Recent global events coupled with the SEC’s growing focus surrounding reporting on impaired assets has created new financial reporting challenges with respect to impairment testing in accordance with ASC 350 and ASC 360. We recently produced a webinar, co-sponsored with Intelligize, reminding participants of the requirements of ASC 350 and ASC 360, and hot topics with respect to impairment testing noted by the SEC. This post summarizes the topics and issues covered in the webinar, as well as answers to the questions from participants that we were unable address during the webinar. If you’d like to watch the replay of the webinar in its entirety, check it out here.

When we decided to co-sponsor the webinar with Intelligize, we let them pick the topic. They chose impairment, specifically impairment of non-financial assets as set out in ASC 350 and ASC 360. Why? Because they had noted an increase in the number and amount of impairment charges recorded by companies, as well as a growing SEC focus surrounding the reporting on impaired assets. We discussed some of the reasons for this increase during the webinar.

We asked Dina Arouri, Research and Content Development Manager for Intelligize, what percentage of Fortune 500 companies had impairment as a critical audit matter (CAM) in their most recent auditor’s report. She showed us how to use Intelligize to quickly research the answer, which was somewhere around 80%. Looks like we got ourselves a “winner” with respect to this being a relevant topic!

Accounting guidance and key issues

Chris Brundrett then provided a quick summary of the guidance within ASC 350 and ASC 360 related to the three different impairment models within U.S. GAAP for:

1. Indefinite-lived intangible assets
2. Long-lived assets and finite-lived intangibles
3. Goodwill

When asked what his top 3 key issues were related to these impairment models noted by auditors and regulators, Chris listed:

1. Identifying triggering events and qualitative assessment factors that would trigger an (additional) impairment test
2. Testing assets for impairment at too high of a level (i.e., proper identification of asset groups and reporting units)
3. Determining the fair value of either the asset, asset group, or reporting unit in accordance ASC 820, specifically market participant assumptions

Not a bad list. Way to go, Chris!

Using a class discussion and polling question, we then discussed the proper order in which to perform impairment tests and why it is so important. I’m glad we did because only about a third of the class got the question right!

We then discussed the new goodwill impairment test set out in ASU 2017-04 Simplifying the Test for Goodwill Impairment and how this guidance eliminated step 2 of the previous test. Thank goodness because that step was a pain! Public business entities (PBEs) that are SEC filers (excluding SRCs) have already adopted this guidance, but other entities don’t have to adopt ASU 2017-04 until next year.

Comment letters

After providing an overview of SEC comment letters, Dina showed us how to use Intelligize to pull examples of comment letters related to impairment. This example she found highlights the issues the SEC is focused on related to goodwill impairment:

We took a poll of the participants, asking them the most frequent area of SEC comment letters, and they passed with flying colors. The correct answer is, of course, non-GAAP financial measures, which is good because that was the topic covered by the webinar!

Non-GAAP financial measures

We ended the webinar with a review of an example of a non-GAAP reconciliation disclosed by an SEC filer Dina found using Intelligize. The discussion was, shall I say, spirited! Let’s just say the “I” in EBITA does not stand for impairment!

Need a summary of the requirements and reminders related to reporting non-GAAP financial measures? Check out this post or this one which highlight some of the issues with non-GAAP financial measures being raised by the SEC.

Questions from participants

Does an impairment indicator for one piece of equipment really trigger the need to perform an impairment test for the much larger asset group?

Yes, assuming the equipment is material and doesn’t have identifiable cash flows that are largely independent of the cash flow of other assets and liabilities within the asset group.

Can asset grouping be down to the individual asset level in the real estate leasing industry?

Sure, if it has identifiable cash flows which are largely independent of the cash flows of other assets and liabilities.

When you have a product line that was acquired and has plans to sunset, how should you treat the impairment of the technology?

Likely the technology does not have its own independent cash flows and, therefore, would be included in a larger asset group, which very well could be the product line. If an impairment trigger exists, then the asset group would be tested for impairment. Now, here’s the interesting part: if the larger asset group is tested and it is not impaired, none of the assets within the group are written down. Therefore, it could be that everyone knows darn well the technology is impaired, but, since it doesn’t have its own cash flows, it can’t be tested for impairment separately. And you just can’t write it off because you feel like it! And if the technology does have its own independent cash flows, we have a different story.

Where would internal-use, capitalized software fall within the previous categories?

Internal-use software is an intangible asset and accounted for in accordance with ASC 350-40. Software certainly has a useful life (which is probably limited) and, therefore, is governed by the trigger-based 2-step impairment test set out in ASC 360-10.

If a company only has “organic” trademarks, are the trademarks an asset in the financial statements? If not, then is it accurate that there is no impairment testing done for these trademarks?

No. Internally generated intangible assets are not recognized in the financial statements (ASC 350-30-25-3) and, therefore, impairment testing is a moot point.

What about trademarks that a company paid an outside firm to creatively create? And the costs to register the trademark?

These would still be considered internally generated intangible assets and, therefore, would not be recognized in the financial statements. Whether you pay your own people to develop your brand or a third-party vendor, it is still internally generated.

Now the costs to register and defend intangible assets are a different story. Such costs can be capitalized in certain circumstances.

How do you determine the fair value of an asset that is unique (e.g., a manufacturing plant that is the only one of its kind in the world)?

Very carefully! Just kidding. It’s tough, but if that manufacturing plant has an indicator of impairment, it must be tested. Likely, you would need use an independent valuation specialist and, since the asset is unique, they would likely not be able to use a market approach and instead would use an income approach (e.g., discounted cash flows) to determine the fair value. Just make sure they use market participant assumptions as required by ASC 820.

Is the sequence for impairment testing and impairment recognition the same?

As a reminder, the sequence for impairment testing (and recognition if any of these assets are impaired) is as follows:

In other words, goodwill is tested last for impairment and, if impaired, should only be written down once all the other assets in the reporting have been tested for impairment and written down, if needed.

For EBITDA, can it be shown in the Form 8-K without triggering SEC comments?

Sure, but it is a non-GAAP financial measure and, as such, would need to follow the requirements of Regulation G and Item 10(e) of Regulation S-K. Don’t want to trigger SEC comments? Follow the rules!

Evaluation and next steps

Based on review of the evaluations, participants really seemed to enjoy our impairment webinar. Here’s a sample of the comments we received in response to the question “What, if anything, did you specifically like about the webinar?”

Really well done. The presenters knew what they were talking about and polling questions kept me engaged. This is a better webinar presentation than the majority of Big 4 CPE offerings.

The presentation was clear. The points and examples were adequately explained.

The poll questions and walk through Intelligize.

Thank you for making this topic interesting and entertaining. The additional presentation on Intelligize was very helpful.

Clear and to the point. No nonsense talk. All presenters are highly effective. Loved their way of presenting the topics and enjoyed the demo/showcase of the new Analytics tool. Well done! 

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Want to learn more about impairment? Check out our Impairment of Non-Financial Assets topic page or, if you’re ready to dive into training, our impairment eLearning course collection. And I’ll let you in on a little secret…use the code Intelligize50 to receive 50% off!

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