Learn about common triggering events for intangible assets covered under ASC 360. This article delves into specific examples and focuses on understanding the circumstances that may require conducting an impairment test for intangible assets.
FASB Accounting Standards Codification (“ASC”) Topic 360 provides guidance for the impairment of long-lived assets, including intangible assets, such as developed technology, customer relationships, and finite-lived trade names, which are subject to amortization. Although subtopic ASC 360-10-35-21 outlines a few examples of triggering events, this official list is short and broadly applies to all long-lived assets, rather than focusing specifically on intangible assets.
When to Test for Impairment
Long-lived assets are tested for impairment only if events or changes in circumstances indicate that the carrying amount of the asset group they belong to may not be recoverable. These events are referred to as “triggering events” and are described in the “Impairment or Disposal of Long-Lived Assets” section of ASC 360-10.
It is important to note that the timing requirements for testing long-lived assets for impairment are different from those for goodwill under ASC 350, “Intangibles – Goodwill and Other,” which requires testing to be done at least annually and sometimes sooner.
Triggering Event Examples
A triggering event is a change in circumstances that is likely to reduce the fair value of an asset below its carrying amount. Refer to the table below for specific examples related to various intangible assets.
|EXAMPLES OF TRIGGERING EVENTS
|Economic Downturn or Recession:   Economic downturns or recessions can significantly impact a company’s intangible assets. For example, during a recession, companies may reduce their IT expenses, leading to a decrease in demand for business-to-business (“B2B”) technology solutions.
|Technological Obsolescence:   Technological obsolescence, or the advancement of technology that renders a company’s intellectual property (“IP”) outdated, can result in an impairment loss. For example, if a company provides only on-premises software, and the industry shifts to a software-as-a-service (“SaaS”) model, this could significantly decrease demand for the company’s legacy software and result in an impairment.
|Changes in Legal or Regulatory Environment:   Changes in the legal or regulatory environment, such as new technology regulations, can impact the value of a company’s intangible assets. For instance, if new cybersecurity regulations require financial institutions to comply with stricter standards, the company’s software assets may become impaired if it cannot adapt its solutions to meet the new requirements.
|Changes in Operations or Business Strategy:   Changes in a company’s operations or business strategy can also trigger an impairment review. For example, discontinuing a product line or shutting down a division may result in impaired intangible assets. A significant decline in financial performance, such as decreased revenue or profitability, may also be considered a triggering event.
|Decline in Sales or Market Share:   A significant decline in sales or market share of products or services related to an intangible asset may indicate a decreasing value to customers and potential impairment. An example of this is a provider of customer relationship management (“CRM”) solutions experiencing a decline in sales and market share as retail companies switch to CRM solutions that integrate with social media platforms.
|Changes in Competitive Landscape:   The emergence of new competitors or significant changes in the competitive landscape can also be considered triggering events. For instance, a new entrant with disruptive artificial intelligence (“AI”) technology entering the online search industry could result in an impairment loss for related intangible assets.
|Loss of Key Personnel:   The departure of key personnel, such as the CEO, CTO, or head of a business unit, can be a triggering event requiring an impairment test on a company’s intangible assets. If these individuals were instrumental in building and maintaining the products and IP, their departure may negatively impact the value of technology-related intangible assets.
|Unforeseen Events:   Unforeseen events, such as natural disasters, pandemics, or other catastrophic events, can also be potential triggering events. These events can significantly decrease supply of or demand for a company’s products or services and result in an impairment loss for related intangible assets.
|Loss of Key Customers:   The loss of a major customer or a substantial number of customers can significantly affect a company’s revenue and cash flow. This could trigger the need for the company to conduct an impairment test on its customer relationships intangible asset.
|Decline in Customer Demand:   A decrease in the demand for a company’s products or services by its customers may trigger an impairment test on its customer relationships intangible asset. This demand reduction may be caused by factors such as heightened competition, changes in customer preferences, or economic conditions.
|Modification of Distribution Channels:   A change in the way a company distributes its products or services to customers may be a triggering event. For instance, if a company shifts from a network of independent distributors to a direct sales model, this change could impact the value of its customer relationships intangible asset.
|Decline in Customer Creditworthiness:   A reduction in the creditworthiness of a company's customers may trigger the need for an impairment test on its customer relationships intangible asset. This creditworthiness decline may result from factors such as economic conditions, changes in the customer's industry, or the customer's own financial situation.
|Changes in Customer Purchasing Patterns:   A change in how a company’s customers purchase its products or services may trigger a review. For example, if customers start purchasing through new channels like e-commerce or digital platforms, this shift may affect the value of the company’s customer relationships intangible asset.
|Loss of Legal Rights to Use Trade Name:   If a company loses the legal rights to use a trade name, it may require an impairment test on its trade name intangible asset. This can occur, for example, if the company’s trademark registration is challenged or if the company is found to be infringing on another party’s trademark.
|Changes in Competitive Environment:   The emergence of new competitors or a significant change in the competitive landscape can be a triggering event that requires an impairment test on a company’s trade name intangible asset. For instance, if a company’s trade name becomes associated with a product or service that becomes obsolete or is significantly impacted by new technologies or trends, this may affect the value of the trade name.
|Negative Publicity:   Negative publicity such as product recalls, controversies, scandals, or negative news about the company can harm the reputation and value of the company’s trade name. This can trigger the need for an impairment test on the trade name intangible asset.
|Changes in Market Conditions:   Changes in market conditions, such as increased competition or shifts in consumer preferences, can also trigger the need for an impairment test on a company’s trade name intangible asset. For example, if a company’s trade name becomes associated with low-quality products or services, this may impact the value of the trade name intangible asset.
|Changes in Business Strategy:   Changes in a company’s business strategy, such as divesting a business unit or discontinuing a product line, can also trigger the need for an impairment test on the company’s trade name intangible asset. For instance, if a company stops using a trade name in connection with certain products or services, this may impact the value of the trade name intangible asset.
What Happens After a Triggering Event?
Before you pull the corporate fire alarm, it’s important to note that a triggering event does not automatically lead to an impairment loss. The next step is to conduct an ASC 360 test to measure any potential impairment loss by comparing the carrying value of the intangible asset (group) to its fair value. The fair value of an intangible asset is the price that would be obtained from selling the asset in a transaction between market participants at the measurement date.
Being familiar with the concept of triggering events is crucial for determining the presence of an impairment loss and ensuring accurate presentation of a company’s financial statements. Common triggering events include changes in the market, technological obsolescence, shifts in customer purchasing behavior, and changes in a company’s operations or business strategy.
The occurrence of a triggering event does not guarantee an impairment loss, but it does trigger the need for the company to perform an impairment test. If an impairment loss is found, it must be measured and recorded in the financial statements in the appropriate measurement period.
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