Possible impairment of intangible assets has to be assessed on a periodical basis. Intangible assets are tested for impairment when there is indication that they might be impaired. Indicators of impairment include legal restrictions, business restructuring, development of new technology, economic changes, etc. Impairment of intangible assets
Impairment test for intangible assets is the same as that for a tangible fixed asset:
- comparing the carrying amount of the asset, and Impairment of intangible assets
- the higher of fair value (less cost to sell) and value in use. Impairment of intangible assets
If b) is lower than a) that difference is recognized as impairment. Impairment of intangible assets
Impairment test for goodwill is a little more complex. The goodwill is first allocated to different units of the business and each unit is tested for impairment individually and the whole impairment loss is then aggregated.
Selai Telecom is mobile telecom operator that purchase a 4G license for $200 million in 2014 which is valid for a 10-year period for a small annual fee. The company expected that the license will generate revenues of $50 million per year for the next 8 years. However, after the first year of operations, the market reception of the new technology is not very encouraging, and the company is forced to revise its estimate of annual cash flows down to $30 million per annum. Further, due to rapid advancement in the technology standards, it now expects new technology to take over in 5 years thereby eliminating any economic benefits from the 4G license.
The decline in market performance and the technological advancement are an indication of impairment necessitating an impairment review.
During the first year, the license amortization expense would be $25 million ($200 million divided by 8). The license’s carrying value at the end of first year works out to $175 million. The test requires the company to work out the license’s fair value. Since the license is not transferable (i.e. fair value less cost to sell is zero), the fair value must be estimated based on the value in use, which is the present value of future cash flows. If the appropriate discount rate is 10%, the fair value of the license works out to $113.72 million.
The impairment loss in this case equals $61.28 million i.e. the amount by which the carrying value, which is $175 million, exceeds the fair value, i.e. $113.72 million.
The impairment loss would be recognized using the following journal entry:
PNL – Impairment loss Impairment of intangible assets
Intangible assets – License impairment loss Impairment of intangible assets Impairment of intangible assets
Under IFRS, the impairment, if any, is worked out by directly comparing the carrying amount with the higher of the fair value less cost to sell (which is zero in this case) to the value in use (which is $113.72 million). There is no need to compare the sum of undiscounted cash flows to the carrying amount. Impairment of intangible assets
Related topics Impairment of intangible assets
Identifying an asset that may be impaired
IAS 36 requires entities to assess at the end of each reporting period whether an asset may be impaired (IAS 36 9) and provide a list of minimum impairment indicators to be considered (see paragraphs IAS 36 12-17). Irrespective of existence of any impairment indicators, goodwill and intangible assets with an indefinite useful life or not yet available for use must be tested for impairment at least annually (IAS 36 10). Impairment of intangible assets
Definition of the recoverable amount
Recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use (IAS 36 6).
Fair value less costs of disposal
Fair value less costs of disposal is the fair value less incremental costs directly attributable to the disposal of an asset (see IAS 36 28-29). It is important to note that fair value less costs of disposal may be used as a basis for recoverable amount even if the entity does not intend to sell the asset.
Fair value measurements are covered in IFRS 13 Fair value measurement.
See also: The IFRS Foundation
Impairment of intangible assets
Impairment of intangible assets Impairment of intangible assets
Impairment of intangible assets Impairment of intangible assets Impairment of intangible assets