Intangible Assets and Goodwill Impairment: CPA FAR Exam Guide
Learn how to account for intangible assets and test goodwill for impairment under ASC 350 for the CPA FAR exam, including finite-life and indefinite-life assets.
Overview of Intangible Assets Under ASC 350
Intangible assets are identifiable nonmonetary assets without physical substance. ASC 350 (Intangibles - Goodwill and Other) governs the accounting for intangible assets and goodwill. These topics are frequently tested on the CPA FAR exam, particularly in the context of business combinations, amortization, and impairment testing.
Types of Intangible Assets
Finite-Life Intangible Assets
Intangible assets with a determinable useful life are amortized over that life. Examples include patents, copyrights, franchise agreements with limited terms, customer lists, and noncompetition agreements. Amortization is typically straight-line unless another method better represents the pattern in which the asset's economic benefits are consumed. Finite-life intangibles are also subject to impairment testing under ASC 360 (similar to tangible long-lived assets) whenever events or circumstances indicate the carrying amount may not be recoverable.
Indefinite-Life Intangible Assets
Intangible assets with an indefinite useful life are not amortized. Instead, they are tested for impairment at least annually. Examples include trademarks and trade names that can be renewed indefinitely, broadcast licenses, and goodwill. An indefinite life does not mean infinite; it means there is no foreseeable limit to the period over which the asset is expected to generate cash flows.
Internally Generated vs. Acquired Intangibles
Under US GAAP, most costs to internally develop intangible assets are expensed as incurred. Research and development costs are expensed per ASC 730. The notable exception is software development costs, which are capitalized after technological feasibility is established (ASC 985-20 for software to be sold) or during the application development stage (ASC 350-40 for internal-use software).
Intangible assets acquired in a business combination are recognized at fair value, even if they were not previously reported on the acquiree's balance sheet. This includes customer relationships, technology, trade names, and other identifiable assets that meet the contractual-legal criterion or the separability criterion.
Goodwill
Goodwill is the excess of the consideration transferred in a business combination over the net identifiable assets acquired at fair value. It is recognized only in a business combination and cannot be internally generated. Goodwill is assigned to reporting units for impairment testing purposes.
Goodwill Impairment Testing
Under ASU 2017-04, the goodwill impairment test was simplified to a one-step quantitative test. An entity compares the fair value of a reporting unit to its carrying amount (including goodwill). If the carrying amount exceeds the fair value, an impairment loss is recognized equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. The previous two-step test, which required a hypothetical purchase price allocation, was eliminated.
An entity may first perform a qualitative assessment (Step 0) to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates impairment is not more likely than not, the quantitative test is not required. Qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, financial performance, and entity-specific events.
Impairment of Indefinite-Life Intangibles (Other Than Goodwill)
For indefinite-life intangible assets other than goodwill, the impairment test compares the fair value of the asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized for the difference. Like goodwill, a qualitative assessment may be performed first.
Impairment of Finite-Life Intangibles
Finite-life intangible assets follow the long-lived asset impairment model under ASC 360-10. The first step is a recoverability test: if the sum of expected future undiscounted cash flows from the asset is less than its carrying amount, the asset is impaired. The impairment loss is then measured as the difference between the carrying amount and the fair value of the asset. Once recognized, impairment losses on long-lived assets cannot be reversed.
Presentation and Disclosure
Amortized intangible assets are presented net of accumulated amortization. The aggregate amortization expense for the period must be disclosed, along with estimated amortization expense for each of the next five years. Goodwill is presented as a separate line item on the balance sheet. Changes in the carrying amount of goodwill by reporting segment must be disclosed.
Exam Preparation Tips
- Distinguish between finite-life (amortized) and indefinite-life (not amortized, tested annually for impairment) intangible assets.
- Know the simplified one-step goodwill impairment test: compare fair value of the reporting unit to its carrying amount.
- Understand the two-step process for finite-life intangibles: recoverability test (undiscounted cash flows) then measurement (fair value).
- Remember that internally generated intangibles are generally expensed, while acquired intangibles are capitalized at fair value.
- Know that impairment losses on long-lived assets and intangibles cannot be reversed under US GAAP.
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