Explain how intangibles are amortised and how assets are impaired
The idea
Intangibles with finite lives are amortised over those lives. Intangibles with indefinite lives, and goodwill, are not amortised but are tested for impairment at least annually. An impairment writes the asset down (to its recoverable amount under IFRS, or fair value under US GAAP) and charges the difference to income, which is a non-cash charge that nonetheless conveys real information: it is management conceding that an acquisition or an asset will not deliver what was assumed. A large goodwill impairment is best read as evidence about the price paid in a past acquisition rather than about the current period's operations.
A practice question
How is goodwill treated after acquisition?
- Amortised over twenty yearsWhy not: That was the treatment under older standards and is no longer permitted. Goodwill has no determinable life, so there is no period to amortise it over.
- Not amortised, but tested for impairment at least annually — correct
- Written off immediately against equityWhy not: Also a historical treatment. Goodwill is recognised as an asset and carried until an impairment test says otherwise.
Goodwill has no determinable life, so it is carried until an impairment test shows it is no longer supported.
A harder one
Why are indefinite-lived intangibles tested annually rather than amortised?
- Because they cannot lose valueWhy not: They very much can, which is why the annual test exists at all.
- Because amortisation is optional for themWhy not: It is not available, rather than optional. Without a finite life there is no schedule to apply.
- Because there is no period to spread over — correct
Recoverability is tested directly instead. Without a life there is no denominator for a schedule, and the test substitutes for it.
The hardest tier
A company records a large goodwill impairment. What does this most directly tell an analyst?
- That goodwill's carrying amount is not recoverable — correct
- That current-period operations have deterioratedWhy not: Trading may well have weakened, and often that is what triggers the test. But the charge is about the recoverability of goodwill rather than about this period's operating result.
- That the company's tangible assets are overstatedWhy not: Goodwill is the premium over identifiable net assets. Impairing it says nothing about the tangible assets, which are tested separately.
The charge says the carrying amount is no longer supported by what the acquired business is now expected to generate. Overpaying at the time is one explanation; deterioration since the deal, or a change in market conditions, are others, and the impairment alone does not distinguish between them. That is why repeated impairments at a serial acquirer are a question about its capital allocation rather than an answer.
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