Examples of intangible assets that meet the criteria for recognition apart from goodwill include:

• Marketing Related: Such as trademarks, trade names and mastheads;
• Customer Related: Such as customer lists and relationships;
• Creative Type: Such as plays, books, literary rights, musical works and artistic recordings;
• Contract-Based: Such as licensing agreements, leases and operating rights;
• Technology Based: Such as patents, unpatented technology, computer software, databases and trade secrets.

Exceptions to recognition apart from goodwill include assembled workforce and in process research & development.

Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment (or one level below an operating segment), which constitutes a business and has the following attributes:

· Segment management must prepare discrete financial information
· Management must regularly review operating results
· Must have distinct economic characteristics from other components

An operating segment with components that possess similar economic characteristics will be deemed a reporting unit if none of the components is a reporting unit, or if it has only one component.

Under FAS 142, the fair value of a reporting unit is compared to its carrying amount, including its goodwill. If the book value (carrying amount) is below the fair value assessment, there will be no impairment loss. If the fair value is below the book value (carrying amount), then the company needs to perform a second test to determine the gap between the impaired fair value of goodwill and its carrying amount.

Step 1 of the two-step impairment test is designed to identify potential goodwill impairment. If goodwill impairment is indicated, Step 2 is designed to measure the amount of the goodwill impairment loss to be recognized, if any. Step 2 testing involves an allocation of tangible and intangible assets to help determine the implied fair value of the goodwill. The test should be repeated if significant changes occur that materially affect the reporting unit’s fair value. Management has the right to choose when to conduct the assessment and consistently report results on an annual basis. FASB also requires that certain identifiable intangible assets nor subject to amortization be tested for possible impairment.

The measurement of fair value constitutes the amount at which a reporting unit could be sold in a current transaction between willing parties. An independent valuation professional should perform the fair value determinations using recognized business valuation approaches, as appropriate. This may involve a discounted future cash flow methodology (income approach) or guideline company methodology (market approach).

Companies can expect to pay anywhere from $10,000-$15,000 per reporting unit for supportable Step 1 valuation conclusions. Expect fees to increase if the valuation firm encounters difficulty obtaining any financial documentation. To the extent it is available, plan on providing the following information prior to due diligence:

· 3-5 years audited financial statements
· 5-10 Year Projections, or Business Plan
· Intangible Asset Descriptions
· Projected Revenues
· Projected Costs
· Projected Market Share
· Budget
· Marketing Plan
· Key Competition and Competitive Factors

Companies can expect a draft report within three to four weeks (or sooner) from the receipt of all requested information. Expect several hours of analyst time dedicated to preparing the data requested above. A quick response to the draft conclusions will help to expedite delivery of a final product within thirty days.

To accurately develop the implied fair value of the goodwill, the valuation firm must identify and allocate supportable value to each identifiable tangible and intangible asset. This effort requires further assistance from analysts and additional fees by the valuation firm to perform the requisite approaches to value. Expect at least a thirty-day turn-around, as the complexity of Step 2 can vary greatly.

Each step will need to be reviewed by independent auditors to assure proper disclosure and treatment within the balance sheet. This review can take anywhere from one to two weeks depending upon backlog. Remember to employ a consistent methodology to periodic testing at future intervals. This entire process should take no longer than sixty to ninety days.

back to library