Indefinite-Lived Intangible Assets: Accounting Treatment

An indefinite-lived intangible asset is a type of non-physical asset that is expected to contribute to a company’s cash flows for an unidentifiable period. Unlike assets that have a clear expiration, such as a piece of machinery or a building, these assets have no foreseeable limit on their economic life. They represent value that is not tied to a physical object but can be just as significant to a business’s operations and overall worth.

These assets are recorded on a company’s balance sheet and play a part in its financial health. Because they lack a defined lifespan, their accounting treatment differs from other assets. Instead of being gradually expensed over time, they are held on the books at their original value until it is determined that their value has declined.

Identifying Indefinite-Lived Intangible Assets

According to Accounting Standards Codification (ASC) 350, an asset’s life is considered indefinite if there are no legal, regulatory, contractual, competitive, economic, or other factors that place a foreseeable limit on the period over which it is expected to generate cash flows.

Common examples of indefinite-lived intangible assets include goodwill, trademarks, brand names, and perpetual franchise agreements. Goodwill represents the premium paid during the acquisition of a company over the fair value of its identifiable net assets. For instance, a well-established brand name can generate revenue for a company for an unpredictable duration, with no built-in expiration date influencing its value. A broadcast license that can be renewed indefinitely at little cost would also qualify.

In contrast, a finite-lived intangible asset, such as a patent, grants exclusive rights for a specific, legally defined period, after which its direct economic benefit ceases. This creates a clear and foreseeable end to its useful life. An indefinite-lived asset, by contrast, has no such built-in endpoint. The evaluation of an asset’s useful life is not a one-time event. Companies are required to reassess in each reporting period whether events and circumstances continue to support an indefinite useful life for an asset.

Initial Recognition and Measurement

Once an intangible asset is identified as having an indefinite life, its initial recording on the financial statements is governed by how it was acquired. The method of acquisition dictates the value at which the asset is first reported, a process known as initial recognition and measurement.

Acquired in a Business Combination

A frequent way companies acquire indefinite-lived intangible assets is through a business combination, which occurs when one company purchases another. In this scenario, the acquiring company must identify all the assets and liabilities of the purchased entity. Any identifiable intangible assets, such as trademarks or brand names, are recorded separately from goodwill.

These assets are measured and recorded at their fair value on the date of acquisition. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants. Determining this value often requires sophisticated valuation techniques, such as analyzing expected future cash flows the asset will generate or looking at market prices for similar assets.

Acquired as a Separate Purchase

An indefinite-lived intangible asset can also be acquired individually, outside of a business combination. For example, a company might purchase a trademark directly from another entity. In this case, the accounting is more straightforward. The asset is recorded on the balance sheet at its cost.

This cost includes the purchase price as well as any other direct costs necessary to prepare the asset for its intended use. Such costs could include legal fees or other transaction costs associated with the acquisition.

The Impairment Testing Model

Because indefinite-lived intangible assets are not amortized, or gradually expensed over time, U.S. Generally Accepted Accounting Principles (U.S. GAAP) require a different approach to ensure their value is not overstated on the balance sheet. This process is known as impairment testing. These assets must be tested for impairment at least annually, or more frequently if certain events or changes in circumstances suggest that the asset’s value may have declined.

The impairment test itself can be a multi-step process. The goal is to compare the asset’s value as stated on the financial statements, known as its carrying amount, with its current fair value. This comparison determines whether the asset has suffered a loss in value that needs to be recognized financially.

The Qualitative Assessment

The first step in the impairment testing model is an optional qualitative assessment. This analysis allows a company to evaluate relevant events and circumstances to determine if it is “more-likely-than-not” that the indefinite-lived intangible asset is impaired. A “more-likely-than-not” threshold means there is a greater than 50% chance that the asset’s fair value is less than its carrying amount.

During this assessment, a company considers various factors that could affect the asset’s value. These can include cost factors, such as a significant increase in the costs to maintain the asset; negative financial performance, like declining revenues associated with the asset; and adverse legal or business developments. If, after weighing all positive and negative factors, the company concludes that it is not more-likely-than-not that the asset is impaired, no further testing is required for that period.

The Quantitative Test

A company must perform a quantitative impairment test if it chooses to skip the qualitative assessment or if the qualitative analysis indicates that an impairment is more-likely-than-not. This test is a direct comparison of the asset’s fair value with its carrying amount. If the carrying amount of the asset exceeds its fair value, the asset is considered impaired. The calculation of fair value for this test can be complex, often involving valuation techniques like discounted cash flow analysis, which projects the future economic benefits of the asset and discounts them back to a present value.

Recognizing and Reporting an Impairment Loss

When the quantitative impairment test reveals that an asset’s carrying value is higher than its fair value, the company must recognize an impairment loss. The amount of the loss is calculated as the difference between these two figures.

The recognition of this loss is recorded through a journal entry. The company debits an account called “Impairment Loss” and credits the specific intangible asset account. This entry simultaneously records the expense on the income statement and reduces the asset’s value on the balance sheet. The impairment loss is reported as a component of income from continuing operations.

After an impairment loss is recognized, the new, lower carrying amount becomes the asset’s new accounting basis. A rule under U.S. GAAP is that an impairment loss recognized for an indefinite-lived intangible asset cannot be reversed in a future period, even if the asset’s fair value subsequently recovers. This prohibition means the write-down is permanent.

Companies are also required to provide disclosures in the notes to their financial statements regarding the impairment. These disclosures include:

• A description of the impaired asset
• The facts and circumstances that led to the impairment
• The amount of the loss recognized
• The method used to determine the asset’s fair value