Goodwill and other intangible assets — Key differences between U.S. GAAP and IFRSs
Under U.S. GAAP and IFRSs, the primary sources of guidance on the recognition, measurement, amortization, and impairment of goodwill and other intangible assets are ASC 350 and both IAS 36, Impairment of Assets, and IAS 38, Intangible Assets.
The table below summarizes these differences and is followed by a detailed explanation of each difference.1
Generally, costs incurred to develop, maintain, or restore intangible assets are recognized as an expense when incurred. Exceptions include costs associated with computer software intended to be sold, Web site development, and computer software for internal use.
Internally developed intangible assets are recognized only if (1) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity, (2) the cost of the asset can be measured reliably, and (3) certain other criteria are met.
Intangible assets are measured at historical cost (less accumulated amortization and impairments); no revaluation of intangible assets is permitted (other than for impairments).
Intangible assets may be accounted for at historical cost (less accumulated amortization and impairments) or pursuant to a revaluation model (permitted in limited situations).
Advertising costs are either expensed as incurred or expensed the first time the advertising takes place. Exceptions include (1) direct-response advertising and (2) expenditures for advertising costs that are incurred after revenues related to those costs (e.g., cooperative advertising) are recognized.
Advertising costs are expensed as incurred unless the expenditure relates to payment made before the entity obtains a right to access goods or receives services.
Reporting unit — either an operating segment or one level below.
Cash-generating unit (CGU) — the lowest level at which goodwill is monitored for internal management purposes. This level cannot be larger than an operating segment.
When testing goodwill for impairment, an entity may perform a two-step goodwill impairment test if it (1) qualitatively determines the fair value of the reporting unit is more likely than not less than the carrying amount or (2) chooses not to perform the qualitative assessment.
Step 1 — Fair value of the reporting unit is compared with its carrying amount, including goodwill. If fair value is greater than carrying amount, step 2 is skipped because goodwill is not impaired.
Step 2 — The "implied fair value" of reporting-unit goodwill is compared with its carrying amount. If the carrying amount exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to that excess.
The recoverable amount of a CGU (higher of (1) fair value less costs to sell and (2) value in use) is compared with the carrying amount. The impairment loss is allocated by (1) reducing any goodwill of the CGU and then (2) reducing the carrying value of other assets of the CGU on a pro rata basis, subject to certain constraints.
When testing an indefinite-lived intangible asset for impairment, an entity may first apply the optional qualitative impairment assessment. If, on the basis of the qualitative impairment assessment, an entity asserts that it is more likely than not that the indefinite-lived intangible asset is impaired, an entity would be required to calculate the fair value of the asset for an impairment test. The fair value of the asset is compared with its carrying amount. An impairment loss is recognized for the amount by which the carrying amount exceeds the fair value.
Reversal of impairment loss is not permitted.
The recoverable amount of the asset (higher of (1) fair value less costs to sell and (2) value in use) is compared with its carrying amount. An impairment loss is recognized for the amount by which the carrying amount exceeds the recoverable amount.
Reversal of impairment loss is required if certain criteria are met.
Under U.S. GAAP, ASC 350-20-25-3 states, “Costs of internally developing, maintaining, or restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when incurred." In addition, ASC 730-10-25-1 states:
Research and development costs encompassed by this Subtopic shall be charged to expense when incurred. As noted in paragraph 730-10-15-4(f), this Topic does not apply to tangible and intangible assets acquired in a business combination or in an acquisition by a not-for-profit entity that are used in research and development activities.
There are also other exceptions, in which costs associated with (1) the creation of computer software intended to be sold (see ASC 985-20), (2) Web site design and construction (see ASC 350-50), and (3) computer software for internal use (see ASC 350-40), may be capitalized in certain instances.
Under IFRSs, paragraph 21 of IAS 38 states that internally developed intangible assets will be recognized only if they meet the following criteria:
a. it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
b. the cost of the asset can be measured reliably.
Under paragraph 63 of IAS 38, some internally generated intangible assets, such as brands, mastheads, publishing titles, and customer lists, are not recognized as intangible assets unless they are purchased externally or acquired in a business combination.
Internally generated intangible asset costs are categorized as being incurred in the "research phase" or the "development phase." All research-phase costs are expensed as incurred. Paragraph 56 of IAS 38 notes the following examples of research expense activities:
a. activities aimed at obtaining new knowledge;
b. the search for, evaluation and final selection of, applications of research findings or other knowledge;
c. the search for alternatives for materials, devises, products, processes, systems or services; and
d. the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.
Paragraph 57 of IAS 38 indicates that costs incurred in the development phase are capitalized only if an entity can demonstrate all the following:
a. the technical feasibility of completing the intangible asset so that it will be available for use or sale.
b. its intention to complete the intangible asset and use or sell it.
c. its ability to use or sell the intangible asset.
d. how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
e. the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
f. its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Paragraph 59 of IAS 38 lists the following examples of activities that could result in the recognition of intangible assets during the development phase:
a. the design, construction and testing of pre-production or pre-use prototypes and models;
b. the design of tools, jigs, moulds and dies involving new technology;
c. the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and
d. the design, construction [and operation] and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.
If an entity cannot determine the phase in which costs were incurred, it should treat such expenditures as if they were incurred in the research phase of the project.
In a business combination under both U.S. GAAP and IFRSs, an acquirer recognizes an intangible asset for certain costs that may have been expensed by the acquiree. ASC 805-20-25-4 states that "the acquirer recognizes the acquired identifiable intangible assets, such as a brand name, a patent, or a customer relationship, that the acquiree did not recognize as assets in its financial statements because it developed them internally and charged the related costs to expense." Under IFRS 3(R), Business Combinations, the same notion would apply and such assets would be recognized in the acquisition-method accounting.
Under U.S. GAAP, revaluation of intangible assets after their initial recognition is not allowed. Intangible assets are carried at historical cost less accumulated amortization and impairments.
Under IFRSs, a cost model is generally used to account for intangible assets. The cost model is similar to the model used under U.S. GAAP in that an intangible asset is carried at its historical cost less accumulated amortization and impairments.
However, if an intangible asset has a quoted market price in an active market (which is rare), the entity has to make an accounting policy choice regarding whether to use the revaluation model or the cost model. The entity must apply the accounting policy it selects to the entire class of intangible assets, unless an individual asset does not have an active market. The revaluation model is applied after the intangible asset has been initially recognized at cost. Under the revaluation model, the intangible asset is carried at a revalued amount, which is fair value on the revaluation date less any subsequent accumulated amortization and any subsequent accumulated impairment losses. Paragraph 75 of IAS 38 states that a revaluation must be kept sufficiently up-to-date so that “the carrying amount of the asset does not differ materially from its fair value.”
Paragraphs 85 and 86 of IAS 38 state that revaluation increases and decreases are recognized either in equity or in profit or loss as follows:
If an intangible asset's carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.
If an intangible asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of that asset. The decrease recognized in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.
Under U.S. GAAP, advertising costs are accounted for pursuant to ASC 720-35. Typically, they are expensed either as incurred or the first time the advertising takes place unless the costs relate to either (1) direct-response advertising or (2) expenditures for advertising costs that are incurred after revenues related to those costs are recognized (e.g., cooperative advertising).
Entities may elect to expense advertising costs either as incurred or the first time the advertising takes place as long as this election is an accounting policy that is consistently applied to similar kinds of advertising expenses. ASC 720-35-25-1 notes that an example of "the first time advertising takes place" would include "the first public showing of a television commercial for its intended purpose and the first appearance of a magazine advertisement for its intended purpose."
Except for direct-response advertising, the cost of communicating advertising should not be expensed until that item or service has been received. For example, ASC 720-35-25-5 states:
a. The costs of television airtime shall not be reported as advertising expense before the airtime is used. Once it is used, the costs shall be expensed, unless the airtime was used for direct-response advertising activities that meet the criteria for capitalization under paragraph 340-20-25-4.
b. The costs of magazine, directory, or other print media advertising space shall not be reported as advertising expense before the space is used. Once it is used, the costs shall be expensed, unless the space was used for direct-response advertising activities that meet the criteria for capitalization under paragraph 340-20-25-4.
Direct-response advertising whose primary purpose is to elicit sales from customers who have been shown to have responded specifically to prior advertising, and that results in probable future economic benefits, should be reported as an asset, net of amortization, and amortized over the period during which future benefits are expected to be received.
Advertising Costs Expended After Revenues Related to Those Costs Are Recognized
Generally, advertising expenditures made after recognition of revenues relate to cooperative advertising. Cooperative advertising is advertising in which an entity assumes an obligation to reimburse its customers for all or a portion of the customer's advertising costs. Revenues related to these transactions are typically earned before the advertising reimbursements are made. Therefore, under ASC 720-35, the entity should accrue and expense cooperative advertising when the related customer's revenues are recognized.
Accounting Under IFRSs
Under IFRSs, advertising costs are expensed as incurred. The one exception is costs that relate to the prepayment of advertising for which a prepaid asset would be recognized until an entity has gained a right to access the related goods or has received the related services. Paragraph 69A of IAS 38 states:
An entity has a right to access goods when it owns them. Similarly, it has a right to access goods when they have been constructed by a supplier in accordance with the terms of a supply contract and the entity could demand delivery of them in return for payment. Services are received when they are performed by a supplier in accordance with a contract to deliver them to the entity and not when the entity uses them to deliver another service, for example, to deliver an advertisement to customers.
The level at which goodwill impairment testing is completed under U.S. GAAP could differ from that under IFRSs. The lowest level at which an entity may test goodwill for impairment under U.S. GAAP is one level below the operating segment. Under IFRSs, the lowest level for testing is not specifically prescribed, although paragraph 80 of IAS 36 does provide some guidance (see below). The only requirement stated under IFRSs is that the level of testing must not be larger than an operating segment level.
ASC 350-20-35-33 through 35-36 provide the following guidance on identifying reporting units:
The provisions of Topic 280 shall be used to determine the reporting units of an entity [defined as an operating segment or one level below an operating segment (also known as a component)].
A component of an operating segment is a reporting unit if the component constitutes a business or a nonprofit activity for which discrete financial information is available and segment management, as that term is defined in paragraph 280-10-50-7, regularly reviews the operating results of that component. Subtopic 805-10 includes guidance on determining whether an asset group constitutes a business. . . .
However, two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. Paragraph 280-10-50-11 shall be considered in determining if the components of an operating segment have similar economic characteristics.
An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if it comprises only a single component.
Under IFRSs, the cash-generating unit (CGU) is the level at which goodwill is tested for impairment under IAS 36. Paragraph 6 of IAS 36 defines a CGU as "the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets."
In addition, paragraph 80 of IAS 36 states:
For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer's cash-generating units, or groups of cash-generating units, that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated shall:
a. represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and
b. not be larger than an operating segment as defined by paragraph 5 of IFRS 8, Operating Segments, before aggregation.
Under U.S. GAAP, when testing goodwill for impairment, an entity may perform the two-step goodwill impairment test if it (1) qualitatively determines the fair value of the reporting unit is more likely than not less than the carrying amount or (2) chooses not to perform the qualitative assessment as outlined in ASC 350-20-35-3 through 35-3G.
ASC 350-20-35-4 through 35-13 outline the two-step method for testing goodwill for impairment:
• Quantitatively determine whether the fair value of the reporting unit is less than its carrying amount, including goodwill.
• If the fair value of the reporting unit is less, proceed to step 2.
• If the fair value of the reporting unit is not less, perform no additional testing of goodwill for impairment.
• If the carrying amount of the reporting unit is zero or negative, proceed to step 2 if, on the basis of qualitative considerations, it is more likely than not that a goodwill impairment exists.
• Determine the implied fair value of goodwill of the reporting unit by allocating the fair value of the reporting unit used in step 1 to all the assets and liabilities of that reporting unit (including any recognized and unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit.
• Compare the implied fair value of goodwill with the carrying amount of goodwill to determine whether goodwill is impaired. If the carrying amount exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to that excess.
Under IFRSs, the recoverable amount of a CGU (higher of (1) fair value less costs to sell and (2) value in use) is compared with the carrying amount of the CGU. Paragraph 104 of IAS 36 states that if the recoverable amount of the CGU is less that than the carrying amount of the CGU, "the impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order:
a. first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and
b. then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount of each asset in the unit (group of units)."
In addition, paragraph 105 of IAS 36 states:
In allocating an impairment loss in accordance with paragraph 104, an entity shall not reduce the carrying amount of an asset below the highest of:
a. its fair value less costs to sell (if determinable);
b. its value in use (if determinable); and
In accordance with paragraph 59 of IAS 36, these reductions in carrying amounts are treated as impairment losses on individual assets.
Under U.S. GAAP, entities may first apply the optional qualitative impairment assessment to determine whether an intangible asset that is not subject to amortization (i.e., indefinite-lived intangible asset) is more likely than not impaired. If, on the basis of the qualitative impairment assessment, an entity asserts that it is more likely than not that the indefinite-lived intangible asset is impaired, an entity would be required to calculate the fair value of the asset for an impairment test. The fair value of the intangible asset is compared with the carrying amount ASC 350-30-35-19 and 35-20 state, in part:
If the carrying amount of an intangible asset exceeds its fair value, an entity shall recognize an impairment loss in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis.
Subsequent reversal of a previously recognized impairment loss is prohibited.
Under U.S. GAAP, ASC 350-30-35-21 through 35-28 provide guidance on grouping certain indefinite-lived intangible assets for impairment testing. IFRSs do not explicitly contain similar guidance.
Under IFRSs, an entity generally tests an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount with its carrying amount. If the recoverable amount is less than the carrying amount, an impairment loss is recognized for the excess. According to paragraph 114 of IAS 36, unlike U.S. GAAP, IFRSs require the subsequent reversal of an impairment loss on an intangible asset with an indefinite useful life (not including goodwill) as follows:
An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If this is the case, the carrying amount of the asset shall, except as described in paragraph 117, be increased to its recoverable amount. That increase is a reversal of an impairment loss.
In addition, paragraph 117 of IAS 36 states:
The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or deprecation) had no impairment loss been recognised for the asset in prior years.
1 Differences are based on comparison of authoritative literature under U.S. GAAP and IFRSs and do not necessarily include interpretations of such literature.