Long Lived Assets

Intangibles – Goodwill and Other

(ASC 350)
Intangible Assets - Definition

► An intangible asset is an asset (not including a financial asset) that lacks physical substance.
► ASC 350 on “Intangibles – Goodwill and Other“ addresses financial accounting and reporting related to
goodwill and other intangibles, including the subsequent measurement of goodwill and intangible assets.
Does not include guidance on accounting of acquisition for goodwill and other intangibles acquired in a
business combination.
► Most common type of intangibles
► Patent
► Copyrights
► Trademark and trade names
► Franchises or licenses
► Goodwill

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Identifiability

► intangible asset is ‘identifiable’ if it:

► Is separable – i.e. capable of being separated or divided and sold, transferred, licensed, rented or
exchanged either individually or together with a related contract, asset or liability, regardless of
whether there is an intent to do so;
or
► Arises from contractual or other legal rights, regardless of whether those rights are transferable or
separable from the entity or from other rights and obligations

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Intangible asset – Initial recognition & measurement

► An intangible asset that is acquired either individually or with a group of other assets shall be recognized.
► Should meet the asset recognition criteria.
► Asset acquisitions in which the consideration given is cash are measured by the amount of cash paid,
which generally includes the transaction costs of the asset acquisition.
► If the consideration given is not in the form of cash (i.e. in form of non-cash assets, liabilities incurred or
equity interests issued), measurement is based on either the cost which shall be measured based on the
fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is
more clearly evident and, thus, more reliably measurable.
► In case of assets acquired in group, purchase price is allocated to assets/liabilities based on their relative
fair values and shall not give rise to goodwill. Excess or deficit of the consideration paid versus the fair
value is allocated based on relative fair value to the assets acquired or liability assumed.

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Case study

► X Inc has paid the license entry fees to government for providing the services like CDMA, National Long
distance (NLD), GSM (2G and 3G). It has received the licence to operate in 5 circles in the US. The
license is valid for a period of 20 years. However, the Company is yet to set up a spectrum to provide the
service.

How the Company should account for the amount paid to acquire the license?

Suggested Solution:
► The amount paid as the license entry fees meets the intangible assets recognition criteria. Also the
Company will receive future economic benefits over the period of license I,e, 20 years. Hence the amount
paid will be recognised as intangible asset and it will be amortised over a period of 20 years.

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Case study

► A direct-mail marketing entity acquired a customer list and expects that it will be able to derive benefit
from the information on the acquired customer list for at least one year but for no more than three years.

Suggested Solution:
► The customer list would be amortized over management’s best estimate of its useful life (say 18
months), following the pattern in which the expected benefits will be consumed or otherwise used up.
Although the acquiring entity may intend to add customer names and other information to the list in the
future, the expected benefits of the acquired customer list relate only to the customers on that list at the
date of acquisition (a closed-group notion).

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Case study

► Y Inc is into the business of telecom and has set up the towers in few cities. Some of the towers are
connected by way of optical fibres and wires laid under the ground. The company has obtained the right
from local municipality to dig and set up the wires under ground. However, Y Inc needs to connect some
towers on routes, where it has not set up the connection by way of optical fibres and wires. Hence it has
obtain from “PQR Inc”, the right to use connection on that route, which is set up by PQR Inc. Y Inc has
paid $500m to use the route for a period of 15 years.

How should Y Inc account for the amount paid to PQR Inc?

Solution:
► The amount paid to PQR Inc will be treated as intangible asset labelled as Indefeasible Right to Use
(IRU), since it meets the recognition criteria as discussed in previous slides. Also the company will
receive future economic benefits over the period of agreement i,e, 15 years. Hence the amount paid will
be recognised as intangible asset and it will be amortised over a period of 15 years.

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Cryptocurrencies
US GAAP Definition
Intangible Assets Intangible assets are assets (not including
financial assets) that lack physical substance
Cash and cash Cash includes currency, demand deposits with
equivalents financial institutions and other accounts that have
the general characteristics of demand deposits.
Cash equivalents are short-term, highly liquid
investments that are readily convertible to known
amounts of cash and represent insignificant risk of
changes in value
Financial A financial instrument is cash, an ownership
instrument interest in an entity or a contract that imposes an
obligation to deliver or a right to receive cash or
another financial instrument.
Inventory Inventory is tangible property held for sale in the
ordinary course of business, in process of
production for sale or to be consumed in the
production of goods or services.
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Classification Conclusion
Met: Cryptocurrencies are nonfinancial assets
that lack physical substance.
Not met: Cryptocurrencies generally are not
accepted as legal tender and are not backed by
sovereign governments. Cryptocurrencies do
not have maturities and have experienced
significant price volatility
Not met: Cryptocurrencies are not cash or an
ownership interest in an entity, and they do not
represent a contractual obligation to deliver or
a right to receive cash or another financial
instrument
Not met: Cryptocurrencies are not tangible
property because they lack physical substance
Internally created intangibles

► Costs of internally developing, maintaining, or restoring intangible assets (including goodwill) that are not
specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and
related to an entity as a whole, shall be recognized as an expense when incurred.
► Internally created intangibles are expensed because at the beginning company do not know if a viable
product will be created or not.

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Research and development costs

► Research and Development (R&D) costs are not intangible assets and must be expensed.
► R&D frequently results in something that a company patent or copyright such as, new product, process,
formula, composition, Idea etc.
► As a general rule cost of internally developing, maintaining or restoring intangible assets should be
expensed as incurred except for following:
► Software developed for sale, lease or license
► Internal-use software
► Website development costs

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Software developed for sale, lease or license

► All costs incurred to establish the technological feasibility of a computer software product are to be
treated as R&D costs and expensed as incurred.

► Subsequent costs incurred up to the point of general release of the product to the customer are
capitalized and reported subsequently at the lower of amortized cost or net realizable value.

► Amortization of capitalized computer software costs start when the product begins to be marketed.

► Two methods are allowed:

► Revenue method
► Straight line method
Company should use method giving greater charge annually.

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Internal-use software

► Internal-use software costs are capitalized or expensed depending on the activities being
performed. ASC 350-40 defines the recognition criteria for costs according to the three distinct stages of
a typical computer software development project: the preliminary project stage, the application
development stage and the post implementation-operation stage.
► Preliminary project stage : Expense all costs when incurred
► Application development stage : Certain costs should be capitalized like:
► External direct costs of materials and services
► Directly associated employee’s payroll and payroll-related costs
► Interest costs during development
► Post-implementation / operating stage : Expense all costs when incurred

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Internal-use software

► General administrative and overhead costs are expensed as they are incurred.
► Capitalization of costs should begin when both of the following occur:
► Preliminary project stage is completed and
► Management authorizes and commits to funding the software project and it is probable that the
project will be completed and the software will serve its intended function

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Internal-use software (cont..)

Examples illustrating when computer software is for internal use:

► A manufacturing entity purchases robots and customizes the software that the robots use to function.
The robots are used in a manufacturing process that results in finished goods.
► An entity develops software that helps it improve its cash management, which may allow the entity to
earn more revenue.
► An entity purchases or develops software to process payroll, accounts payable, and accounts receivable.
► A travel agency purchases a software system to price vacation packages and obtain airfares.
► A bank develops software that allows a customer to withdraw cash, inquire about balances, make loan
payments, and execute wire transfers.
► A mortgage loan servicing entity develops or purchases computer software to enhance the speed of
services provided to customers.
► A telecommunications entity develops software to run its switches that are necessary for various
telephone services such as voice mail and call forwarding.

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Website development costs

► Website development costs are subject to the same general capitalisation criteria as internal-use
software

► Website development cost

► Planning stage : Expense all costs when incurred
► Web application and infrastructure development stage : All costs are capitalized and amortized
► Operating stage : Expense all costs when incurred

► Costs incurred to create initial graphics for the website should be capitalized

► Content development costs incurred should generally be expensed as incurred

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Other costs, similar to R&D costs

► Other costs, similar to R&D costs that are expensed as they are incurred:
► Start up costs for new operations
► Initial operating losses
► Advertising costs (exception – Direct response advertisement)
► Training activities
► relocating or reorganising part or all of an entity

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Start-up costs for new operations

► Incurred for one time activities to start a new business. Examples are:
► Costs incurred in opening a new plant
► Introducing a new product or services; or
► Conducting business in a new territory

► Costs include organisational costs: such as legal and state fee incurred to organise a new business
activity.

► Start-up costs should be expensed as incurred as conservative approach is being followed by the
standard setters.

► Stat-up activities commonly occur at the same time as activities involving the acquisition of assets.
Therefore, it is important to differentiate between start-up costs or costs incurred to purchase a PPE.
If cost incurred qualify for recognition as part of the cost of PPE, then it should be capitalised

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Initial operating losses and advertising costs

Initial operating losses

► Generally when you start a business you incur losses. Someone might argue that these losses are
part of starting a business and therefore should be capitalised.
► Initial operating losses should be expensed like start-up costs.

Advertisement costs
► As a general rule, advertisement costs should be expensed as future benefits from advertisement can
not be measured.
► As a exception to above, direct-response advertising expenditure is capitalised if below mentioned
criteria are met.
► The primary purpose is to elicit sales from customers who can be shown to have responded
specifically to that advertising; and
► there is persuasive evidence, including historical patterns, that the advertising will result in probable

future economic benefits.

► The capitalised cost of direct-response advertising is amortised using the ratio of current period revenues
that relate to the direct-response advertising cost pool to the total of current and estimated future period
revenues for that cost pool.
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Intangibles acquired in a business combination

► Identified intangibles, such as brands, patent, customer lists etc., acquired in a business combination
should be recognised as assets apart from goodwill at their fair value.
► The acquiring company will recognise these intangibles as assets even if they were not recognised as
assets by the acquiree, so long as they are identifiable and controlled and their fair value can be
measured reliably.
► If any of these criteria are not met, the intangible is not recognised as a separate asset but is instead
included in goodwill.
► Must be classified as having a finite or an indefinite useful life.

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Goodwill

► Represent future economic benefits arising from the other assets acquired in a business combination that
are not individually identified and separately recognised.
► Only recognised when entire business is purchased.
► Goodwill is measured as the excess of….
Cost of purchase over the FMV of the identified net assets (assets less liabilities) purchased
► Internally generated goodwill should not be capitalised.
► Goodwill considered to have a indefinite life and therefore should not be amortised.
► Test impairment at least annually at a level of reporting referred to as a reporting unit and test whenever
there is an indication that the intangible asset may be impaired.

Bargain purchase
► Cost of purchase is less than the FMV of the identified net assets (assets less liabilities) purchased
► Difference is recognised as a gain by purchaser

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Case study

► ABC Inc. decides that it needs a parts division to supplement its existing tractor distributorship. Therefore,
ABC Inc. is interested in buying XYZ Inc.
► The illustrative statement of financial position of XYZ Inc. is as follows:

Balance sheet
As at 31 December 2019
Assets $ Liabilities $
Cash 25,000 Current liabilities 55,000
Account receivable 35,000 capital stock 100,000
Inventory 42,000 Retained earnings 100,000
PPE, net 153,000
Total assets 255,000 Total liabilities 255,000

► XYZ Inc. decides to accept the offer of ABC Inc. offer of $400,000.
► What is the value of goodwill, if any.
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Case study (cont..)

Solution
► Determination of goodwill:
Calculation of goodwill
$
Cash 25,000
Account receivable 35,000
Inventory 122,000
PPE, net 205,000
Patent 18,000
Current liabilities (55,000)
Fair value of net identifiable assets 350,000
Purchase price 400,000
Value assigned to goodwill 50,000

► Since ABC Inc. could not allocated the $50,000 to any other identifiable asset, residual value will be assigned
to goodwill.
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Defensive intangible asset

► Defensive intangible asset is an acquired intangible asset in a situation in which an entity does not
intend to actively use the asset but intends to hold (lock up) the asset to prevent others from
obtaining access to the asset.
► A defensive intangible asset could include any of the following:
► An asset that the entity will never actively use
► An asset that will be used by the entity during a transition period when the intention of the entity is to
discontinue the use of that asset.
► Defensive intangible assets are not written off immediately but are amortised over their useful lives,
which is the period over which the assets contribute directly or indirectly to the entity’s cash flows.
► It would be rare for a defensive intangible asset to have an indefinite life because the fair value of the
defensive intangible asset will generally diminish over time as a result of a lack of market exposure or as
a result of competitive or other factors.
► If an acquired intangible asset meets the definition of a defensive intangible asset, it shall not be
considered immediately abandoned.

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Case study

► Entity A, a consumer products manufacturer, acquires an entity that sells a product that competes with
one of Entity A's existing products. Entity A plans to discontinue the sale of the competing product within
the next six months, but will maintain the rights to the trade name, at minimal expected cost, to prevent a
competitor from using the trade name. As a result, Entity A's existing product is expected to experience
an increase in market share. Entity A does not have any current plans to reintroduce the acquired trade
name in the future.

Solution:
► Because Entity A does not intend to actively use the acquired trade name, but intends to hold the rights
to the trade name to prevent others from using it, the trade name meets the definition of a defensive
intangible asset.

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Case study

► Entity A acquires a group of assets, one of which is billing software developed by the selling entity for its
own use. After a six month transition period, Entity A plans to discontinue use of the internally developed
billing software. In valuing the billing software in connection with the acquisition, Entity A determines that
a market participant would use the billing software, along with other assets in the asset group, for its full
remaining economic life—that is, Entity A does not intend to use the asset in a way that is at its highest
and best use. Due to the specialized nature of the software, Entity A does not believe the software could
be sold to a third party without the other assets acquired.

Solution:
► Although Entity A does not intend to actively use the internally developed billing software after a six
month transition period, Entity A is not holding the internally developed software to prevent others from
using it. Therefore, the internally developed software asset does not meet the definition of a defensive
intangible asset.

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Useful life of intangible asset

► Useful life of an intangible asset to an entity is the period over which the asset is expected to contribute
directly or indirectly to the future cash flows.
► Factors to consider in determining useful life
► Expected use of the asset by the Company
► Expected useful life of other asset to which the intangible asset relates
► Legal, regulatory or contractual provision may limit the useful life
► Entity’s own historical experience in renewing/extending similar arrangements.
► In the absence of own experience, the entity should consider the assumptions that market participants
would use about renewal or extension
► Economic factors e.g. obsolescence, demand, competition etc.
► Level of maintenance expenditure required

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Useful life of intangible asset

► Entity should review the classification in each annual reporting period to decide whether the
assessment made about the useful life of an intangible asset as indefinite or finite is still appropriate.

► Change in useful life is accounted for prospectively as a change in accounting estimate.

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Case study

► ABC Inc a manufacturer of digital video products, acquired an exclusive annually renewable technology
license from a third party.
► ABC Inc has made significant progress in developing next generation technology for digital video
products and believes that in next two years, after it has completed developing its next generation
products; the acquired technology license would become obsolete because customers will convert to its
products.
► Market participants, however, are not as advanced in their development efforts and are not aware of ABC
Inc's proprietary development efforts. Thus, those market participants would expect the technology
license to be obsolete in three years.
► ABC Inc determines the fair value of the technology license utilizing three years of cash flows is $40
million, consistent with the highest and the best use of the asset by market participants

Is the estimate of useful life of three years of the acquired technology license by ABC Inc appropriate?

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Case study (cont..)

Solution:
► The acquiring entity would consider its own historical experience in renewing or extending similar
arrangements. In this case, the acquiring entity lacks historical experience in renewing or extending
similar arrangements. Therefore, it would consider the assumptions that a market participant would use
consistent with the highest and best use of the technology license. However, because the acquiring
entity expects to use the technology license until it becomes obsolete in two years, it must adjust the
market participants' assumptions for the entity-specific factors which requires consideration of the entity's
expected use of the asset. As a result, the technology license would be amortized over a two-year
period.

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Case study

► An acquired airline route authority from the United States to the United Kingdom expires in three years.
The route authority may be renewed every five years, and the acquiring entity intends to comply with the
applicable rules and regulations surrounding renewal.
► Route authority renewals are routinely granted at a minimal cost and have historically been renewed
when the airline has complied with the applicable rules and regulations. The acquiring entity expects to
provide service to the United Kingdom from its hub airports indefinitely and expects that the related
supporting infrastructure (airport gates, slots, and terminal facility leases) will remain in place at those
airports for as long as it has the route authority. An analysis of demand and cash flows supports those
assumptions.

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Case study

Solution:
► Because the facts and circumstances support the acquiring entity’s ability to continue providing air
service to the United Kingdom from its U.S. hub airports indefinitely, the intangible asset related to the
route authority is considered to have an indefinite useful life. Therefore, the route authority would not be
amortized until its useful life is deemed to be no longer indefinite and would be tested for impairment.

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Case study

► An acquired copyright has a remaining legal life of 50 years. An analysis of consumer habits and market
trends provides evidence that the copyrighted material will generate cash flows for approximately 30
more years

Solution:
► The copyright would be amortized over its 30-year estimated useful life following the pattern in which the
expected benefits will be consumed or otherwise used up.

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Subsequent measurement of Limited life intangibles

► Subsequent measurement of intangible asset depends on whether it has finite useful life or indefinite
useful life.

► Intangible assets with finite useful lives

► Amortize over useful life. If an intangible asset has a finite useful life, but the precise length of that life
is not known, the intangible asset should be amortized over the best estimate of its useful life.
► Amortization to reflect the pattern in which asset’s economic benefits are consumed
► Test for impairment whenever there are “triggers” present
► Reassess useful life whenever there are “triggers” present
► Amortization should be cost less residual value*

*The residual value of an intangible asset with a finite useful life should be assumed to be zero. Unless (a)
there is a commitment by a third party to purchase the asset at the end of its useful life; or (b) there is an
active market for the asset and it is probable that such a market will exist at the end of the asset’s useful life.

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Subsequent measurement of Indefinite life intangibles

► Intangible assets with Indefinite life

► Do not amortize
► Test impairment at least annually and whenever there is an indication that the intangible asset
may be impaired
► Compare book value to fair value for measuring impairment.
► If impaired, the adjusted carrying amount of the indefinite-lived intangible asset becomes the new
basis for the asset

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Case study

► Company A manufactures and distributes men’s and women’s sportswear. In 20X2, Company A
acquired Company B, a competitor that owned a prominent women’s sportswear line under
Brand W. The brand name has no limit on its legal life, and Company A intends to market and
distribute women’s sportswear products under the Brand W name indefinitely. Future cash flow
projections support the assertion that products sold under Brand W’s name will generate cash
flows for Company A for an indefinite period of time

Whether the useful life of Brand will be considered as indefinite?

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Case study

Suggested Solution:
► Company A would recognize an intangible asset for the acquisition-date fair value of Brand W. Since
Brand W is expected to contribute to cash flows indefinitely and there are no associated costs of
renewal, it would be considered to have an indefinite useful life. Accordingly, Brand W would not be
amortized unless its useful life is determined to no longer be indefinite. Rather, it would be tested for
impairment annually, or more frequently if events or changes in circumstances indicate that it is more
likely than not that the asset is impaired.

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Case study

► Assume the same facts as above, except that the women’s sportswear industry is rapidly changing, with
significant competition coming from other apparel companies that have more sophisticated technological
capabilities than Company A. Recent trends indicate that consumer preference is shifting to apparel with
sweat-absorption technology, an area in which Company A has not yet made significant advancements
(Brand W similarly did not have such technology when acquired from Company B).

Whether the useful life of Brand will be considered as indefinite?

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Case study

Suggested Solution:
► The products sold under Brand W’s name are in a competitive market that is expected to see increased
competition, which likely will result in declining consumer demand for Brand W. Further, Company A’s
lack of technological expertise to provide products with the desired sweat-absorption technology would
likely make it difficult to conclude that Brand W will generate cash flows for Company A for an indefinite
period of time. Accordingly, Brand W would be assigned a finite useful life.

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Retirement and disposal

► An intangible asset should be derecognised:

► on disposal; or
► when no future economic benefits are expected from its use or disposal.
► Gain or loss is the difference between any net proceeds received and the carrying amount of the
asset
► The disposal of an intangible asset may occur in a variety of ways (e.g. by sale, by entering into a
finance lease, or by donation).
► When a portion of a reporting unit is disposed of, goodwill of that reporting unit is included in the
carrying amount of the portion of the reporting unit in calculating the gain or loss on disposal.

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Retirement and disposal

► The amount of goodwill included in the carrying amount of the operation being disposed of is based on
the relative fair value of the business to be disposed of and the portion of the reporting unit* that will be
retained.

► If the operation being disposed of does not constitute a business, then goodwill is not included in the
carrying amount of the operation being disposed of.

*Reporting Unit: 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 (also known as a component).

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Impairment - limited-life Intangibles

► Same as impairment of long lived assets

► Impairment calculation of limited-life intangible includes two tests:
► Recoverability test: If the sum of expected future net cash flows (undiscounted) is less than the
carrying amount of the asset, an impairment has occurred
► Fair value test: Impairment amount is the amount by which the carrying amount of the asset exceed
the fair value of the asset

► The loss is reported as part of income from continuing operations “Other expenses and losses” section.

► The company can not recognize restoration of previously recognized impairment loss.

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Case study

► ABC Inc. has a patent on how to extract oil from shale rock. Unfortunately, several recent non-shale oil
discoveries adversely affected the demand for shale-oil technology. As a result, ABC performs a
recoverability test. It finds that the expected future net cash flows from the patent are $35 Million.

► ABC’s patent has a carrying amount of $60 Million. Discounting the expected future net cash flows at its
market rate of interest, ABC determines the fair value of its patent to be $20 Million.

► Perform recoverability test.

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Solution

► First test - perform a recoverability test:

Recoverability test
Expected future net cash flows $35,000,000
Carrying value of patent $60,000,000
Asset impaired ($25,000,000)

Since future net cash flows are less, asset is impaired.

► Second test – Determine how much is impairment, for which perform the fair value test

Fair value test

Carrying value of patent $60,000,000
Fair value $20,000,000
Loss in impairment ($40,000,000)

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Impairment - Indefinite-life Intangibles other than goodwill

► Should be tested for impairment at least annually.

► Impairment test is a fair value test
► If the fair value of asset is less than the carrying amount, an impairment loss is recognized for the
difference
► Recoverability test is not used

► An optional quantitative assessment may be performed to determine whether the fair value test need to
be performed.

► Reason of not doing recoverability test

Standard setter were of the view that, if asset is having an indefinite life how someone can calculate the
future cash flow of something that is going to stay forever.

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Case study

► Radio Inc. purchased a broadcast license for $2 million. Radio Inc. has renewed the license with the
FCC twice, at a minimal cost.

► Because it expects cash flows to last indefinitely, Radio Inc. report the license as a indefinite-life
intangible.

► Recently, FCC decided to auction these license to the highest bidder instead of renewing them.

► Radio Inc. expects cash flow from license for further 2 years from existing license and accordingly, it
perform an impairment test and determines the fair value of intangible is $1.5 million

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Solution

► In this case, first Radio Inc. need to reassess useful life of broadcast license. Since, Radio Inc. will not be
able to renew the license for further period at a minimal cost, life of indefinite-life intangible will change to
limited life intangible.
► Change in useful life is accounted for prospectively as a change in accounting estimate.
► On the date of reassessment company will perform the impairment test. Since life of license was
indefinite-life, only fair value test will be performed:

Fair value test

Carrying value of broadcast license $2,000,000
Less: Fair value of broadcast license $1,500,000
Loss on impairment ($500,000)

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Case Study: Change in estimates useful life: From indefinite to finite

► Company A manufactures and distributes men’s and women’s sportswear. At 31 December 20X1, Company A has an
indefinite-lived intangible asset recorded for an existing women’s sportswear brand, Brand X, from a previous
acquisition. In 20X2, Company A acquired Company B, a competitor that owned a prominent women’s sportswear line
under Brand W. The brand name has no limit on its legal life, and Company A intends to market and distribute
women’s sportswear products under the Brand W name indefinitely. Future cash flow projections support the assertion
that products sold under Brand W’s name will generate cash flows for Company A for an indefinite period of time. As
of the acquisition date, the acquisition of Brand W did not affect Company A’s conclusion that Brand X should still be
classified as an indefinite-lived intangible asset.
► In 20X3, Brand W’s sales declined while Brand X’s sales increased. Accordingly, on 30 June 20X3, Company A
determines that the continuing competition between its two brands is detrimental to Company A’s overall sales and,
therefore, decides to phase out Brand W over the next five years.

► Analysis:
► Company A’s decision to phase out Brand W over the next five years results in the determination that Brand W should
no longer be classified as an indefinite-lived intangible asset. Accordingly, Company A should test Brand W for
impairment immediately prior to the change in classification (in this case as of 30 June 20X3), and recognize an
impairment charge, if any. Company A should then amortize Brand W over its five-year useful life.

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Impairment - Goodwill

Two steps process

► Step 1: If fair value is less than the carrying amount of the net asset of reporting unit (including goodwill),
then perform a second step to determine possible impairment.
► Step 2: Determine the fair value of goodwill (implied value of goodwill) and compare to carrying amount.

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Impairment - Goodwill

► The implied fair value of goodwill shall be determined in the same manner as the amount of goodwill
recognized in a business combination or an acquisition by a not-for-profit entity was determined i.e. the
excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the
implied fair value of goodwill.
► Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the
measurement of that loss is recognized.
► Goodwill of a reporting unit shall be tested for impairment on an annual basis and between annual tests if
indicators of impairment are there.
► Annual test can be performed any time during the fiscal year provided the test is performed at the same
time every year.

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Flowchart

Qualitative assessment Step 1

Evaluate relevant facts and It is more likely’ Calculate the fair value of reporting unit and
circumstances to determine Y compare with its carrying amount (including
than not that the fair value
whether the fair value test need to of reporting unit is less goodwill),
be performed than its CA?

Is the fair value

N N
of reporting unit is less
than its CA?

Y
Step 1
Determine the fair value of goodwill (implied
value of goodwill) and compare to carrying
amount

Is the implied
N fair value of reporting unit is
Stop
less than its CA?

Y
Recognise impairment

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Case study

► ABC Inc. has three divisions. It purchased one division “PP product” four years ago for $2 million. ABC
management is now reviewing the division for purpose of recognizing an impairment.
► Below lists the PP Division’s net assets, including the associated goodwill of $900,000 from the purchase.

Cost $2,00,000
Accounting receivable $3,00,000
Inventory $7,00,000
PPE (net) $8,00,000
Goodwill $9,00,000
Accounts and notes payable ($5,00,000)
Net assets $2,400,000

► Assume that the fair value PP Division’s is $1,900,000

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Solution

► Step 1: Since fair value is less than the carrying amount, moving to second step ($1,900,000 <
$2,400,000)

► Step 2: Determine the fair value of goodwill (implied value of goodwill) and compare to carrying amount.

Fair value $1,900,000

Carrying amount (net of goodwill) $1,500,000*
Implied goodwill $4,00,000
Carrying amount of goodwill $9,00,000
Loss on impairment ($500,000)

*$2,400,000 - $900,000 = $1,500,000

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Thank You