Many parts of impairment test are based on the concept of fair value. Fair value standard is used as part of impairment testing of PP&E, intangible asset subject to amortization, goodwill and other indefinite-lived intangible assets. Fair value concept is defined in ASC 820, Fair Value Measurement. ASC 820 defines fair value from the viewpoint of market participants, being buyers and sellers in the principal (or most advantageous) market for the asset or liability subject to valuation.

Impairment guidance in certain codified sections of U.S. GAAP does not explicitly reference ASC 820 fair value guidance. Lack of explicit impairment guidance opens the door to varying and inconsistent accounting and valuation practices.

Impairment test of PP&E is performed in two steps. As part of Step 1, a reporting entity compares the net carrying value of the asset or asset group to the net sum of undiscounted cash flows, resulting from the use and eventual disposition of the asset or asset group. Undiscounted cash flows in Step 1 test are determined using entity-specific cash flows, not market participant specific cash flows. In other words, Step 1 cash flows will be determined from the entity perspective.

If Step 2 analysis is performed, the entity is required to estimate the fair value of the asset (asset group). US GAAP does not provide any specific guidance related to determining Step 2 fair value. Based on the existing accounting practices, Step 2 fair value will be determined from a market participant perspective, not the reporting entity’s perspective.

Goodwill impairment is determined as the difference between the carrying amount of a reporting unit (including goodwill) and reporting unit’s estimated fair value. Fair value of a reporting unit is determined using ASC 820 fair value concept, including market participant view.

We believe that ASC 820 fair value concept applies when performing impairment test of indefinite-lived intangible assets other than goodwill. For this type of assets, the impairment loss is determined as the difference between asset’s carrying amount and estimated fair value.

The order of impairment tests performed in relation to different types of assets is as follows:

  • Accounts receivable, inventory, prepaid assets, external-use software under applicable guidance;
  • Indefinite-lived intangible assets other than goodwill;
  • Intangible assets subject to amortization;
  • PP&E (asset group);
  • Goodwill;

Indefinite-lived intangible assets cannot be included in the same asset group subject to impairment that includes amortizable intangible assets, PP&E, goodwill or any other asset. Therefore, practically speaking, indefinite-lived intangible assets can be tested for impairment before, after or at the same time as other assets are.

The sequence of an impairment test performed in relation to different asset types may likely impact the result of the test.