Customer relationships, trade names, technology and licenses all sit under ASC 350-30 once they are on the balance sheet. The first question is whether the useful life is finite or indefinite, because that choice decides whether the asset is amortized and which impairment test applies. This guide covers the life determination, the amortization pattern, the indefinite-lived impairment test and the audit procedures, with entries. Goodwill follows its own rules in the goodwill impairment test. Acquired intangibles come from purchase price allocation.
When is a useful life indefinite?
When no legal, regulatory, contractual, competitive, economic or other factor limits it. PwC quotes that language from ASC 350-30 and adds that indefinite does not mean infinite or indeterminate: the asset must be expected to contribute to cash flows with no foreseeable limit.
A trade name with no legal expiry and a brand that the entity intends to keep using is the typical candidate. A customer list usually is not, because customer relationships tend to attrit.
How is a finite-lived intangible amortized?
Over the best estimate of its useful life, using a method that reflects the pattern in which the economic benefits are consumed.
Illustration only, with round numbers. An acquirer records customer relationships at $600,000. It expects them to produce benefits evenly over six years, so straight-line applies.
| Account | Debit | Credit |
|---|---|---|
| Amortization expense | $100,000 | |
| Customer relationships (or accumulated amortization) | $100,000 |
If attrition data show the relationships lose value faster in early years, the pattern of benefit consumption would support an accelerated method. The choice follows the evidence.
Must the life be reassessed?
Yes for indefinite-lived assets. They are evaluated each reporting period to see whether events and circumstances still support an indefinite life.
When an asset moves from indefinite to finite, the entity first tests it for impairment as an indefinite-lived asset and then amortizes the remaining carrying amount prospectively over the remaining useful life. A finite-lived asset later determined to have an indefinite life stops being amortized.
How is an indefinite-lived intangible tested for impairment?
Indefinite-lived assets are not amortized and are tested annually, or more frequently if events or changes in circumstances indicate impairment is more likely than not. PwC illustrates this with a trademark that is not amortized and is tested annually. The Journal of Accountancy describes the qualitative option: the entity may first assess qualitative factors, and the quantitative test is needed only if it is more likely than not that the asset is impaired. In the quantitative test, fair value is compared with carrying amount, and any excess of carrying amount over fair value is an impairment loss.
Illustration only. A trademark has a carrying amount of $400,000 and is classified as indefinite-lived. The annual valuation puts fair value at $340,000.
| Account | Debit | Credit |
|---|---|---|
| Impairment loss on intangible assets | $60,000 | |
| Trademark | $60,000 |
No amortization follows. The new carrying amount of $340,000 is tested again at the next annual date.
Finite-lived assets are different. They are tested under the long-lived asset guidance in ASC 360-10 when a triggering event occurs, as PwC's contrast between annual and indicator-driven testing shows. The mechanics, including the recoverability screen and the asset group, are in the ASC 360 recoverability test worked example.
Audit angle
- Life determination. For each material intangible, obtain management's analysis of legal, contractual, competitive and economic factors. Challenge any indefinite life on a technology or customer asset. Compare to the valuation report used at acquisition.
- Amortization. Recompute amortization from in-service date, cost, life and method. Where an accelerated method is used, test the attrition or usage data behind the pattern.
- Reassessment. Ask what management did in the period to reassess indefinite lives. A file with no evidence of reassessment is a finding. Look for events such as a rebrand, a lost customer or a product retirement that shorten a life.
- Indefinite-lived test. Agree the carrying amount to the ledger. If a qualitative assessment was used, test the evidence behind "not more likely than not." If quantitative, evaluate the valuation inputs. See fair value measurement and using the work of a specialist.
- Finite-lived triggers. Read minutes and customer data for indicators. Check that a trigger led to a recoverability test.
- Reclassifications. If an indefinite life became finite, check that the impairment test was done before amortization began.
Common misstatements: indefinite life assigned to customer relationships, amortization that stops or never starts, no annual test of a trademark, and straight-line applied without examining the pattern of benefit.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- PwC, Business combinations guide, 8.2 Indefinite-lived intangible assets: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combination/business_combination__28_US/chapter_8_accounting_US/82_indefinitelived_i_US.html
- Deloitte DART, Roadmap: Goodwill and intangible assets, 4.5 Reevaluating the useful life of an intangible asset (indefinite to finite, impairment test first, prospective amortization): https://dart.deloitte.com/USDART/home/codification/assets/asc350-20/goodwill/chapter-4-subsequent-accounting-for-intangible/4-5-reevaluating-useful-life-an
- Journal of Accountancy, qualitative assessment for indefinite-lived intangibles (2012 article on the proposal): https://www.journalofaccountancy.com/news/2012/jan/20125047/
- PwC, Bankruptcies and liquidations guide, 2.2 Asset impairments (annual versus indicator-driven testing): https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/bankruptcies_and_liq/bankruptcies_and_liq_US/chapter_2_accounting_US/22_asset_impairments_US.html
Part of CORAA University · US GAAP for private companies: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error