Understanding ASC 350

ASC 350, Intangibles – Goodwill and Other, governs the subsequent accounting for goodwill and intangible assets after their initial recognition. While initial recognition typically occurs through a business combination (ASC 805) or a separate asset acquisition, ASC 350 addresses the ongoing questions that every finance team faces: How do we amortize intangible assets? When do we test for impairment? And how do we measure impairment when it occurs?

These questions carry significant financial statement consequences. Goodwill impairment charges can be among the largest single items on an income statement, and intangible asset amortization drives meaningful differences between GAAP and non-GAAP earnings. This guide provides a practical framework for managing both.

Intangible Assets: Finite-Lived vs. Indefinite-Lived

Finite-Lived Intangible Assets

Most acquired intangible assets have a finite useful life and are amortized over that life. Common examples include:

  • Customer relationships (typically 5-15 years)
  • Developed technology (typically 3-7 years)
  • Non-compete agreements (typically 2-5 years)
  • Order backlog (typically less than 1 year)
  • Patents (remaining legal life or shorter economic life)

Amortization method: The amortization method should reflect the pattern in which the economic benefits are consumed. If that pattern cannot be reliably determined, straight-line amortization is used. For customer relationships, an accelerated method (based on projected customer attrition) is common, though straight-line is also acceptable.

Indefinite-Lived Intangible Assets

Some intangible assets have no foreseeable limit to the period over which they are expected to generate cash flows. The most common example is a trade name or brand that is expected to contribute to revenue indefinitely. Indefinite-lived intangible assets are not amortized but are tested for impairment at least annually.

Reassessment: At each reporting period, evaluate whether events or circumstances continue to support an indefinite useful life. If the useful life is no longer indefinite, reclassify the asset as finite-lived and begin amortization.

Goodwill: No Amortization, Annual Impairment Testing

Goodwill is not amortized under US GAAP for public companies and most non-public companies (though a private company alternative exists that permits goodwill amortization over 10 years). Instead, goodwill is tested for impairment at least annually, or more frequently when triggering events indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

The Private Company Alternative

Under ASU 2014-02, private companies can elect to amortize goodwill on a straight-line basis over 10 years (or a shorter period if the company demonstrates that a shorter useful life is more appropriate). If the election is made, the entity tests goodwill for impairment only when a triggering event occurs, rather than annually.

Identifying Reporting Units

Goodwill impairment testing is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (a component). Components with similar economic characteristics may be aggregated into a single reporting unit.

Practical Considerations

  • Reporting unit identification is a judgment that should be documented and revisited when the organizational structure changes.
  • Reorganizations, divestitures, or changes in how the chief operating decision maker (CODM) reviews financial results can trigger a reassignment of goodwill to new or modified reporting units.
  • When goodwill is reassigned, it should be allocated based on relative fair values of the businesses being reorganized.

The Goodwill Impairment Test

Step 0: Qualitative Assessment (Optional)

Before performing a quantitative impairment test, an entity may perform a qualitative assessment to determine whether it is more likely than not (greater than 50%) that the fair value of a reporting unit is less than its carrying amount. Factors to consider include:

  • Macroeconomic conditions (recession, rising interest rates, declining markets)
  • Industry and market conditions (new competitors, regulatory changes, declining demand)
  • Entity-specific events (loss of key customers, management turnover, litigation)
  • Financial performance (actual results vs. projections, declining margins, cash flow deterioration)
  • Stock price declines (for public companies, a sustained decline below book value)
  • Changes in the cost of capital or discount rates

If the qualitative assessment concludes that impairment is not more likely than not, no further testing is required. If it is more likely than not, proceed to the quantitative test.

Step 1: Quantitative Impairment Test

Compare the fair value of the reporting unit to its carrying amount (including goodwill). If the fair value exceeds the carrying amount, there is no impairment. If the carrying amount exceeds the fair value, recognize an impairment charge equal to the excess, limited to the amount of goodwill allocated to that reporting unit.

Key simplification: ASU 2017-04 eliminated the former Step 2, which required a hypothetical purchase price allocation to determine the implied fair value of goodwill. Now, the impairment charge is simply the difference between the carrying amount and the fair value of the reporting unit (capped at the goodwill balance).

Fair Value Measurement for Reporting Units

Determining the fair value of a reporting unit is the most judgment-intensive part of the impairment test. Common approaches include:

Income Approach (Discounted Cash Flow)

This is the most commonly used method. It involves projecting the reporting unit’s future cash flows and discounting them to present value using a weighted average cost of capital (WACC).

Critical inputs:

  • Revenue growth rates – Should be consistent with the entity’s budget and long-range plan, tempered by market conditions.
  • Margin assumptions – Operating margins should reflect historical trends and expected changes.
  • Terminal value – Typically calculated using a perpetuity growth model with a long-term growth rate (often 2-4%).
  • Discount rate – The WACC should reflect the risk profile of the reporting unit, not the consolidated entity.

Market Approach

Uses market multiples from comparable public companies or precedent transactions. Common multiples include EV/Revenue, EV/EBITDA, and P/E ratios.

Reconciliation to Market Capitalization

For public companies, the sum of the fair values of all reporting units should reconcile to the company’s market capitalization (plus an appropriate control premium). If the sum of reporting unit fair values significantly exceeds or falls below market capitalization, the entity must evaluate and explain the difference.

Impairment Testing for Indefinite-Lived Intangible Assets

The framework is similar to goodwill impairment testing:

  1. Optional qualitative assessment – Determine whether it is more likely than not that the asset’s fair value is less than its carrying amount.
  2. Quantitative test – Compare the fair value of the intangible asset to its carrying amount. If the carrying amount exceeds fair value, recognize an impairment charge for the difference.

The relief-from-royalty method is the most common valuation technique for trade names and other indefinite-lived intangible assets.

Impairment of Finite-Lived Intangible Assets

Finite-lived intangible assets are tested for impairment under ASC 360, Property, Plant, and Equipment (not ASC 350), using a two-step process:

  1. Recoverability test – Compare the undiscounted future cash flows expected from the asset (or asset group) to its carrying amount. If undiscounted cash flows exceed the carrying amount, no impairment exists.
  2. Fair value measurement – If the asset fails the recoverability test, measure the impairment as the excess of the carrying amount over the fair value.

Triggering Events for Finite-Lived Assets

Unlike goodwill and indefinite-lived intangibles, finite-lived intangible assets are not tested annually. They are tested only when events or changes in circumstances indicate that the carrying amount may not be recoverable. Common triggers include:

  • Significant decline in revenue from the underlying customer base
  • Loss of a key customer associated with a customer relationship intangible
  • Technological obsolescence rendering developed technology less valuable
  • Adverse regulatory changes affecting the value of licenses or permits

Common Pitfalls and Best Practices

Pitfall 1: Using Stale Projections

The cash flow projections used in impairment testing should reflect the most current view of the business. Using the prior year’s budget or an outdated long-range plan can lead to either missed impairments or overstated fair values.

Pitfall 2: Ignoring Qualitative Indicators

Many impairment surprises occur because the quarterly monitoring of qualitative indicators was insufficient. Build a quarterly impairment indicator checklist and assign ownership to a specific team member.

Pitfall 3: Inconsistent Discount Rates

The discount rate used in the impairment test should be consistent with the risk profile of the reporting unit’s projected cash flows. If the projections are aggressive (optimistic), the discount rate should be correspondingly higher to reflect the execution risk.

Pitfall 4: Inadequate Documentation

Auditors will scrutinize the impairment analysis, particularly when the headroom (excess of fair value over carrying amount) is thin. Document the key assumptions, the basis for those assumptions, and the sensitivity of the conclusion to changes in the key inputs.

Building an Annual Impairment Testing Process

Follow this timeline to manage the annual impairment test effectively:

  1. Q1 – Confirm reporting unit structure and goodwill allocation. Update the qualitative indicator checklist.
  2. Q2 – Begin updating long-range cash flow projections. Engage a valuation specialist if needed.
  3. Q3 – Perform the qualitative assessment (if elected) or begin the quantitative analysis. Update discount rates and market multiples.
  4. Q4 – Finalize the impairment analysis, review results with management and the audit committee, and prepare disclosures.
  5. Ongoing – Monitor for interim triggering events each quarter.

Final Thoughts

Impairment testing is not just a year-end compliance exercise. It is a discipline that forces management to critically evaluate the carrying value of its most significant assets against current economic realities. Organizations that invest in a robust, year-round monitoring process and maintain high-quality documentation will navigate impairment testing with far less stress and far fewer surprises.