FAR · Select balance sheet accounts · 6 practice questions
Intangible impairment: finite vs indefinite, life changes
Finite-lived intangibles use a recoverability screen; indefinite-lived intangibles go straight to fair value. Below: a step-by-step decision tree and 9 free practice questions.
Try one first
Hint
Separate the finite-lived and indefinite-lived intangibles before doing any math, and decide whether the patent is tested by itself or with other assets.
Answer B. The finite-lived patent must be tested as part of the Product Line A asset group because it does not generate independent cash flows; the group's undiscounted cash flows ($1,140,000) exceed the group's carrying amount ($320,000 + $780,000 = $1,100,000), so the group is recoverable and no impairment is recognized for the patent. The indefinite-lived trade name is tested separately by comparing carrying amount to fair value; its fair value ($225,000) is less than carrying amount ($260,000), so a $35,000 impairment loss is recorded.
Why not A: Tempting because it compares the patent's carrying amount directly to its standalone fair value (320,000 − 210,000 = 110,000). That's incorrect here: the patent must be tested within the Product Line A asset group, and the asset group is recoverable based on undiscounted cash flows, so no patent impairment is recognized.
Why not C: This lures candidates who try to net unrelated assets. U.S. GAAP requires testing the trade name separately (it is indefinite-lived) and comparing its individual fair value to its carrying amount; here the trade name's fair value is below carrying, so an impairment exists.
Why not D: This option mixes errors: the asset group is not impaired because undiscounted cash flows exceed carrying amount, so no loss is measured or allocated to the patent; and the qualitative assessment for an indefinite-lived intangible is optional, not mandatory, so Noll may proceed directly to the quantitative test and must recognize the $35,000 trade name impairment.
Decide it in order
T1Is the intangible indefinite-lived on the test date?
T2Has management concluded the previously indefinite-lived intangible now has a finite life?
T3For a finite-lived intangible, does it generate largely independent cash flows?
T4On the change date (indefinite to finite), is fair value less than carrying amount?
YesRecognize an impairment loss for the shortfall, then amortize the adjusted carrying amount prospectively over the new life.NoNo impairment. Begin amortizing prospectively over the new life.T5For an indefinite-lived intangible with no life change, is fair value less than carrying amount at the annual test or when indicators exist?
YesRecognize an impairment loss equal to the shortfall in earnings; do not amortize; retest at least annually.NoNo impairment; do not amortize; retest at least annually.T6Finite-lived intangible tested alone: do undiscounted expected future cash flows equal or exceed carrying amount?
YesNo impairment. Continue amortizing over the remaining life.NoImpairment indicated. Write down to fair value and then amortize prospectively.T7Finite-lived intangible in an asset group: do the group’s undiscounted expected future cash flows equal or exceed the group’s carrying amount?
YesNo impairment for assets in the group, even if an individual asset’s fair value is lower.NoRecord an impairment for the asset group measured to fair value and allocate the loss to long-lived assets; update amortization prospectively.
Key points
- If a finite-lived intangible does not generate largely independent cash flows, include it in the related asset group’s recoverability test (ASC 360).
- Passing the recoverability screen means no impairment for a finite-lived intangible even if fair value is lower.
- Indefinite-lived intangibles (for example, trademarks) are not amortized and are tested individually at fair value, with losses in earnings, not OCI.
- Capitalize successful legal defense of an intangible; expense advertising as incurred.
- When life changes from indefinite to finite, measure impairment first, then start amortization on the adjusted carrying amount; do not backdate amortization.
- When life changes from finite to indefinite, stop amortization prospectively; do not reverse accumulated amortization and test at least annually.
How the exam traps you
- Using discounted cash flows for the recoverability screen on finite-lived intangibles. Use undiscounted cash flows to screen. Only after failure do you measure the loss using fair value.
- Including an indefinite-lived trademark in an asset-group recoverability test. Test indefinite-lived intangibles separately by comparing carrying amount to fair value.
- Recording an impairment on a finite-lived intangible just because fair value is below carrying amount. First apply the undiscounted recoverability screen. If the asset (or group) is recoverable, no impairment is recorded.
- Beginning amortization when life changes from indefinite to finite without first testing for impairment. On the change date, compare carrying amount to fair value, record any impairment, then amortize prospectively.
Question 2
| Asset | Life | Carrying Amount | Undiscounted Future Cash Flows | Fair Value |
|---|---|---|---|---|
| Patent | Finite | $480,000 | $450,000 | $410,000 |
| Customer list | Finite | $230,000 | $250,000 | $200,000 |
| Trademark | Indefinite | $300,000 | , | $260,000 |
Hint
Separate the assets by life: finite-lived intangibles do not use the same impairment screen as indefinite-lived intangibles.
Answer A. The patent (finite-lived) fails the recoverability test because undiscounted cash flows ($450,000) are less than carrying amount ($480,000); measure impairment as carrying minus fair value: $480,000 - $410,000 = $70,000. The customer list (finite-lived) passes the recoverability test since undiscounted cash flows ($250,000) exceed carrying amount ($230,000), so no impairment is recorded despite a lower fair value. The indefinite-lived trademark is tested by comparing carrying amount to fair value, producing $300,000 - $260,000 = $40,000 impairment. Total impairment = $70,000 + $40,000 = $110,000.
Why not B: Tempting if the candidate writes both finite-lived assets down to fair value (patent $70,000 + customer list $30,000) but incorrectly applies that approach to the customer list, which actually passes the undiscounted recoverability test and therefore is not impaired; this also omits the trademark impairment.
Why not C: Tempting if the candidate recognizes only the patent impairment (write-down of $70,000) but overlooks that the indefinite-lived trademark must be compared to fair value and also requires a $40,000 write-down.
Why not D: Tempting if the candidate compares carrying amount to fair value for all three assets (70 + 30 + 40 = 140), but that shortcut is incorrect because finite-lived intangibles must first pass the undiscounted cash flow recoverability test before any write-down to fair value is recognized; the customer list passes that test here.
Question 3
Hint
Decide whether changing a previously estimated useful life is an accounting estimate or a change in principle, then apply the prospective accounting rule and the impairment-testing requirement for indefinite-lived intangibles.
Answer B. Changing a previously estimated useful life is a change in accounting estimate and is accounted for prospectively. Maxwell stops amortizing the trademark going forward, but previously recorded accumulated amortization is not reversed, so the carrying amount on January 1, Year 4 equals cost less accumulated amortization. Indefinite-lived intangibles must be tested for impairment at least annually.
Why not A: This is tempting because candidates may confuse reclassification with a change in accounting principle or an error that requires restatement. It is incorrect because a change in estimated useful life is a change in estimate, which is accounted for prospectively; prior amortization is not reversed and prior periods are not restated.
Why not C: This attracts candidates who think initial estimates are locked in. It's wrong because useful-life estimates and classifications can be revised prospectively; once an asset is reclassified as indefinite-lived, amortization ceases and annual impairment testing is required.
Why not D: This lures candidates who conflate finite- and indefinite-lived impairment rules. It's incorrect because indefinite-lived intangibles require at least annual impairment testing even in the absence of specific indicators.
Question 4
Hint
Separate three decisions: useful life classification, which Year 1 costs become part of the intangible's carrying amount, and how impairment is measured once fair value is given.
Answer C. Because renewal is routine at nominal cost and Harlan intends and is able to renew indefinitely, the trade name is an indefinite-lived intangible and is not amortized. The successful legal defense preserved the asset's future benefits and is capitalized, while advertising costs are expensed as incurred. Carrying amount before impairment is $960,000 ($900,000 + $60,000), so an $80,000 impairment loss is required to reduce the carrying amount to the $880,000 fair value.
Why not A: This distractor exploits the 10-year registration period, but renewal at nominal cost with an intent to renew indefinitely yields an indefinite life (no amortization). Also, costs to successfully defend the asset that preserve future benefits are capitalized rather than expensed.
Why not B: This is tempting because it correctly classifies the trade name as indefinite-lived and treats the defense and advertising costs correctly, but it is incorrect to defer impairment. Indefinite-lived intangibles must be tested at least annually and written down when fair value is below carrying amount.
Why not D: This choice is attractive because it treats the asset as indefinite-lived, but advertising is generally expensed as incurred and would not be capitalized. In addition, capitalizing both $60,000 and $40,000 would produce a $1,000,000 carrying amount before impairment, so an $80,000 write-down would not reconcile to the stated $880,000 fair value (the numbers are inconsistent).
Question 5
Hint
First determine whether the trademark is finite- or indefinite-lived; then recall which impairment test and presentation (net income vs OCI) U.S. GAAP requires for indefinite-lived intangibles.
Answer D. Indefinite-lived intangibles are not amortized but must be tested for impairment by comparing fair value to carrying amount. Because fair value ($380,000) is less than the carrying amount ($600,000), Meridian should recognize an impairment loss of $220,000. Under U.S. GAAP the impairment loss is recorded in net income, which reduces the asset carrying amount, retained earnings, and total assets.
Why not A: Tempting for candidates who conflate IFRS revaluation/OCI treatments with U.S. GAAP, but incorrect under U.S. GAAP: impairment losses for intangible assets are recognized in net income, not OCI.
Why not B: Tempting because some intangibles are amortized, but incorrect: Meridian classified the trademark as indefinite-lived, and the immediate issue is the fair-value decline that triggers an impairment test. Reclassifying and amortizing instead of testing for impairment would delay recognition of the loss and is not the appropriate initial response under GAAP.
Why not C: Tempting since indefinite-lived intangibles are not amortized, but incorrect: 'not amortized' does not mean 'never impaired.' A sustained decline in fair value triggers impairment testing for indefinite-lived intangibles, and if fair value is below carrying amount a loss must be recorded.
Question 6
Hint
Focus on the required order of analysis when an intangible asset changes from indefinite-lived to finite-lived.
Answer A. When an intangible previously classified as indefinite-lived is later determined to have a finite life, GAAP requires testing for impairment under the indefinite-lived impairment model before any reclassification or amortization. Because fair value ($840,000) is less than carrying amount ($900,000) on 7/1/20X4, Lark recognizes a $60,000 impairment loss. After that impairment is recorded, the adjusted carrying amount is amortized prospectively over the newly estimated 5-year useful life.
Why not B: This option confuses the prospective treatment of a change in useful life with the sequencing required when an asset moves from indefinite to finite life. GAAP requires an impairment test under the indefinite-lived model first; since fair value is below carrying amount, Lark must recognize the impairment before beginning amortization.
Why not C: This answer treats the revised life as if it were a correction of an error requiring retrospective adjustment. In reality, a change from indefinite to finite life is a change in estimate and is handled prospectively; prior periods are not retrospectively amortized.
Why not D: Finite-lived intangibles are normally evaluated under long-lived asset impairment guidance, but the sequencing matters here: before treating the asset as finite-lived (and starting amortization), it must be tested under the indefinite-lived impairment model. Lark's fair value is below carrying amount, so an impairment loss is required on 7/1/20X4.
Common questions
Do finite-lived intangibles get tested alone or with an asset group?
If the asset’s cash flows are largely independent, test it alone. If not, include it in the related long-lived asset group’s recoverability test using undiscounted cash flows.
How are indefinite-lived intangibles tested and reported?
They are not amortized. Test at least annually or when indicators arise by comparing fair value with carrying amount. Recognize any shortfall in earnings.
What happens when an indefinite-lived intangible becomes finite?
On the change date, test for impairment and record any loss. Then amortize the adjusted carrying amount prospectively over the new life. Prior amortization is not recorded retroactively.
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