 Hello and welcome to the session in which we would look at impairment of intangible assets other than Goodwill. We will treat Goodwill in a separate recording. What is the big idea of impairment of intangible asset? Well, I hope you know what an intangible asset is. It's an asset that lack physical existence. It's a long-term asset that provide future benefit for the company. What is impairment? Impairment happens when this asset that you have like a patent, a copyright, trademark, trade name, loss utility, loss value. For many reasons, we'll talk about why. Lost utility and as a result, what do we have to do as accountant? We have to write it down. We have to impair it. We have to take the loss. Why do we have to take the loss? Two reasons. First is conservatism. If the asset is overstated, if we don't write it down. Two, matching. We need to record the loss in the same period that the event that the loss event took place. So what events could trigger impairment? Well, for intangible asset, maybe rapid changes in technology. You had a technology, but now there is a better technology out there that's cheaper and better than your technology. Well, your technology is not worth as much as you thought it would. As well as new innovation. You have a patent, but guess what? Someone came with a better patent, a cheaper patent. Now your patent is worthless. Maybe illegal decision. That could be the case. Maybe someone sued you. Or maybe the government made a decision to discontinue your product. Well, guess what? If you have any intangibles related to that, especially when it comes to pharmaceutical, your asset is impaired. As well as other reasons. When we do impairment for intangibles, we have to differentiate between two types of intangibles. Limited life intangibles and unlimited life intangibles or indefinite life intangibles. The way we do impairment for limited life is different than unlimited life. The good news is this. If you already know how to do impairment for property, plant and equipment, then it's the same thing as limited life intangibles. And hopefully you already watched this recording. So limited life intangibles will be easy for you to process. Well, this topic is covered in intermediate accounting as well as the CPA exam. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. I am a useful addition. I can explain the material differently from a different angle, from a different perspective. I can provide you additional resources, lectures, multiple choice practice questions, CPA questions that's gonna help you do better on your exam. Your risk is one month of subscription. Your potential gain is actually doing better on your exam, doing better on the CPA exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. This is a list of all my courses. Intermediate accounting, cost accounting, advanced accounting, governmental accounting, that I provide additional resources, such as multiple choice through false, so on and so forth. My supplemental CPA resources are aligned with your Roger, Becker, Gleam, and Wiley. So it's very easy to go back and forth between my material and your CPA review course. I also give you access to 1500 plus AICPA previously released questions with detailed solution. If you have not connected with me only then, please do so, take a look at my LinkedIn recommendation like this recording, share it with other connect with me on Instagram, Facebook, Twitter, and Reddit. So let's first start to look at the limited life intangibles. And as I mentioned, they're the same as property, plant, and equipment, which hopefully you remember, we have to go through a two-step process, recoverability test, and the impairment loss. So let's review those tests and work an example. Recoverability test is when we look at the expected future cash flow, undiscounted, and we compare that to the book value. If our future cash flow, undiscounted, is less than the book value, cannot recover the book value. So if our expected future cash flow is $100 and our book value is 120, well, all the future cash flow cannot recover the book value. Therefore, the answer is yes, we have an impairment. If the answer is our future cash flow is 150, if the future cash flow is not less, then we don't have an impairment. But here we're gonna assume our future cash flow is 100. Therefore, we do have an impairment. If we have an impairment, we go to step two. In step two, we compare the fair value of the asset versus the book value of the asset. So notice the book value is in both tests. In the first test, you will compare the undiscounted cash flow. In the second test, you compare the fair value to the book value. And the difference between them is the impairment loss. Now, sometimes the fair value may not be giving as the fair value, sometimes the fair value is giving as the present value of the expected future net cash flow. The same thing. So sometimes they're telling you the expected future net cash flow, the present value of them, it means the discounted amount will be your fair value. So be careful about this. Let's take a look at an example. Pharma company has a patent on a drug to treat cholesterol. Recently, the FDA approved a better drug from a competitor to treat cholesterol. Pharma company has a carrying value of 50 million, that's the book value, the expected undiscounted cash flow from the patent is 35 million. So now the patent, the future undiscounted cash flow is 35 and the carrying value is 50, they cannot recover it. Therefore, when we compare the expected future cash flow undiscounted to the carrying value, we notice it's less, the answer is yes, it means we have an impairment test. Now, Pharma determines that the fair value of the patent based on the discounted cash flow is 30 million. So notice the discounted cash flow is the fair value now. Now we compare the book value 50 million to the discounted cash flow, which is the present value computation of 30 million and our loss on this intangible is 20 million, we debit loss on impairment and we credit the patent. So notice what we did two tests. This is test one and test one, the answer is yes, test two is where we have the figures and we book the loss based on test two. Now let's take a look at impairment of indefinite life intangibles other than Goodwill. So these assets, these intangibles, they have indefinite life. What we'd have to do on a yearly basis, we have to test them for impairment or as needed if technology changes. The good news about the indefinite life intangibles other than Goodwill, there's only one test. It's called the fair value test. You don't have two tests and we'll see why we don't have two tests. And basically the test is easy. You would look at the fair value. If the fair value is less than the book value, guess what? You have an impairment loss for the difference. So why don't we have a recoverability test? So there's no recoverability test, which is test one. The reason is simple. The nature of the asset has an indefinite life. Indefinite life means unlimited life for a student or for an accountant to do the recoverability test, they have to look at what is the future cash flow that is not discounted, undiscounted future cash flow. Well, if your asset, it's gonna provide future cash flow forever, how can you compute that amount? Therefore, you will go with one test. You compare the fair value to the carrying value and the difference is your loss. Simply put, let's assume Adam purchased a license for three million from the federal government to broadcast news, satellite news. Adam can renew the license with a minimal cost. In other words, Adam expect the cash flow to last indefinitely as a result. Adam report the license as an indefinite life asset because they can renew it at a minimal cost. Therefore, the asset has an indefinite life. That's fine. They paid three million for it. Now, recently the federal government auctioned the same license to the highest bidder for 1.8 million. What does that mean? It means when Adam knew about this information, they knew immediately that what they paid, they overpaid. Now the license is worth 1.8 million. It means it lost utility. Now what they have to do is, this becomes basically the fair value because if it's sold for that much, it's the fair value. Now we compare the carrying value because it was recorded at three million because we don't amortize indefinite life intangibles and we'll take the difference between that and the fair value of 1.8 million. We'll find the loss of 1.2 million. Then we booked the loss. We debit loss on impairment, 1.2 million, credit the patent, 1.2 million or credit whatever that asset is, whatever we call it. It's not really a patent, license, 1.2 million. So that's the entry for it. So notice we only had one test and that's the fair value test because the book value, it's gonna be what we paid for the asset. We don't write down, in other words, we don't amortize the indefinite life intangibles. We don't amortize them. Remember those assets, no amortization. That's why I assumed that three million is also the book value. Now it's no longer three million. Now technically the book value becomes 1.8 million because you reduce the license by 1.2 million. The best way to learn about this and get better is to work additional multiple choice questions on my website, farhatlectures.com. At the end of this recording, once again, I'm gonna remind you, whether you are an accounting student or a CPA candidate to visit my website, my material will supplement. 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