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Controlling and Reporting of Intangible Assets
Intangible Asset Impairment
Accounting Textbooks Boundless Accounting Controlling and Reporting of Intangible Assets Intangible Asset Impairment
Accounting Textbooks Boundless Accounting Controlling and Reporting of Intangible Assets
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Accounting
Concept Version 9
Created by Boundless

Indefinite-Life Impairment

Because Indefinite-life tangibles continue to generate cash they can't be amortized; they must be evaluated for impairment yearly.

Learning Objective

  • Summarize how to impair indefinite life intangibles


Key Points

    • Examples of Indefinite-life intangibles are goodwill, trademarks, and perpetual franchises.
    • Instead of amortization, indefinite-life assets are evaluated for impairment yearly.
    • The Impairment cost is calculated as: Carrying value - Recoverable amount.

Terms

  • intangible

    Incapable of being perceived by the senses; incorporeal.

  • impairment

    When the carrying value exceeds the fair value.

  • Indefinite

    Without limit; forever, or until further notice; not definite


Example

    • A software company has a trademark valued at $10 million with an indefinite useful life. Due to market conditions, the company believes the trademark's value has decreased and tests it for impairment at the end of the year. Year end calculations reveal the trademark is valued at $8 million and an impairment loss of $2 million is recorded as a debit to Loss on Trademark Impairment on the income statement and a credit to Accumulated Impairment Losses on the balance sheet (disclosed as a contra asset account to the intangible asset).

Full Text

Indefinite-Life Impairment

In accounting, intangible assets are defined as non-monetary assets that cannot be seen, touched or physically measured.

Under US GAAP, intangible assets are classified into: Purchased vs. internally created intangibles, and Limited-life vs. indefinite-life intangibles.

Since intangible assets are typically expensed according to their respective life expectancy, it is important to understand the difference between limited-life intangible assets and indefinite-life intangible assets. Intangible assets with identifiable useful lives (limited-life) include copyrights and patents. These items are amortized on a straight-line basis over their economic or legal life, whichever is shorter.

Some examples of indefinite-life intangibles are goodwill, trademarks, and perpetual franchises. Indefinite-life tangibles are not amortized because there is no foreseeable limit to the cash flows generated by those intangible assets. Instead of amortization, indefinite-life assets are evaluated for impairment yearly. If an impairment has occurred, then a loss must be recognized.

The purpose of the accounting cycle

Properly reporting items is important to the accounting cycle.

An Impairment cost must be included under expenses when the carrying value of a non-current asset exceeds the recoverable amount. The Impairment cost is calculated as:

Carrying value - Recoverable amount

The carrying amount is defined as the value of the asset as displayed on the balance sheet. The recoverable amount is the higher of either the asset's future value for the company or the amount it can be sold for, minus any transaction cost.

Intangibles can also be classified as: legal intangibles or competitive intangibles. Legal intangibles are also known as Intellectual Property. They include trade secrets, copyrights, patents, and trademarks. Competitive intangibles comprise knowledge activities, know-how, collaboration activities, leverage activities, and structural activities.

Reversal of Impairment Loss

When an intangible asset's impairment reverses and value is regained, the increase in value is recorded as a gain on the income statement and reduction to accumulated impairment loss on the balance sheet, up to the amount of impairment loss recorded in prior periods. Increases in value in excess of prior impairment loss is debited directly to the asset and credited to a revaluation reserve account in the equity section of the balance sheet. According to IAS 36, reversal of impairment losses for goodwill are not allowed.

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