
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1ASC

350-50-25-14 through 25-17, and ASC 350-40-25-10: FASB Accounting Standards Codification, https://asc.fasb.org/

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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Tangible and Intangible Asset Impairment, Part 2


Overview Goodwill Intangibles With Finite Useful Lives Intangibles Without Finite Useful Lives Tangible Assets Applying EITF 03-13: Applying Paragraph 42 (ASC 205) Resources

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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Thank You!

2013 DeVry / Becker Educational Development Corp. All rights reserved.

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