a. General Rules

ASC 350-30-50-1 contains disclosure requirements for the period of acquisition of intangible assets (other than goodwill) by way of a business combination, acquisition by a not-for-profit entity, or asset acquisition. The required disclosures in the acquisition period for these assets are as follows:⁸

1. For intangible assets subject to amortization, all of the following:
   1. The total amount assigned and the amount assigned to any major intangible asset class
   2. The amount of any significant residual value, in total and by major intangible asset class
   3. The weighted-average amortization period, in total and by major intangible asset class
2. For intangible assets not subject to amortization, the total amount assigned and the amount assigned to any major intangible asset class
3. The amount of research and development assets acquired in a transaction other than a business combination or an acquisition by a not-for-profit entity and written off in the period and the line item in the income statement in which the amounts written off are aggregated
4. For intangible assets with renewal or extension terms, the weighted-average period before the next renewal or extension (both explicit and implicit), by major intangible asset class

ASC 350-30-50-2 requires disclosures for every period in which an entity presents financial statements. The required disclosures are as follows:

1. For intangible assets subject to amortization, all of the following:
   1. The gross carrying amount and accumulated amortization, in total and by major intangible asset class
   2. The aggregate amortization expense for the period
   3. The estimated aggregate amortization expense for each of the five succeeding fiscal years
2. For intangible assets not subject to amortization, the total carrying amount and the carrying amount for each major intangible asset class
3. The entity's accounting policy on the treatment of costs incurred to renew or extend the term of a recognized intangible asset
4. For intangible assets that have been renewed or extended in the period for which a statement of financial position is presented, both of the following:
   1. For entities that capitalize renewal or extension costs, the total amount of costs incurred in the period to renew or extend the term of a recognized intangible asset, by major intangible asset class
   2. The weighted-average period before the next renewal or extension (both explicit and implicit), by major intangible asset class

For PRV Corp. the current period is the acquisition period, so ASC 350-30-50-1 applies. An illustrative application of the required disclosures for PRV Corp. is shown in Exhibit 5.3.

The information in Exhibit 5.3 appears only in the period in which PRV Corp. purchases the intangible asset from SB Co. Exhibit 5.4 shows the required disclosures if this was not in the period of purchase. In that case, ASC 350-20-50-2 applies. PRV Corp. covers requirements a(1) and b of the above list of nonacquisition year disclosures in Exhibit 5.4. The written information below the matrix covers requirements a(2), and a(3). Therefore, PRV Corp. covers the requirements in parts a and b. Requirements c and d relate to intangible assets that have been renewed or extended; such intangibles are not present in this example.

b. Impairment Losses

An entity must disclose the following information for each recognized impairment loss related to an intangible asset in the notes to any financial statements that include the period in which the impairment loss is recognized:⁹

• A description of the impaired intangible asset and the facts and circumstances leading to the impairment
• The amount of the impairment loss and the method for determining fair value
• The caption in the income statement or the statement of activities in which the impairment loss is aggregated
• If applicable, the segment in which the impaired intangible asset is reported under ASC 280

Because an entity must use fair value techniques to determine an impairment loss, it must comply with the disclosure requirements under ASC 820-10-50 regarding fair value measurements. However, it is exempt from one of the disclosure requirements under ASC 820-10-50. Specifically, if it used significant Level 3 inputs in its fair value calculations concerning intangible assets, it need not make the quantitative disclosures required by ASC 820-10-50-2(bbb).¹⁰

c. Renewal or Extension of Legal or Contractual Life

If an intangible asset is subject to renewal or extension, an entity must disclose information that enables financial statement users to assess the extent to which the expected future cash flows associated with the asset are affected by the entity's intent and/or ability to renew or extend the arrangement.¹¹

d. Change in Useful Life of an Intangible Asset or in Likelihood of Renewal or Extension

A change in the estimated useful life of an intangible asset or in its expected likelihood of renewal or extension must be disclosed under ASC 275-10-50 if certain conditions are met. Generally, ASC 275-10-50 requires disclosure if it is reasonably possible on the date of the financial statements that an estimate used in the financial statements will change in the near term (i.e., within the next year) and the potential effect from the change in condition will be material to the financial statements. In other words, disclosure is appropriate if a potential change in estimate meets the reasonably possible test and the materiality test. The term reasonably possible, which is defined in the ASC Glossary, means that the chance of a future event occurring is more than remote but less than likely.¹² The materiality test is met if a reasonably possible change in an estimate would have a material effect on the financial statements, even if the estimate as reported in the financial statements does not have a material effect on the financial statements.¹³ The materiality test is met for an estimate of the useful life of an intangible asset if either a change in the intangible's useful life or in the expected likelihood of renewal or extension of that life would be material to the financial statements. This test is applied both at the individual intangible asset level and in the aggregate to each major intangible asset class.¹⁴

e. Internal Research and Development

For industries such as the pharmaceutical and life sciences industries that have a lot of R&D, the SEC Staff frequently asks registrants to provide more detailed disclosures in the Management Discussion and Analysis (MD&A) about their R&D activities. Specifically, the SEC Staff focuses on the status of major R&D projects and the costs incurred to date as well as the estimated completion dates, completion costs, and capital requirements.

For example, of all the SEC comment letters sent to companies in the pharmaceutical and life sciences industry, about 25 percent related to MD&A. Of these comments on MD&A, 44 percent related to the discussion of research and development expense in MD&A, and another 11 percent related to discussion of patents. The SEC Staff requests that a registrant that does not track R&D costs by project disclose that fact along with an explanation of why it does not track R&D costs by project. The SEC Staff also requests other quantitative and qualitative disclosures that describe the amount of the registrant's resources being used on each project or group of projects (e.g., by therapeutic classes). If registrants conclude they are unable to track R&D costs in any other way than by total R&D expense, they must disclose that fact. Also, if registrants cannot estimate the completion dates or costs to complete the project, the SEC Staff asks registrants to disclose the circumstances precluding such estimates.¹⁵

f. Acquired IPR&D Assets

a. General Rules

ASC 350-20-50-1 requires an entity to discuss changes in the carrying amount of goodwill during the current period through the following disclosures:

1. The gross carrying amount of goodwill and accumulated goodwill impairment losses at the beginning of the period
2. Additional goodwill recognized during the period, except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale in accordance with ASC 360-10-45-9
3. Adjustments resulting from the subsequent recognition of deferred tax assets during the period in accordance with ASC 805-740-25-2 through ASC 805-740-25-4 and ASC 805-740-45-2
4. Goodwill included in a disposal group classified as held for sale in accordance with ASC 360-10-45-9 and goodwill derecognized during the period without having previously been reported in a disposal group classified as held for sale
5. Goodwill impairment losses recognized during the period
6. Net exchange differences arising during the period in accordance with ASC 830
7. Any other changes in the carrying amounts during the period
8. The gross amount of goodwill and accumulated impairment losses at the end of the period

Entities that report segment information in accordance with ASC 280 must provide the above information about goodwill in total and for each reportable segment and must disclose any significant changes in the allocation of goodwill by reportable segment. If any portion of goodwill has not yet been allocated to a reporting unit at the date the financial statements are issued, that unallocated amount and the reasons for not allocating that amount must be disclosed.²¹

b. Impairment Losses

If an entity recognizes an impairment loss related to goodwill, it must disclose each loss in the notes to its financial statements in the period it recognizes the impairment loss. The disclosures required under ASC 350-20-50-2 are as follows:

1. A description of the facts and circumstances leading to the impairment
2. The amount of the impairment loss and the method of determining the fair value of the associated reporting unit (whether based on quoted market prices, prices of comparable businesses, present value or other valuation technique, or a combination thereof)
3. If a recognized impairment loss is an estimate that has not yet been finalized,²² that fact and the reasons therefore and, in subsequent periods, the nature and amount of any significant adjustments made to the initial estimate of the impairment loss

Because an entity must use fair value techniques to determine an impairment loss, it must comply with the disclosure requirements under ASC 820-10-50 regarding fair value measurements. However, it is exempt from one of the disclosure requirements under ASC 820-10-50. Specifically, if it used significant Level 3 inputs in its fair value calculations concerning goodwill, it need not make the quantitative disclosures required by ASC 820-10-50-2(bbb).²³

In 2006, the Association of Chartered Certified Accountants (ACCA) published a research report titled “Impairment of Assets: Measurement without Disclosure?” (Research Report No. 92). Some of the key findings in the research report are:²⁴

1. More than one in five companies listed on the FTSE 350 have reported an impairment loss.
2. Impairment losses were present in 26 out of 29 sectors.
3. The media sector had the highest incidence of companies that reported impairment losses.
4. The telecom sector had the highest value of reported impairment losses.
5. The total amount of impairment losses disclosed by the sample companies was £20,126m.
6. Goodwill was the most frequently impaired asset, with 40 percent of all impairments relating to goodwill.
7. Goodwill was the largest asset in terms of value of impairment loss.
8. 58 out of 79 companies (73 percent) reported an impairment of goodwill.
9. 62 percent of companies in the sample did not disclose a specific accounting policy note about how the impairment loss is calculated.
10. 40 percent of companies in the sample did not disclose a reason for the impairment loss.
11. Overall, the reported impairment losses had a significant impact on reported profits.

As early as 2003, the SEC has requested companies to expand their MD&A to describe the methodology and assumptions or estimates used to test goodwill and other intangible assets for impairment, and to highlight the reporting units for which goodwill impairment charges were reasonably likely to occur.²⁵