impairment of intangible assets pwc

Intangible assets with finite useful lives are considered for impairment when there is an indication that the asset has been impaired. These valuations will require significant professional judgement. Another consideration for companies is the income tax effect from any tax-deductible goodwill on the carrying amount of the entity (or the reporting unit). As with the existing model, getting the sequencing right can help avoid potential errors in assessing impairment. Under IFRS, comparison is made between the carrying amount of the asset and the higher of fair value (less cost to sell) and value in use and any excess is recognized as impairment. The initial measurement of an intangible asset depends on whether it has been acquired separately, has been acquired as part of business combination or was internally generated. All rights reserved. For 31 March 2020 reporting dates and thereafter, companies may be faced with triggering events and be compelled to assess recoverable amounts of assets and/ or cash generating units (CGUs) in terms of International Accounting Standard 36 ‘Impairment of Assets’ (“IAS 36”). Introduction PwC 1. Intangible assets with indefinite useful lives and intangible assets not yet in use are tested annually for impairment and whenever there is an indication of impairment. Although the effect of this limitation could be mitigated by employing an enterprise premise of value when conducting Step 1 of the impairment test, there are still factors (including corporate level debt that usually does not get pushed down to the reporting unit level) that could limit the precision of the calculation. Under IFRS, an impairment loss is recognized if the carrying amount exceeds the recoverable amount of the asset. • An intangible asset with an indefinite useful life is not amortised but tested for impairment. A simultaneous equation is required to adjust the goodwill impairment and deferred tax impact when tax deductible goodwill is present. Besides goodwill and long-lived intangible assets, this may trigger the requirement for impairment tests for property, plant and equipment (PPE), inventory, financial assets, real estate and investments (including investments in associates and joint ventures). The increased emphasis on the identification of intangible assets and the mandatory annual impairment testing of goodwill has highlighted the importance of impairment as a management issue. impairment?” The answer will depend on the asset being tested and its reliance on other assets to generate cash inflows. Generally, except for brands, these assets have a definite useful life. Some acquirers might be motivated to report fewer intangibles, and higher goodwill, because most intangible assets must be amortised whereas goodwill is measured under an impairment only approach. This includes clearly outlining information and data requirements, as well as key decision points to effectively test goodwill for impairment. 1 of 3 Save and exit Continue Cancel Impairment of Intangible Assets. Companies should take a fresh look at existing processes and controls for assessing asset impairment, as proper identification of triggering events is integral to appropriately measuring goodwill impairment. 6 Taxation of intangible assets We take it further PwC offers you a multi-disciplinary team to help you design tax optimisation policies and processes for your company’s intangible assets management strategy, generating tax savings that are better applied to financing your business growth. While the approach for measuring the amount of goodwill impairment has been simplified, there are nuances in how the revised impairment guidance will interact with the subsequent measurement of other assets (not goodwill) governed by other accounting standards. All rights reserved. equipment and IAS 38 Intangible assets – Variable payments for asset purchases The IC received a request to address the accounting for variable payments to be made for the purchase of an item of property, plant and equipment or an intangible asset that is not part of a business combination. This in turn increases the carrying value of the reporting unit and may trigger further goodwill impairment. Generally, except for brands, these assets have a definite useful life. Under US GAAP, an asset‘s carrying amount is considered not recoverable when it exceeds the undiscounted expected future cash flows. Intangible assets with indefinite useful life (including goodwill) are tested for impairment at least annually and others are tested when there are indications of impairment such as legal restrictions, business restructuring, development of new technology, economic changes, etc. Examples of intangible assets with a limited-life include copyrights and patents. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. For example, for assets that are held and used, other assets (e.g. indefinite-lived intangible assets on the balance sheet. Impairment of assets (IAS 36) Financial instruments - Hedge accounting (IFRS 9) ... Intangible assets (IAS 38) Regulatory deferral accounts (IFRS 14) ... PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. We offer a combination of accounting, valuation, financial reporting and industry know-how to assist with your company’s impairment testing. Many assets (whether they are a building, a machine or a brand name) are likely to need other assets in the value chain to support their carrying amount. Early involvement and coordination between cross-functional teams from accounting, tax and valuation is critical in order to align expectations and evaluate the financial reporting implications. Such assets should be tested for impairment Observations from the front lines provides PwC’s insight on current economic issues, our perspective regarding the financial reporting complexities, and what companies should be thinking about to effectively address those issues. Under the equity premise of value, all liabilities (including debt) associated with the reporting unit are assigned to the reporting unit and included in the valuation of the reporting unit. IAS 23 - Capitalisation of borrowing costs: PwC In depth INT2015-09; IAS 36 - Impairment of non-financial assets – Expanding on the top 5 tips for impairment testing INT2015-08. © 2010 - Thu Dec 24 18:45:42 UTC 2020 PwC. Intangible assets, particularly goodwill, have constituted a significant proportion of the purchase consideration in business combinations over recent years. Such assets should be tested for impairment Where an ‘intangible resource’ is not recognised as an intangible asset, it is subsumed into goodwill. Two valuation approaches are typically employed. Goodwill and intangible assets decreased by approximately $13 million due to the strengthening of the Canadian dollar and amortization of finite life intangible assets. intangible assets, for which an annual impairment test is required, IAS 36 requires reporting entities to assess at the end of each reporting period whether there is any indication of impairment for all assets (within the scope). The IC was unable to reach a consensus on It is highly recommended that entities consult with their technical accounting advisors and valuation professionals when assessing the potential effects of a choice in valuation methodology. impairment?” The answer will depend on the asset being tested and its reliance on other assets to generate cash inflows. Contact us to discuss your business challenges. PwC and UNICEF, in support of Generation Unlimited, believe securing digital access for millions of youth can be a driver of new, more resilient economies. equipment and IAS 38 Intangible assets – Variable payments for asset purchases The IC received a request to address the accounting for variable payments to be made for the purchase of an item of property, plant and equipment or an intangible asset that is not part of a business combination. An impairment loss takes place when a company makes a judgment call that the carrying value of an intangible asset on the company balance sheet is less than fair value, or what an unpressured person would pay for the asset in an open marketplace. 'result' : 'results'}}. We also touch on the new accounting In addition to the considerations around an entity’s assets, the fair value of its liabilities, relative to their carrying amounts, may also influence the goodwill impairment analysis. The recoverable amount of an asset is defined as “the higher of the asset’s fair value minus costs of disposal and its value in use.” The value in use is a discounted measure of expected future cash flows. and long-lived assets are assessed for impairment prior to testing goodwill. Step 2 requires a hypothetical purchase price allocation to measure the amount of a goodwill impairment. Learn how previous charges may affect your ASC 842 transition. Companies have to periodically test intangible assets to see whether there’s potential for any loss due to impairment. Use cross-checks to gain comfort. COVID-19 can be seen as a triggering event for impairment testing for a significant number of entities. These complexities will be important for management and stakeholders to understand when adopting and applying the revised guidance. Where the RoU asset is part of a CGU that contains goodwill, indefinite-life intangible assets, or intangible assets that are not yet ready for use, it will be included as part of the annual impairment requirement. Set preferences for tailored content suggestions across the site, Navigating the new goodwill impairment testing guidance (ASU 2017-04), {{contentList.dataService.numberHits}} {{contentList.dataService.numberHits == 1 ? IAS 36 applies to a variety of non-financial assets including property, plant and equipment, right-of-use assets, intangible assets and goodwill, investment properties measured at cost and investments in associates and joint ventures 2. Under the old guidance, a more precise determination of goodwill impairment would have been addressed in Step 2 by determining the implied fair value of the goodwill. In rising interest rate environments, the fair value of these financial assets will often be significantly less than the carrying value, which consequently could lead to the impairment of goodwill to reflect the decrease in the fair value of the reporting unit. Under IAS 36, ‘Impairment of assets’, these assets are required to be tested annually for impairment irrespective of indictors of impairment (IAS 36 para 10). Intangible assets with finite useful lives are considered for impairment when there is an indication that the asset has been impaired. • The depreciation method/amortisation method used would reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. [IAS 36.2, 4] PwC refers to the US member firm, or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. The general requirement of IAS 36 is that assets are tested for impairment where there is an impairment indicator, and this includes RoU assets. Without the more involved calculation that would have been performed when applying Step 2 (i.e., the implied fair value of goodwill is no longer calculated), there is a higher potential for a less precise amount of goodwill impairment. US GAAP does not require the use of an enterprise or equity premise. The revised guidance simplifies the goodwill impairment test to address concerns related to the existing test’s cost and complexity by eliminating Step 2 (see diagram) of the current goodwill impairment test. Intangibles Assets Non-financial assets recognised by an entity under Ind AS may include, tangible fixed assets such as Property, Plant and Equipment (PPE), investment property and intangible assets such as technology, brands, etc. Reversal of Impairment Loss. Fig 3. intangible assets) requires a detailed understanding of the value chain of the business and the extent to which the services play an important role within this value chain. The general requirement of IAS 36 is that assets are tested for impairment where there is an impairment indicator, and this includes RoU assets. inventory, financial assets, etc.) Please see www.pwc.com/structure for further details. Consider the example of a company that has long-lived assets that are recoverable under ASC 360-10: Property, Plant and Equipment—but the fair value of its fixed assets or finite-lived intangible assets have fallen below their carrying amounts. The effect that debt may have on the analysis will be dependent on the valuation approach selected. The standard states that it is acceptable to perform impairment tests at any time in the financial year, … Effective coordination between accounting and tax professionals will help appropriately reflect goodwill and deferred tax balances in the financial statements. The carrying value of each CGU containing the assets and goodwill being reviewed should be compared with the higher of its value in use and fair value less costs of disposal. As leases are now recorded on the balance sheet, we begin with a recap of how the long-lived asset impairment model works. This is specifically relevant to cases in which an entity has a zero or negative carrying amount for any of its reporting units. Only intangible assets with an indefinite life are reassessed each year for impairment. This document sets out to highlight potential challenges that preparers of impairment assessments are likely to face in the current environment. The Business combinations and noncontrolling interests guide discusses the definition of a business and transactions in the scope of accounting for business combinations under ASC 805.It also provides guidance on identifying the acquirer, determining the acquisition date, and recognizing and measuring the net assets acquired. The amount of the impairment loss reduces the carrying amount of the asset on the balance sheet and reduces net income on the income statement. Given the unique nature of such services, a suffi-ciently reliable comparable transaction may be difficult to identify and therefore other TP methods may be more reliably applied. All rights reserved. Asset impairment tests Typical intangible assets at telecom companies, besides goodwill, are telecom licences, internally developed software, subscriber acquisition costs3 and customer relationships, brands and trademarks acquired in a business combination. 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