COVID-19 and the Sequence of Asset Impairment Testing

As businesses continue to assess and respond to the impact of COVID-19 and the related financial reporting implications, they will likely need to consider whether assets have been impaired. Guidance on asset impairment is spread across several sections of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), and which rules apply depend on the nature of the asset. Assets such as inventory, contract assets, equity securities, debt securities, deferred tax assets and other investments are among the many assets that may need to be considered for impairment. In addition, indefinite-lived intangible assets, long-lived assets and goodwill may also need to be assessed. Some assets are tested for impairment annually, upon the occurrence of a triggering event, or both (e.g. at least annually or upon a triggering event).

What is a triggering event?

Many impairment rules require the assessment of assets for impairment upon the occurrence of a triggering event, which is an event or a change in circumstances that indicates it is more likely than not that an asset is impaired. Learn more about triggering events in our article, “Goodwill Impairment Testing Considerations During COVID-19.” Triggering events can be both macro and micro events, and for goodwill and intangibles can be found in ASC 350-20 and 350-30. In light of the current conditions brought on by the COVID-19 pandemic, most businesses are likely to conclude that a triggering event has occurred, which will likely result in the need for asset impairment testing.

As businesses consider the financial reporting impacts of COVID-19 and whether assets are impaired, they will need to carefully consider the rules regarding the sequence in which impairment testing is to be performed.

Sequencing of Impairment Test Infographic
Figure 1: Sequencing of Impairment Tests
  1. Tested First Indefinite-Lived Intangible Assets (ASC 350-30)
    • Tested annually or more frequently if a triggering event indicating impairment has occurred
    • One step test - Compare carrying value to the fair value
  2. Tested Second Long-Lived Assets, Held and Used (ASC 360-10)
    • Tested when a triggering event indicating impairment has occurred
    • Two step test - Is the carrying amount recoverable? If not, measure impairment
  3. Test Last Goodwill (ASC 350-20)
    • Tested annually or more frequently if a triggering event indicating impairment has occurred (unless the entity has adopted the PCC alternative in which Goodwill is tested when a triggering event indicating impairment has occurred)
Indefinite-Lived Intangible Assets (ASC 350-30)

Indefinite-lived intangible assets are not subject to amortization and are tested for impairment annually or more frequently if a triggering event occurs. Guidance on impairment considerations for indefinite-lived intangible assets is included in ASC 350-30. These assets should be tested for impairment prior to testing long-lived assets or goodwill for impairment. Given indefinite-lived intangible assets are not subject to amortization, they may be more susceptible to impairment than certain other assets (e.g., those subject to amortization). By nature, these assets may be more difficult to value, and valuation of these assets may require the use of a third-party specialist. Once the fair value has been determined, it is compared to the carrying amount of the asset. If the carrying amount of the asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess.

Long-Lived Asset (Asset Group) Held and Used, Including Finite-Lived Intangible Assets (ASC 360-10)

Once indefinite-lived intangible assets have been tested for impairment and any necessary impairment loss has been recognized, an entity should consider whether long-lived assets, including finite-lived intangible assets should be tested for impairment. Guidance on impairment of long-lived assets (asset groups) is included in ASC 360. These assets (asset groups) are tested for impairment whenever events or changes in circumstances indicate that an impairment may have occurred (i.e., a triggering event). If a triggering event occurs, the carrying amount of the asset (asset group) is tested for recoverability. The recoverability test is performed by comparing undiscounted cash flows attributable to the asset (asset group) to the carrying amount of that asset (asset group). If the recoverability test indicates that the carrying amount of the asset (asset group) is recoverable, no impairment should be recognized. If the recoverability test indicates that the carrying amount of the asset (asset group) is not recoverable, the fair value of the asset (asset group) should be determined and an impairment loss should be recognized if the carrying amount of the asset (asset group) is greater than the fair value of the asset (asset group).

Goodwill (ASC 350-20)

Goodwill is tested for impairment only after all other assets have been tested for impairment and any impairment loss recognized in the carrying value of the reporting unit. The sequence of impairment testing is important because goodwill is tested at the reporting unit level, or in the case of private companies who have elected the Private Company Council alternative, at the reporting unit level or the entity level depending on the company’s accounting policy. If other assets such as indefinite-lived intangible assets and long-lived assets have not been adjusted for impairment prior to testing goodwill for impairment, the goodwill impairment test cannot be accurately performed, which may lead to misstatement of goodwill balances.

Goodwill is tested for impairment annually or more frequently if a triggering event occurs, unless the private company alternative allowing for amortization of goodwill has been elected in which case it is assessed for impairment only when a triggering event occurs. The goodwill impairment test is performed by calculating the fair value of the reporting unit (including goodwill) and comparing it to the carrying amount of the reporting unit. If the fair value of the reporting unit including goodwill exceeds its carrying amount, no impairment loss is recognized. If the fair value of the reporting unit is less than its carrying amount, the implied fair value of the reporting unit goodwill should be calculated. If the carrying amount of the reporting unit goodwill exceeds its fair value, an impairment loss should be recognized for the difference between the implied fair value of the goodwill and the carrying amount of the goodwill.

Other Considerations

Businesses have the option of performing a qualitative impairment analysis when considering whether indefinite-lived intangible assets and goodwill are impaired. The purpose of a qualitative impairment test is to determine whether it is greater than 50 percent chance that the asset is impaired. If a business elects to perform a qualitative impairment test, and concludes it is more likely than not that the asset is impaired, a quantitative test would then be required.

It is generally not appropriate to perform a qualitative impairment test when a triggering event has occurred. The factors considered in a qualitative test are the same as the factors considered when determining whether a triggering event has occurred. Therefore, it would generally be inconsistent to conclude that a triggering event has occurred and also conclude in a qualitative test that it is not more likely than not that impairment has occurred based on the same factors. The COVID-19 pandemic is likely to be considered a triggering event by many businesses, and therefore many businesses will need to perform a quantitative impairment assessment as a result.

For more information, contact your DHG advisor or assurance@dhg.com.

CONTRIBUTORS

Liz Gantnier
Partner, DHG Audit Innovation & Methodology
Liz.Gantnier@dhg.com

Robert Cherry
Senior Manager
robert.cherry@dhg.com

RELATED KNOWLEDGE SHARE

© Dixon Hughes Goodman LLP. All rights reserved.
DHG is registered in the U.S. Patent and Trademark Office to Dixon Hughes Goodman LLP.
praxity