Many medical device manufacturers will find themselves recording intangible assets, such as patents and licenses, on their balance sheet.
FASB Accounting Standards Codification, ASC 350 provides the authoritative guidance for the initial recognition and subsequent accounting for nongoodwill intangibles.
FASB ASC 350 requires you to amortize nongoodwill intangible assets with finite lives. For similar assets with indefinite lives, you don’t need to amortize. You’re required to review both classifications of nongoodwill intangibles for impairment but under different approaches.
Impairment testing for nongoodwill intangible assets with finite lives
You should review an intangible asset for impairment if it’s subject to amortization in accordance with FASB ASC 350.
The guidance requires you to test a long-lived asset or asset group for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
The carrying amount of a long-lived asset isn’t recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Some examples of nonrecoverable assets might include:
- A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used
- A significant change in legal factors or business climate that could affect the value of the long-lived asset
- Current period operating or cash flow loss combined with previous losses or projected future losses.
An entity should recognize an impairment loss if the carrying amount of the intangible asset isn’t recoverable. And, if it exceeds its fair value.
The recorded loss is based on the amount of the asset at the date it’s tested for recoverability. Whether the asset is in use or under development. The impairment loss is measured by the amount that the carrying value of the intangible asset exceeds its fair value.
After an impairment loss is recognized, the adjusted carrying amount of the intangible asset would become its new accounting basis. The guidance prohibits a subsequent reversal of a recognized impairment loss.
Impairment testing for nongoodwill intangible assets with indefinite lives
Intangible assets with indefinite lives aren’t amortized. However, the guidance requires you to review impairment at least annually.
The same factors in the preceding section are also indicators of impairment for intangible assets with indefinite lives.
When testing for impairment of indefinite-lived intangible assets, an entity can perform an initial qualitative assessment. This assessment determines whether it’s more likely than not that the asset is impaired.
If the intangible asset is impaired after the initial qualitative assessment, calculate the asset’s fair value. Then, compare it with the carrying value to determine whether you should recognize an impairment loss.
However, if you determine the probability that the indefinite life asset is impaired is less than 50%, you don’t need to calculate the fair value of the intangible asset. And, you don’t need to perform the quantitative impairment test.
An entity is allowed to bypass the qualitative assessment and proceed directly to the quantitative impairment test.
FASB ASC 350 provides varying guidance on the treatment of long-lived assets that can be difficult to interpret and implement. In summary, assets with finite lives are amortized over their useful life.
Impairment testing should be performed whenever events give rise to the recoverability of the intangible asset.
On the other hand, intangible assets with indefinite lives aren’t amortized and should be reviewed at least annually for impairment. Or, more frequently if events or changes in circumstances indicate that it’s more likely that the asset is impaired.
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