Impairment Testing: ASC 350, 360 and IAS 36

Impairment, in the context of an acquired business or asset, generally refers to a decrease in book or carrying value of an underlying asset(s) of the company, such as goodwill, customer relationships, a tradename, equipment, or real estate.

Impairments are caused by an acquirer not meeting the financial projections established for the acquired assets or enterprises, either due to the acquirer’s overestimation of future performance of the acquired assets/business, or by market conditions beyond the control of the acquirer.

Testing for Impairment has been a part of the US Financial Reporting lexicon for almost 20 years. Under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Subtopic 350-20-35-1, goodwill and certain intangible assets are not amortized by public companies; rather, these assets must be periodically tested for impairment under ASC No. 350, Intangible-Goodwill and Other.

According to ASC 350-20-35-30, goodwill should also be tested for impairment “between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount” (a “triggering event”). Testing is typically performed annually and provides management, auditors, and investors with some assurance that the company’s balance sheet reflects the current expectations. Furthermore, ASC 360 and 842 address the impairment assessment of non-financial long-lived assets such as machinery and equipment, leases, customer relationships and technology.

 

ASC 350 requires interim impairment testing for public and private companies when certain triggering events occur.  The following are examples of possible triggering events[1]:

  • Deterioration of macroeconomic conditions
  • Obsolescence of a product line or equipment
  • Limitations on accessing capital
  • Fluctuations in foreign exchange rates
  • Increased competition
  • Decline in market multiples
  • Industry weakening
  • Change in product/service demand
  • Industry weakening
  • Change in product/service demand
  • Changes in regulatory or political environments
  • Increased costs
  • Declining revenues and/or cash flows
  • Lost customers
  • Contemplation of bankruptcy
  • Litigation
  • Changes in how the reporting unit is structured/the asset group
  • A sustained decline in share price, if applicable

 

[1] As indicated in FASB ASC 350-20-35-3F, these examples are not all-inclusive, and an entity should consider other relevant events and circumstances that affect the fair value of a reporting unit.

 

Marshall & Stevens performs impairment testing analyses annually for some clients and on an as needed basis for others. Several of our senior valuation professionals have worked in the valuation practices of international public accounting firms doing the same review your audit team will perform. We are happy to coordinate with you and your audit team upon request. 

For more information about impairment testing, please contact one of the professionals below or look to the links to the right.

Impairment Testing Services Contacts

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