ASU 2015-05

In April 2015, the FASB issued ASU 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer's Accounting for fees Paid in a Cloud Computing Arrangement. The ASU is part of the FASB's simplification initiative. Lack of clear guidance for customers in cloud computing arrangements led to diversity in practice. The ASU is designed to reduce diversity and save costs by simplifying the assessment of costs and fees associated with these software arrangements.

Guidance. In cloud computing arrangements, the customer never takes possession of a physical product. Instead, the software residing on a vendor's or third party's hosting site, which the customer accesses remotely. The ASU does not provide explicit guidance, but provides help on which accounting model the customer should apply. Customers will essentially use the same criteria as vendors in determining whether the arrangement contains a software license or is solely a service contract:

• The customer has the contractual right to take possession of the software at any time during the arrangement's period without significant penalty.
• It is feasible for the customer to run the software on its own hardware or to contract with another party to host the software.

If both those provisions are not met, the arrangement is treated as service contract and separate accounting for a license is not permitted. If those provisions are met, the arrangements are treated as multiple-element arrangements to purchase a software license and a service for hosting the software. The customer applies the existing guidance on internal-use software to the license and costs are allocated between the license and hosting arrangements, based on relative fair value.

The ASU also eliminates

• The requirement for the customer to use the analogy to leasing arrangements previously used by customer licensing internal-use software, and
• The specific rule for internal-use software for accounting for acquired intangible assets.

Amortization and Impairment Testing

Goodwill is considered to have an indefinite life and, therefore, is not amortized. (See the Goodwill—Accounting Alternative section for an alternative for private companies.) Goodwill is, however, subject to unique impairment testing techniques. Goodwill is impaired when its implied fair value is less than its carrying amount. The fair value of goodwill cannot be measured directly; it can only be “implied,” that is, measured as a residual.

Reporting unit. The impairment test for goodwill is performed at the level of the reporting unit. A reporting unit, as detailed in ASC 350-20-35-33 through 46, is an operating segment or one level below an operating segment. In the chapter on ASC 280, the diagram entitled “Alternative Balance Sheet Segmentation” illustrates how different groupings in a business can be characterized as reporting units. The diagram is accompanied by definitions of reporting units, operating segments, and other organizational groupings. The reporting entity may internally refer to reporting units by terms such as business units, operating units, or divisions.

Determination of reporting units is largely dependent on how the business is managed and its structure for reporting and management accountability. An entity may have only one reporting unit, which would, of course, result in the goodwill impairment test being performed at the entity level. This can occur when the entity has acquired a business that it has integrated with its existing business in such a manner that the acquired business is not separately distinguishable as a reporting unit.

On the date an asset is acquired or a liability is assumed, the asset or liability is assigned to a reporting unit if it meets both of the following conditions:

1. The asset will be used in or the liability is related to the operations of a reporting unit
2. The asset or liability will be considered in determining the fair value of the reporting unit.

The methodology used to determine reporting units must be reasonable and supportable and must be applied similarly to how aggregate goodwill is determined in a purchase business combination.

Net assets include assets and liabilities that are recognized as “corporate” items if they, in fact, relate to the operations of the reporting unit. Examples of corporate items are environmental liabilities associated with land owned by a reporting unit, and pension assets and liabilities attributable to employees of a reporting unit. Executory contracts (e.g., operating leases, contracts for purchase or sale, construction contracts) are considered part of net assets only if the amount reflected in the acquirer's financial statements is based on a fair value measurement subsequent to entering into the contract. To illustrate, if an acquiree had a preexisting operating lease on either favorable or unfavorable terms as compared to its fair value on the date of acquisition, the acquirer would recognize, in its purchase price allocations, an asset or liability for the fair value of the favorable or unfavorable terms, respectively. ASC 350 distinguishes between accounting for this fair value of an otherwise unrecognized executory contract and prepaid rent or rent payable, which generally have carrying values that approximate their fair values.

Implied fair value. The implied fair value of goodwill is the excess of the fair value of the reporting unit as a whole over the fair values that would be assigned to its assets and liabilities in a purchase business combination.

Timing of testing. The annual goodwill impairment test may be performed at any time during the fiscal year as long as it is done consistently at the same time each year. Each reporting unit is permitted to establish its own annual testing date. ASC 350-20-35-30 indicates that additional impairment tests are required between annual impairment tests if:

1. They are warranted by a change in events and circumstances, and
2. It is more likely than not that the fair value of the reporting unit is below its carrying amount.

ASC 350-20-35-30 references ASC 350-20-35-3C to provide examples of events or circumstances that require goodwill of a reporting unit to be tested for impairment between annual tests:

1. Macroeconomic conditions, such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets
2. Industry and market considerations, such as a deterioration in the environment in the city in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for entity's products or services, or a regulatory or political development
3. Cost factors, such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows
4. Overall financial performance, such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods
5. Other relevant entity-specific events, such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation
6. Events affecting a reporting unit, such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing all, or a portion, of a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit
7. If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).

This list is not intended to be all-inclusive. Other indicators may come to the attention of management that would indicate that goodwill impairment testing should be performed between annual tests. Goodwill must also be tested for impairment if a portion of goodwill is allocated to a business to be disposed of.

If indicators exist requiring impairment testing of goodwill, impairment testing of nonamortizable intangibles, and/or recoverability evaluation of tangible long-lived assets or amortizable intangibles, the other assets are tested/evaluated first and any impairment loss is recognized prior to testing goodwill for impairment.

Performing the impairment test. To what had been a two-step process, the FASB has, in effect, introduced “Step 0.” Step 0 gives entities the option of performing a qualitative assessment before calculating the fair value in Step 1. In the qualitative assessment, entities determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. The qualitative assessment is optional and entities may bypass it for any reporting unit in any period.

The factors listed previously that indicate impairment testing should be done between annual tests are the same as those that should be considered in the qualitative assessment. (See ASC 350-20-35-3C examples above.)

ASC 350-20-35-3F goes on to say that these examples are not all-inclusive, and offers other events and circumstances than an entity must consider:

An entity shall consider the extent to which each of the adverse events and circumstances identified could affect the comparison of a reporting unit's fair value with its carrying amount. An entity should place more weight on the events and circumstances that most affect a reporting unit's fair value or the carrying amount of its net assets. An entity also should consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity has a recent fair value calculation for reporting unit, it also should include as a factor in its consideration the difference between the fair value and the carrying amount in reaching its conclusion about whether to perform the first step of the goodwill impairment test.

ASC 350-20-35-3G advises that the events and circumstances should be considered in context and no one event necessarily requires the entity to perform Step 1.

If it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing is not performed. If it is more likely than not the fair value of the reporting unit is less than the carrying amount, the entity proceeds to Step 1.

1. Step 1. Compare the fair value of the reporting unit as a whole to its carrying value, including goodwill.
   • If the reporting unit's carrying amount is greater than zero and its fair value exceeds its carrying value, goodwill is not impaired and no further computations are required.
   • If the reporting unit has a zero or negative carrying amount, then the entity must proceed to the next step if it is more likely than not that a goodwill impairment exists. In making this evaluation, the entity should consider whether there are significant differences between the carrying amount and the estimated fair value of the assets and liabilities, and the existence of significant unrecognized intangible assets. (ASC 350-20-35-8)
   • If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is required.
2. Step 2. Determine whether and by how much goodwill is impaired as follows:
   1. Estimate the implied fair value of goodwill.
   2. Compare the implied fair value of goodwill to its carrying amount.
   3. If the carrying amount of goodwill exceeds its implied fair value, it is impaired and is written down to the implied fair value.

Consistent with long-standing practice in GAAP, upon recognition of an impairment loss, the adjusted carrying amount of goodwill becomes its new cost basis, and future restoration of the written down amount is prohibited.

Determining the implied fair value of goodwill. The fair value of a reporting unit is defined in the ASC 350 Glossary as the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. The determination of the implied fair value of goodwill is based on the assumption that the fair value of a reporting unit as a whole differs from the fair value of its identifiable net assets. This is the general principle that gives rise to goodwill in the first place. The acquirer assigns additional value to the acquiree (as evidenced by a purchase price that exceeds the collective fair values of the assets and liabilities to be acquired) based on the acquirer's perceived ability to take advantage of synergies and other benefits that flow from its control over the acquiree.

Determining the Fair Value of a Reporting Unit

Quoted market prices in active markets are considered the best evidence of fair value and are to be used if available. However, market capitalization of a publicly traded business unit is computed based on a quoted market price per share that does not consider any advantages that might inure to an acquirer in a situation where control is obtained. For this reason, ASC 350-20-35-23 cautions that the market capitalization of a reporting unit with publicly traded stock may not be representative of its fair value. Presumably, estimating the fair value of a privately held business using earnings multiples derived from publicly traded companies in the same line of business might have the same limitation.

ASC 350 also prescribes that when a significant portion of a reporting unit is comprised of an acquired entity, the same techniques and assumptions used to determine the purchase price of the acquisition are to be used to measure the fair value of the reporting unit unless such techniques and assumptions are not consistent with the objective of measuring fair value.

If quoted market prices are not available, the estimate of fair value is to be based on the best information available, including prices for similar assets and liabilities or the results of applying available valuation techniques. Such techniques include expected present value methods, option pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis. The weight given to evidence gathered in the valuation process must be proportional to the ability to objectively observe it. When an estimate is in the form of a range of either the amount or timing of estimated future cash flows, the likelihood of possible outcomes should be considered (i.e., probability weightings are assigned in order to estimate the most likely outcome).

The measurement techniques and assumptions used to estimate the fair values of the reporting unit's net assets should be consistent with those used to measure the fair value of the reporting unit as a whole. For example, estimates of the amounts and timing of cash flows used to value the significant assets of the reporting unit are to be consistent with those assumptions used to estimate such cash flows at the reporting unit level when a cash flow model is used to estimate the reporting unit's fair value as a whole.

For the purposes of determining the fair value of a reporting unit, the relevant facts and circumstances are to be carefully evaluated with respect to whether to assume that the reporting unit could be bought or sold in a taxable or nontaxable transaction. The factors to consider in making the evaluation are set forth in ASC 350-20-35:

1. The assumptions that marketplace participants would make in estimating fair value
2. The feasibility of the assumed structure considering
   1. The ability to sell the reporting unit in a nontaxable transaction, and
   2. Any limits on the entity's ability to treat a sale as a nontaxable transaction imposed by income tax laws or regulations, or corporate governance requirements.
3. Whether the assumed structure would yield the best economic after-tax return to the (hypothetical) seller for the reporting unit.

If a reporting unit is not wholly owned by the reporting entity, the fair value of that reporting unit and the implied fair value of goodwill are to be determined in the same manner as prescribed by ASC 805. If the reporting unit includes goodwill that is solely attributable to the parent, any impairment loss would be attributed entirely to the parent. If, however, the reporting unit's goodwill is attributable to both the parent and the noncontrolling interest, the impairment loss would need to be allocated to both the parent and the noncontrolling interest in a rational manner. The same logic applies to gain or loss on disposal of all or a portion of a reporting unit. When that reporting unit is disposed of, the gain or loss on disposal is to be attributed to both the parent and to the noncontrolling interest.

For the purpose of goodwill impairment testing, the carrying value of a reporting unit includes deferred income taxes irrespective of whether fair value of the reporting unit was determined assuming taxable or nontaxable treatment.

Recognition of Impairment Loss

If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss in the amount equal to the excess is recognized. The recognized loss cannot exceed the carrying amount of goodwill. The new carrying amount of the goodwill is the adjusted amount after recognizing the loss. Once the loss is recognized, it cannot be reversed subsequently.

If the second step of the impairment test is not completed before the financial statements are issued and a loss is probable, the entity should recognize the loss and disclose the fact that it is an estimate. Upon completion of the test, the entity may make an adjustment to that estimated loss in the subsequent period.

Other Goodwill Considerations

Other provisions included in ASC 350 include the following:

• Equity method goodwill continues to be recognized under ASC 323 and is not subject to amortization. This goodwill is not tested for impairment under ASC 350, but rather, is tested under ASC 323. This test considers whether the fair value of the underlying investment has declined and whether that decline is “other than temporary.”
• Goodwill of a reporting unit that is fully disposed of is included in the carrying amount of the net assets disposed of in computing the gain or loss on disposal.
• If a significant portion of a reporting unit is disposed of, the goodwill of that unit is required to be tested for impairment. In performing the impairment test, only the net assets to be retained after the disposal are included in the computation. If, as a result of the test, the carrying amount of goodwill exceeds its implied fair value, the excess carrying amount is allocated to the carrying amount of the net assets disposed of in computing the gain or loss on disposal and, consequently, is not considered an impairment loss.

Presentation

To provide financial statement users with transparent information about goodwill, ASC 350-20-45 requires separate line item treatment as follows:

• Balance sheet (statement of financial position)—the aggregate amount of goodwill included in assets is captioned separately from other assets and may not be combined with other intangibles.
• Income statement—the aggregate amount of goodwill impairment losses is captioned separately in the operating section unless associated with discontinued operation. If the goodwill impairment loss is associated with a discontinued operation, the loss should be presented net of tax within discontinued operations.

Determining the Useful of Life of Intangible Assets

An income approach is commonly used to measure the fair value of an intangible asset. The period of expected cash flows used to measure fair value of the intangible, adjusted for applicable entity-specific factors, is to be considered by management in determining the useful life of the intangible for amortization purposes.

Under ASC 350-30-35-3, in estimating the useful life of an intangible asset, the reporting entity is to consider:

1. The entity's expected use of the asset
2. The expected useful life of another asset or asset group to which the useful life of the intangible asset may be related
3. Any provisions contained in applicable law, regulation, or contract that may limit the useful life
4. The entity's own historical experience in renewing or extending similar arrangements if such experience is consistent with the intended use of the intangible asset by the reporting entity, irrespective of whether those similar arrangements contained explicit renewal or extension provisions. In the absence of such historical experience, management is to consider the assumptions that market participants would use about the renewal or extension consistent with their highest and best use of the asset, and adjusted for relevant entity-specific factors.
5. The effects of obsolescence, demand, competition, and other economic factors such as
   1. Stability of the industry,
   2. Known technological advances,
   3. Legislative action that results in an uncertain or changing regulatory environment, and
   4. Expected changes in distribution channels.
6. The level of maintenance expenditures that would be required to obtain the expected future cash flows from the asset.

If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset is considered to be indefinite (which, of course, is not the same as unlimited or infinite). (ASC 350-30-35-4)

Defensive intangible assets. In connection with a business combination or asset acquisition, management of the acquirer may acquire intangible assets that it does not intend to actively use but, rather, wishes to hold in order to prevent other parties from employing them or obtaining access to them. As noted in ASC 350-30-25-5, these intangibles are often referred to as defensive assets, or as “locked-up assets.”²

To qualify as a defensive intangible asset, the asset must be either:

1. Acquired with the intent to not use it, or
2. Used by the acquirer with the intent to discontinue its use after completion of a transition period.

   (ASC 350-30-55-1)

Obviously, upon being characterized as a defensive intangible, the asset is precluded from being considered abandoned upon acquisition, regardless of the fact that it is not being used.

Subsequent to the asset being characterized as a defensive intangible, management may decide to actively employ the asset. If so, it would cease to be considered a defensive intangible. (ASC 350-30-55-1B)

At acquisition, defensive intangibles are subject to the same fair value valuation principles as any other acquired intangible asset, including that they be measured considering exit price to marketplace participants that would put them to their highest and best use. In making the measurement, defensive intangibles are accounted for as a separate unit of accounting and are not to be grouped with other intangibles.

It would be rare for defensive intangible assets to have an indefinite life, since lack of market exposure and competitive and other factors contribute to diminish the fair value of these assets over time. (ASC 350-30-35-5B)

Defensive intangible assets are, in theory, to be assigned a useful life representing how (and for how long) the entity expects to consume the expected benefits related to them in the form of direct and indirect cash flows that would result from the prevention of others from realizing any value from them. In practice, however, such estimates would be difficult to make and highly subjective; consequently, ASC 350-30-35-5A substituted what it believed to be a more workable determination of useful life based on management's estimate of the period over which the defensive intangible asset diminishes in fair value.

Amortization of Intangible Assets

Identifiable intangible assets, such as franchise rights, customer lists, trademarks, patents and copyrights, and licenses are to be amortized over their expected useful economic life with required impairment reviews of their recoverability when necessitated by changes in facts and circumstances in the same manner as set forth in ASC 360 for tangible long-lived assets.

ASC 350-30-35-8 also requires consideration of the intangible's residual value (analogous to salvage value for a tangible asset) in determining the amount of the intangible to amortize. Residual value is defined as the value of the intangible to the entity at the end of its (entity-specific) useful life reduced by any estimated disposition costs. The residual value of an amortizable intangible is assumed to be zero unless the intangible will continue to have a useful life to another party after the end of its useful life to its current holder, and one or both of the following criteria are met:

1. The current holder has received a third-party commitment to purchase the intangible at the end of its useful life, or
2. A market for the intangible exists and is expected to continue to exist at the end of the asset's useful life as a means of determining the residual value of the intangible by reference to marketplace transactions.

The entity should evaluate the residual value each reporting period.

Amortization and impairment considerations. Many intangible assets are based on rights that are conveyed legally by contract, statute, or similar means. For example, governments grant franchises or similar rights to taxi companies, cable companies, and hydroelectric plants; and companies and other private-sector organizations grant franchises to automobile dealers, fast-food outlets, and professional sports teams. Other rights, such as airport landing rights, are granted by contract. Some of those franchises or similar rights are for finite terms, while others are perpetual. Many of those with finite terms are routinely renewed, absent violations of the terms of the agreement, and the costs incurred for renewal are minimal. Many such assets are also transferable, and the prices at which they trade reflect expectations of renewal at minimal cost. However, for others, renewal is not assured, and their renewal may entail substantial cost.

Trademarks, service marks, and trade names may be registered with the government for a period of twenty years and are renewable for additional twenty-year periods as long as the trademark, service mark, or trade name is used continuously. (Brand names, often used synonymously with trademarks, are typically not registered and thus the required attribute of control will be absent.) The U.S. government now grants copyrights for the life of the creator plus fifty years. Patents are granted by the government for a period of seventeen years but may be effectively renewed by adding minor modifications that are patented for additional seventeen-year periods. Such assets also are commonly transferable.

A broadcast license, while nominally subject to expiration in five years, might be indefinitely renewable at little additional cost to the broadcaster. If cash flows can be projected indefinitely, and assuming a market exists for the license, no amortization is to be recorded until such time as a finite life is predicted. However, impairment is required to be tested at least annually to ensure that the asset is carried at no more than its fair value. (ASC 350-30-55-12)

The foregoing examples all addressed identifiable intangibles, which are recognized in the financial statements when purchased separately or in connection with a business combination. There are other intangibles, which are deemed to not be identifiable because they cannot be reliably measured. Technological know-how and an assembled workforce are examples of such intangible assets. Intangibles that cannot be separately identified are considered integral components of goodwill.

Indefinite-Lived Intangible Assets

Identifiable intangible assets having indefinite useful economic lives supported by clearly identifiable cash flows are not subject to regular periodic amortization. Instead, the carrying amount of the intangible is tested for impairment annually, and again between annual tests if events or circumstances warrant such a test. An impairment loss is recognized if the carrying amount exceeds the fair value. Furthermore, amortization of the asset commences when evidence suggests that its useful economic life is no longer deemed indefinite.

Testing for impairment of indefinite-lived intangible assets. The ASC gives entities the option to first assess qualitatively whether it is more likely than not (more than 50 percent) that the asset is impaired. The qualitative assessment test can be performed on some or all of the assets, or the entity can bypass the qualitative test and perform the quantitative test.

If it is not more likely than not that the asset is impaired, the entity does not have to calculate the fair value of the intangible asset and perform the quantitative impairment test. If it is more likely than not that the asset is impaired, the entity must perform the quantitative impairment test and calculate the fair value of an indefinite-lived intangible asset.

If performing the qualitative assessment, the entity needs to identify and consider those events and circumstances that, individually or in the aggregate, most significantly affect an indefinite-lived intangible asset's fair value. Examples of events and circumstances that should be considered include those listed in ASC 350-30-35-18B:

1. Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on future expected earnings and cash flows that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
2. Financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
3. Legal, regulatory, contractual, political, business, or other factors, including asset-specific factors that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
4. Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
5. Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (in both absolute terms and relative to peers), or a change in the market for an entity's products or services due to the effects of obsolescence, demand, competition, or other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing business environment, and expected changes in distribution channels) that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
6. Macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.

Any positive and mitigating events and circumstances should also be considered, as well as the difference between the fair value in a recent calculation of an indefinite-lived intangible asset and the then carrying amount, whether there have been changes to the carrying amount of the indefinite-lived intangible asset. (ASC 350-30-35-18C)

Determining the unit of accounting. ASC 350-30-35 provides guidance about when it is appropriate to combine into a single “unit of accounting” for impairment testing purposes, separately recorded indefinite-life intangibles, whether acquired or internally developed.

The assets may be combined into a single unit of accounting for impairment testing if they are operated as a single asset and, as such, are inseparable from one another. The following indicators are to be used in evaluating the individual facts and circumstances to enable the exercise of judgment. (ASC 350-30-35-21)

The following are indicators that indefinite-lived intangibles are to be combined as a single unit of accounting. (ASC 350-30-35-23):

1. The intangibles will be used together to construct or enhance a single asset.
2. If the intangibles had been part of the same acquisition, they would have been recorded as a single asset.
3. The intangibles, as a group, represent “the highest and best use of the assets” (e.g., they could probably realize a higher sales price if sold together than if they were sold separately). Indicators pointing to this situation are:
   1. The unlikelihood that a substantial portion of the assets would be sold separately, or
   2. The fact that, should a substantial portion of the intangibles be sold individually, there would be a significant reduction in the fair value of the remaining assets in the group.
4. The marketing or branding strategy of the entity treats the assets as being complementary (e.g., a trademark and its related trade name, formulas, recipes, and patented or unpatented technology can all be complementary to an entity's brand name).

The following are indicators that indefinite-lived intangibles are not to be combined as a single unit of accounting. (ASC 350-30-35-24):

1. Each separate intangible generates independent cash flows.
2. In a sale, it would be likely that the intangibles would be sold separately. If the entity had previously sold similar assets separately, this would constitute evidence that combining the assets would not be appropriate.
3. The entity is either considering or has already adopted a plan to dispose of one or more of the intangibles separately.
4. The intangibles are used exclusively by different asset groups (as defined in the ASC Master Glossary).

5. The intangibles have differing useful economic lives.

ASC 350-30-35-26 provides guidance regarding the “unit of accounting” determination.

1. Goodwill and finite-lived intangibles are not permitted to be combined in the “unit of accounting” since they are subject to different impairment rules.
2. If the intangibles collectively constitute a business, they may not be combined into a unit of accounting.
3. If the unit of accounting includes intangibles recorded in the separate financial statements of consolidated subsidiaries, it is possible that the sum of impairment losses recognized in the separate financial statements of the subsidiaries will not equal the consolidated impairment loss.
4. Should a unit of accounting be included in a single reporting unit, that same unit of accounting and associated fair value is to be used in computing the implied fair value of goodwill for measuring any goodwill impairment loss.

Quantitative Impairment Test for Indefinite-Lived Intangible Asset

This test consists simply of comparing the fair value of the asset with its carrying amount.

Recognition of Impairment Loss for Indefinite-Lived Intangible Asset

If the carrying amount exceeds its fair value, the entity recognizes an impairment loss equal to that excess. After recognition of the loss, the adjusted carrying amount becomes the new basis for that intangible asset.

Presentation

To provide financial statement users with transparent information about intangible assets, ASC 350-30-45 requires:

• Statement of financial position: All intangible assets must be aggregated and presented as a separate line item in the statement of financial position. The entity may also choose to present individual intangible assets or classes of intangible assets as separate line items.
• Income statement: As appropriate, the entity should present amortization expense and impairment losses in line items within continuing operations.

Costs Subject to Capitalization

Cost capitalization commences when an entity has completed the conceptual formulation, design, and testing of possible project alternatives, including the process of vendor selection for purchased software, if any. These early-phase costs (referred to as “preliminary project stage” in ASC 350-40) are analogous to research and development costs and must be expensed as incurred. These cannot be later restored as assets if the development proves to be successful.

Costs incurred subsequent to the preliminary project stage that meet the criteria under GAAP as long-lived assets are capitalized and amortized over the asset's expected economic life. Capitalization of costs begins when both of two conditions in ASC 350-40-25-12 are met.

• First, management having the relevant authority authorizes and commits to funding the project and believes that it is probable that it will be completed and that the resulting software will be used as intended.
• Second, the conceptual formulation, design, and testing of possible software project alternatives (i.e., the preliminary project stage) have all been completed.

Application development stage. Costs capitalized include those of the application development stage of the software development process. These include coding and testing activities and various implementation costs. ASC 350-40-30-1 limits these costs to:

1. External direct costs of materials and services consumed in developing or obtaining internal-use computer software;
2. Payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software project to the extent of the time spent directly on the project; and
3. Interest cost incurred while developing internal-use computer software, consistent with the provisions of ASC 835-20.

Costs expensed. General and administrative costs, overhead costs, and training costs are expensed as incurred. (ASC 350-40-30-3) Even though these may be costs associated with the internal development or acquisition of software for internal use, under GAAP those costs relate to the period in which they are incurred. The issue of training costs is particularly important, since internal-use computer software purchased from third parties often includes, as part of the purchase price, training for the software (and often fees for routine maintenance as well). When the amount of training or maintenance fees is not specified in the contract, entities are required to allocate the cost among training, maintenance, and amounts representing the capitalizable cost of computer software. Training costs are recognized as expense as incurred. Maintenance fees are recognized as expense ratably over the maintenance period.

Examples of computer software developed for internal use. ASC 350-40-55-1 provides examples of when computer software is acquired or developed for internal use. The following is a list of examples illustrating when computer software is for internal use:

1. A manufacturing entity purchases robots and customizes the software that the robots use to function. The robots are used in a manufacturing process that results in finished goods.
2. An entity develops software that helps it improve its cash management, which may allow the entity to earn more revenue.
3. An entity purchases or develops software to process payroll, accounts payable, and accounts receivable.
4. An entity purchases software related to the installation of an online system used to keep membership data.
5. A travel agency purchases a software system to price vacation packages and obtain airfares.
6. A bank develops software that allows a customer to withdraw cash, inquire about balances, make loan payments, and execute wire transfers.
7. A mortgage loan servicing entity develops or purchases computer software to enhance the speed of services provided to customers.
8. A telecommunications entity develops software to run its switches that are necessary for various telephone services such as voice mail and call forwarding.
9. An entity is in the process of developing the accounts receivable system. The software specifications meet the entity's internal needs and the entity did not have a marketing plan before or during the development of the software. In addition, the entity has not sold any of its internal-use software in the past. Two years after completion of the project, the entity decided to market the product to recoup some or all of its costs.
10. A broker-dealer entity develops a software database and charges for financial information distributed through the database.
11. An entity develops software to be used to create components of music videos (for example, the software used to blend and change the faces of models in music videos). The entity then sells the final music videos, which do not contain the software, to another entity.
12. An entity purchases software to computerize a manual catalog and then sells the manual catalog to the public.
13. A law firm develops an intranet research tool that allows firm members to locate and search the firm's databases for information relevant to their cases. The system provides users with the ability to print cases, search for related topics, and annotate their personal copies of the database.

    (ASC 350-40-55-1)

On the other hand, software that does not qualify as being for internal use includes software sold by a robot manufacturer to purchasers of its products; the cost of developing programs for microchips used in automobile electronic systems; software developed for both sale to customers and internal use; computer programs written for use in research and development efforts; and costs of developing software under contract with another entity. ASC 350-40-55-2 contains more examples.

Impairment

Impairment of capitalized internal-use software is recognized and measured in accordance with the provisions of ASC 360 in the same manner as tangible long-lived assets and other amortizable intangible assets. Per ASC 350-40-35-1, circumstances that might suggest that an impairment has occurred and that would trigger a recoverability evaluation include:

1. A realization that the internal-use computer software is not expected to provide substantive service potential;
2. A significant change in the extent or manner in which the software is used;
3. A significant change has been made or is being anticipated to the software program; or
4. The costs of developing or modifying the internal-use computer software significantly exceed the amount originally expected. These conditions are analogous to those generically set forth by ASC 360, Property, Plant, and Equipment.

In some instances, ongoing software development projects will become troubled before being discontinued. ASC 350-40 indicates that management needs to assess the likelihood of successful completion of projects in progress. When it becomes no longer probable that the computer software being developed will be completed and placed in service, the asset is to be written down to the lower of the carrying amount or fair value, if any, less costs to sell. Importantly, it is a rebuttable presumption that any uncompleted software has a zero fair value.

ASC 350-40-35-3 provides indicators that the software is no longer expected to be completed and placed in service. These include

1. A lack of expenditures budgeted or incurred for the project;
2. Programming difficulties that cannot be resolved on a timely basis;
3. Significant cost overruns;
4. Information indicating that the costs of internally developed software will significantly exceed the cost of comparable third-party software or software products, suggesting that management intends to obtain the third-party software instead of completing the internal development effort;
5. The introduction of new technologies that increase the likelihood that management will elect to obtain third-party software instead of completing the internal project; and
6. A lack of profitability of the business segment or unit to which the software relates or actual or potential discontinuation of the segment.

Amortization

Paragraphs 4, 5, and 6 in ASC 350-40-35 provided guidance on amortization. As for other long-lived assets, the cost of computer software developed or obtained for internal use should be amortized in a systematic and rational manner over its estimated useful life. The intangible nature of the asset contributes to the difficulty of developing a meaningful estimate, however. Among the factors to be weighed are the effects of obsolescence, new technology, and competition. Management would especially need to consider if rapid changes are occurring in the development of software products, software operating systems, or computer hardware, and whether it intends to replace any technologically obsolete software or hardware.

Amortization commences for each module or component of a software project when the software is ready for its intended use, without regard to whether the software is to be placed in service in planned stages that might extend beyond a single reporting period. Computer software is deemed ready for its intended use after substantially all testing has been completed.

Internal-Use Software Subsequently Marketed

In some cases internal-use software is later sold or licensed to third parties, notwithstanding the original intention of management that the software was acquired or developed solely for internal use. In such cases, ASC 350-40 provides that any proceeds received are to be applied first as a reduction of the carrying amount of the software. No profit is recognized until the aggregate proceeds from sales exceed the carrying amount of the software. After the carrying value is fully recovered, any subsequent proceeds are recognized as revenue or gain, depending on whether the contract is with a customer. (ASC 350-40-35-8)