A new proposal from the Financial Accounting Standards Board may save companies some third-party costs involved with measuring the fair value of intangible assets.
The change would give companies more flexibility in how they determine whether certain assets need to be tested for impairment. Similar to a rule approved last year for goodwill-impairment tests, this proposed amendment to a FASB rule would let companies make a “qualitative” assessment of whether the fair value of an indefinite-lived intangible asset is more than its carrying amount (the book value) because of events and circumstances that occurred during the year.
If the company determines that the fair value is “more likely than not” higher, it won’t need to calculate the actual fair value. Such a valuation can be complex and costly.
Indefinite-lived intangible assets — which include trademarks, licenses, and distribution rights — are not amortized. They must be tested on an annual basis to see if their fair value falls below the carrying amount. If it does, the company will need to record an impairment loss.
Given the rules in their current form, companies have often felt compelled to make that yearly determination for possible write-downs by using the services of outside valuation experts. But in some instances, companies could use so-called qualitative factors to determine whether the fair value of these intangible assets has shifted. This entails considering events and circumstances that could have affected the inputs used to determine the fair value of an asset, such as changes in foreign-exchange rates and costs.
Under the new guidance, if approved, companies won’t feel a need to have every valuation checked by outside parties. “If a company can satisfy itself that more likely than not there has been no impairment, based on a thoughtful assessment of qualitative factors, then it won’t be required to take the next step of paying someone to quantify that assessment,” says Chris Smith, a partner and audit and accounting practice leader at accounting and consulting firm BDO USA.
In some cases, close judgement calls that management may make in this regard could lead to auditor questions later on, Smith acknowledges. Companies could still take the safe route and defer these evaluations to third parties. The new guidance says companies can “bypass” the qualitative assessment in favor of calculating an asset’s fair value.
The guidance is meant to simplify the process for companies without affecting financial reports. In a statement, FASB chair Leslie Seidman said the proposed amendment will reduce costs “without changing the information provided to investors.”
The change, which is open for public comment through April 24, would go into effect for fiscal years beginning after June 15, 2012.
Sarah Johnson is senior editor for news at CFO.