3062 - Goodwill and Other Intangible Assets by CBt5G1

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									3062 - Goodwill and Other Intangible Assets
SPECIFIC ITEMS
SECTION 3062
goodwill and other intangible assets


TABLE OF CONTENTS               Paragraph
Purpose and scope       .01-.04
Definitions     .05
Intangible assets       .06-.21
Initial recognition and measurement .06-.09
Subsequent measurement          .10-.17
Determining the useful life of an intangible asset .15-.17
Recognition and measurement of an impairment loss              .18-.21
Intangible assets subject to amortization      .18
Intangible assets not subject to amortization .19-.21
Goodwill        .22-.47
Recognition and measurement of an impairment loss              .25-.38
Fair value of goodwill .32
Assigning assets and liabilities to reporting units    .33-.35
Assigning goodwill to reporting units          .36-.37
Reorganization of reporting structure .38
When to test goodwill of a reporting unit for impairment .39-.43
Disposal of all or a portion of a reporting unit       .44-.47
Presentation .48-.50
Disclosures .51-.54
Differential reporting .55-.62
Goodwill        .55-.58
Intangible assets not subject to amortization .59-.62
Transitional provisions         .63-.77
Implementation guidance         Appendix A
Examples of disclosure          Appendix B

Purpose and Scope
PURPOSE AND SCOPE
.01      This Section establishes standards for the recognition, measurement, presentation and
disclosure of goodwill and other intangible assets by profit-oriented enterprises.
.02      Standards for the recognition, measurement, presentation and disclosure of tangible
capital assets are provided in PROPERTY, PLANT AND EQUIPMENT, Section 3061.
Standards for the initial recognition, measurement and disclosure of assets acquired and
liabilities assumed in a business combination are provided in BUSINESS COMBINATIONS,
Section 1581. Not-for-profit organizations account for intangible assets in accordance with
CAPITAL ASSETS HELD BY NOT-FOR-PROFIT ORGANIZATIONS, Section 4430.
.03      This Section does not apply to intangible assets associated with research and
development activities (see RESEARCH AND DEVELOPMENT COSTS, Section 3450), or
to servicing assets (see ACCOUNTING GUIDELINE AcG-12, Transfers of Receivables). It
also does not address the establishment of a new cost basis for intangible assets as part of a
comprehensive revaluation (see COMPREHENSIVE REVALUATION OF ASSETS AND
LIABILITIES, Section 1625).
.04      The portion of the difference between an investor's cost of an investment subject to
significant influence and the amount of its underlying equity in the net assets of the investee
that is similar to goodwill (equity method goodwill) is not reviewed for impairment in
accordance with this Section. Investments accounted for by the equity method are reviewed
for impairment in accordance with LONG-TERM INVESTMENTS, paragraphs 3050.20-.26.
Impairment write-downs as a result of the application of Section 3050, are not presented in
the income statement as part of the goodwill impairment losses.

DEFINITIONS
.05     The following terms are used in this Section with the meanings specified:
(a)     Fair value is the amount of the consideration that would be agreed upon in an arm's
length transaction between knowledgeable, willing parties who are under no compulsion to
act.
(b)     Goodwill is the excess of the cost of an acquired enterprise over the net of the
amounts assigned to assets acquired and liabilities assumed. The amount recognized as
goodwill includes acquired intangible assets that do not meet the criteria in BUSINESS
COMBINATIONS, Section 1581, for recognition as an asset apart from goodwill.
(c)     An intangible asset is an asset, other than a financial asset, 1 that lacks physical
substance.
(d)     A reporting unit is the level of reporting at which goodwill is tested for impairment
and is either an operating segment (see SEGMENT DISCLOSURES, Section 1701), or one
level below (referred to as a component). A component of an operating segment is a reporting
unit when the component constitutes a business for which discrete financial information is
available and segment management regularly reviews the operating results of that component.
(Segment management consists of one or more segment managers, as that term is defined in
SEGMENT DISCLOSURES, Section 1701.) However, two or more components of an
operating segment are aggregated and deemed a single reporting unit when the components
have similar economic characteristics. An operating segment is deemed to be a reporting unit
when all of its components are similar, when none of its components is a reporting unit, or
when it is comprised of only a single component.
(e)     Useful life is the period over which an asset is expected to contribute directly or
indirectly to future cash flows of an enterprise.

INTANGIBLE ASSETS

Initial recognition and measurement
.06      ¨ An intangible asset that is acquired either individually or with a group of other assets
should be initially recognized and measured at cost. An intangible asset is not written down
or written off in the period of acquisition, unless it becomes impaired during this period.
[JAN. 2002]
.07      While goodwill is an intangible asset, the term "intangible asset" in this Section refers
to an intangible asset other than goodwill. The degree of certainty as to future benefits to be
derived from costs attributable to developing intangible assets varies and, in many cases, the
expected future benefits may be too uncertain to justify asset recognition. When future
benefits are reasonably assured, however, such costs are capitalized. The cost of an intangible
asset includes direct development costs and overhead costs directly attributable to
development activity.
.08      The cost incurred to enhance the service potential of an intangible asset is a
betterment. Service potential may be enhanced when there is an increase in the previously
assessed output or service capacity, associated operating costs are lowered, the life or useful
life is extended, or the quality of output is improved. The cost incurred in the maintenance of
the service potential of an intangible asset is a repair, not a betterment. When a cost has the
attributes of both a repair and a betterment, the portion considered to be a betterment is
included in the cost of the intangible asset.
.09      The guidance on determining cost in PROPERTY, PLANT AND EQUIPMENT,
Section 3061, can also be used in determining the cost of intangible assets acquired other than
in a business combination. The cost of a group of assets acquired in a transaction other than a
business combination is allocated to the individual assets acquired based on their relative fair
values and does not give rise to goodwill. BUSINESS COMBINATIONS, Section 1581,
requires intangible assets acquired in a business combination that do not meet certain criteria
to be included in the amount initially recognized as goodwill. These recognition criteria do
not apply to intangible assets acquired in a transaction other than a business combination.
Intangible assets acquired in a business combination are initially recognized and measured in
accordance with BUSINESS COMBINATIONS, Section 1581.

Subsequent measurement
.10     ¨ A recognized intangible asset should be amortized over its useful life to an
enterprise, unless the life is determined to be indefinite. When an intangible asset is
determined to have an indefinite useful life, it should not be amortized until its life is
determined to be no longer indefinite. [JAN. 2002]
.11     ¨ The amortization method and estimate of the useful life of an intangible asset should
be reviewed annually. [JAN. 2002]
.12     When an intangible asset has a finite useful life, but the precise length of that life is
not known, the intangible asset is amortized over the best estimate of its useful life. Guidance
for determining the useful life of an intangible asset is provided in paragraphs 3062.15-.17.
Appendix A includes illustrative examples of different intangible assets and how to account
for them in accordance with this Section, including guidance on determining whether the
useful life of an intangible asset is indefinite.
.13     The amount of an intangible asset to be amortized is the amount initially assigned to
that asset less any residual value. The residual value of an intangible asset is assumed to be
zero unless, at the end of its useful life to the reporting enterprise, the asset is expected to
continue to have a useful life to another enterprise, and:
(a)     the reporting enterprise has a commitment from a third party to purchase the asset at
the end of its useful life; or
(b)     the residual value can be determined by reference to an exchange transaction in an
existing market for that asset and that market is expected to exist at the end of the asset's
useful life.
.14     The method of amortization will reflect the pattern in which the economic benefits of
the intangible asset are consumed or otherwise used up. PROPERTY, PLANT AND
EQUIPMENT, Section 3061, provides guidance on amortization methods. When the pattern
of economic benefits cannot be reliably determined, a straight-line amortization method is
used.

Determining the useful life of an intangible asset
.15     The estimate of the useful life of an intangible asset is based on an analysis of all
pertinent factors, in particular:
(a)     the expected use of the asset by the enterprise;
(b)     the expected useful life of another asset or a group of assets to which the useful life of
the asset may relate (such as mineral rights to depleting assets);
(c)     any legal, regulatory or contractual provisions that may limit the useful life;
(d)      any legal, regulatory or contractual provisions that enable renewal or extension of the
asset's legal or contractual life without substantial cost (provided there is evidence to support
renewal or extension, and renewal or extension can be accomplished without material
modifications to the existing terms and conditions);
(e)      the effects of obsolescence, demand, competition, and other economic factors (such as
the stability of the industry, known technological advances, legislative action that results in
an uncertain or changing regulatory environment, and expected changes in distribution
channels); and
(f)      the level of maintenance expenditures required to obtain the expected future cash
flows from the asset.
         When no legal, regulatory, contractual, competitive, economic or other factors limit
the useful life of an intangible asset to the enterprise, the useful life of the asset is considered
to be indefinite. The term "indefinite" does not mean infinite.
.16      When an intangible asset that is being amortized is subsequently determined to have
an indefinite useful life, the asset is tested for impairment, in accordance with paragraph
3062.19, ceases being amortized and is accounted for in the same manner as other intangible
assets not subject to amortization. (An impairment loss recognized in accordance with this
paragraph is included in earnings for the current period and is not a change in accounting
policy.)
.17      When an intangible asset that is not being amortized is subsequently determined to
have a finite useful life, the asset is tested for impairment in accordance with paragraph
3062.19. (An impairment loss recognized in accordance with this paragraph is included in
earnings for the current period and is not a change in accounting policy.) The intangible asset
is then amortized over its estimated remaining useful life and accounted for in the same
manner as other intangible assets that are subject to amortization.
Recognition and measurement of an impairment loss

Intangible assets subject to amortization
.18     ¨ An intangible asset that is subject to amortization should be tested for impairment in
accordance with the provisions of IMPAIRMENT OF LONG-LIVED ASSETS, Section
3063. [JAN. 2002 *]
Intangible assets not subject to amortization
Intangible assets not subject to amortization
.19     ¨ An intangible asset that is not subject to amortization should be tested for
impairment annually, or more frequently if events or changes in circumstances indicate that
the asset might be impaired. The impairment test should consist of a comparison of the fair
value of the intangible asset with its carrying amount. When the carrying amount of the
intangible asset exceeds its fair value, an impairment loss should be recognized in an amount
equal to the excess. [JAN. 2002]
.20     The fair value of an intangible asset is estimated using the guidance in Appendix A of
BUSINESS COMBINATIONS, Section 1581.
.21     ¨ An impairment loss for an intangible asset should not be reversed if the fair value
subsequently increases. [JAN. 2002]

GOODWILL
.22      ¨ Goodwill should be recognized on an enterprise's balance sheet at the amount
initially recognized, less any write-down for impairment. [JAN. 2002]
.23      Goodwill is not amortized. It is tested for impairment in accordance with this Section
at a level of reporting referred to as a reporting unit.
.24    Equity method goodwill is not amortized (see LONG-TERM INVESTMENTS,
paragraph 3050.12).

Recognition and measurement of an impairment loss
.25     ¨ A goodwill impairment loss should be recognized when the carrying amount of the
goodwill of a reporting unit exceeds the fair value of the goodwill. An impairment loss
should not be reversed if the fair value subsequently increases. [JAN. 2002]
.26     The fair value of goodwill can be measured only as a residual, not directly. This
Section, therefore, includes a methodology to determine an amount that achieves a reasonable
estimate of the fair value of goodwill for purposes of recognizing and measuring an
impairment loss. The loss recognized cannot exceed the carrying amount of goodwill.
.27     ¨ A two-step impairment test should be used to identify a potential goodwill
impairment and measure the amount of a goodwill impairment loss to be recognized, if any:
(a)     The fair value of a reporting unit should be compared with its carrying amount,
including goodwill, in order to identify a potential impairment. When the fair value of a
reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to
be impaired and the second step of the impairment test is unnecessary.
(b)     When the carrying amount of a reporting unit exceeds its fair value, the fair value of
the reporting unit's goodwill should be compared with its carrying amount to measure the
amount of the impairment loss, if any. The fair value of goodwill is determined in accordance
with the guidance in paragraph 3062.32. When the carrying amount of reporting unit
goodwill exceeds the fair value of the goodwill, an impairment loss should be recognized in
an amount equal to the excess. [JAN. 2002]
.28     When the second step of the goodwill impairment test is not complete before the
financial statements are issued, and a goodwill impairment loss is probable and can be
reasonably estimated, the best estimate of that loss is recognized in those financial statements
(see MEASUREMENT UNCERTAINTY, Section 1508). The measurement of the
impairment loss is completed as soon as possible. Any adjustment to the estimated loss based
on the completion of the measurement of the impairment loss is recognized in the subsequent
reporting period.
.29     An enterprise that is not required to report segment information in accordance with
SEGMENT DISCLOSURES, Section 1701, is nonetheless required to test goodwill for
impairment at the reporting unit level. The enterprise will use the guidance in Section 1701 to
determine its operating segments for purposes of determining its reporting units. However,
two or more operating segments, or two or more components of an operating segment, are
aggregated and deemed to be a single reporting unit when the segments, or the components of
a segment, have similar economic characteristics.
.30     When goodwill and another asset (or asset group) of a reporting unit are tested for
impairment at the same time, the other asset (or asset group) is tested for impairment before
goodwill. For example, when a significant asset group is to be tested for impairment (thus
potentially requiring a goodwill impairment test), the impairment test for the significant asset
group is performed before the goodwill impairment test. When the asset group is impaired,
the impairment loss is recognized prior to goodwill being tested for impairment.
.31     All goodwill recognized by a subsidiary (subsidiary goodwill) in its separate financial
statements is accounted for in accordance with this Section. Subsidiary goodwill is tested for
impairment at the subsidiary level using the subsidiary's reporting units. When a goodwill
impairment loss is recognized by the subsidiary, goodwill of the reporting unit or units (at the
higher consolidated level) in which the subsidiary's reporting unit with impaired goodwill
resides is tested for impairment if the event that gave rise to the loss at the subsidiary level
would more likely than not reduce the fair value of the reporting unit (at the higher
consolidated level) below its carrying amount. Only when goodwill of that higher-level
reporting unit is impaired is a goodwill impairment loss recognized at the consolidated level.

Fair value of goodwill
.32      The fair value of goodwill is determined in the same manner as the value of goodwill
is determined in a business combination. An enterprise allocates the fair value of a reporting
unit to all of the assets and liabilities of the unit, whether or not recognized separately, 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. The fair value of the reporting
unit is estimated using the guidance in Appendix A of BUSINESS COMBINATIONS,
Section 1581. The guidance in paragraphs 3062.33-.35 is used in determining the recognized
assets and liabilities that are associated with that reporting unit. The excess of the fair value
of the reporting unit over the amounts assigned to its assets and liabilities is the fair value of
goodwill. The purchase price allocation guidance in BUSINESS COMBINATIONS, Section
1581, is used in determining how to allocate the fair value of a reporting unit to the assets and
liabilities of that unit. However, the intangible asset recognition criteria in that Section apply
only to intangible assets acquired in a business combination. All intangible assets, acquired in
transactions other than business combinations, that have been assigned to the reporting unit
are allocated a portion of the fair value of the reporting unit in determining the fair value of
goodwill. This allocation process is performed only for purposes of testing goodwill for
impairment and does not cause an enterprise to write up or write down a recognized asset or
liability or to recognize a previously unrecognized asset as a result of this allocation process.

Assigning assets and liabilities to reporting units
.33      ¨ For the purpose of testing goodwill for impairment, acquired assets and assumed
liabilities should be assigned to a reporting unit, as of the date of acquisition, when:
(a)      the asset is employed in, or the liability relates to, the operations of a reporting unit;
and
(b)      the asset or liability is considered in determining the fair value of the reporting unit.
[JAN. 2002]
.34      The requirement to assign items to reporting units applies to assets acquired and
liabilities assumed in a business combination as well as to those acquired or assumed
individually or with a group of other assets. Assets or liabilities considered part of corporate
assets or liabilities are also assigned to a reporting unit when both of the above criteria are
met. Examples of items that might meet these criteria and therefore be assigned to a reporting
unit are environmental liabilities that relate to an existing operating facility of the reporting
unit and a pension obligation included in the determination of the fair value of the reporting
unit.
.35      Some assets or liabilities may be employed in or related to the operations of multiple
reporting units. The methodology used to determine the amount of those assets and liabilities
to assign to a reporting unit is reasonable and supportable, and applied in a consistent
manner. For example, assets and liabilities not directly related to a specific reporting unit, but
from which the reporting unit benefits, could be allocated according to the benefit received
by the different reporting units, or based on the relative fair values of the different reporting
units. In the case of pension items, for example, a pro rata allocation based on payroll
expense might be used.
Assigning goodwill to reporting units
.36      ¨ For the purpose of testing goodwill for impairment, all goodwill acquired in a
business combination should be assigned to one or more reporting units as of the date of
acquisition. [JAN. 2002]
.37      The total amount of acquired goodwill may be divided among a number of reporting
units. The methodology used to determine the amount of goodwill to assign to a reporting
unit is reasonable and supportable, and applied in a consistent manner. In concept, the
amount of goodwill assigned to a reporting unit is determined in the same manner as the
amount of goodwill to be recognized in a business combination. In essence, the fair value
representing a "purchase price" is determined for each reporting unit, and this "purchase
price" is allocated to the assets and liabilities of the unit. When the "purchase price" exceeds
the amount assigned to those net assets, the excess is the goodwill assigned to that reporting
unit. Goodwill is assigned to reporting units of the acquiring enterprise that are expected to
benefit from the synergies of the combination even though other assets or liabilities of the
acquired enterprise may not be assigned to that reporting unit. When goodwill is assigned to a
reporting unit that has not been assigned any of the assets acquired or liabilities assumed in
the acquisition, the amount of goodwill to be assigned to the reporting unit might be
determined by applying a "with and without" computation so that the difference between its
fair value before the acquisition and its fair value after the acquisition represents the amount
of goodwill assigned to the reporting unit. The allocation of goodwill to reporting units is to
be completed within the same year as the allocation of the purchase price for the business
combination as a whole in accordance with BUSINESS COMBINATIONS, Section 1581,
when possible, or in the following year.

Reorganization of reporting structure
.38     When an enterprise reorganizes its reporting structure in a manner that changes the
composition of one or more of its reporting units, the guidance in paragraphs 3062.33-.35 is
used to reassign assets and liabilities to the reporting units affected. Goodwill is reassigned to
the reporting units affected using a relative fair value allocation approach, similar to that used
when a portion of a reporting unit is to be disposed of (see paragraphs 3062.44-.47). For
example, existing reporting unit A is to be split up and integrated into reporting units B, C
and D. Goodwill in reporting unit A is assigned to reporting units B, C and D based on the
relative fair values of the three portions of reporting unit A prior to them being integrated into
reporting units B, C and D.

When to test goodwill of a reporting unit for impairment
.39     ¨ Goodwill of a reporting unit should be tested for impairment on an annual basis,
unless all of the following criteria have been met:
(a)     The assets and liabilities that make up the reporting unit have not changed
significantly since the most recent fair value determination.
(b)     The most recent fair value determination resulted in an amount that exceeded the
carrying amount of the reporting unit by a substantial margin.
(c)     Based on an analysis of events that have occurred and circumstances that have
changed since the most recent fair value determination, the likelihood that a current fair value
determination would be less than the current carrying amount of the reporting unit is remote.
[JAN. 2002]
.40     A recent significant acquisition or a reorganization of an enterprise's segment
reporting structure are examples of events that might significantly change the composition of
a reporting unit.
.41     The annual goodwill impairment test may be performed at any time during the fiscal
year provided the test is at the same time every year. Different reporting units may be tested
for impairment at different times.
.42     ¨ Goodwill of a reporting unit should be tested for impairment between annual tests
when an event or circumstance occurs that more likely than not reduces the fair value of a
reporting unit below its carrying amount. [JAN. 2002]
.43     Examples of such events or circumstances include:
(a)     a significant adverse change in legal factors or in the business climate;
(b)     an adverse action or assessment by a regulator;
(c)     unanticipated competition;
(d)     a loss of key personnel;
(e)     a more-likely-than-not expectation that a significant portion or all of a reporting unit
will be sold or otherwise disposed of;
(f)     the testing for write-down or impairment of a significant asset group within a
reporting unit; or
(g)     the recognition of a goodwill impairment loss in its separate financial statements by a
subsidiary that is a component of the reporting unit.

Disposal of all or a portion of a reporting unit
.44     ¨ When a reporting unit is to be disposed of in its entirety, goodwill of that reporting
unit should be included in the carrying amount of the reporting unit in determining the gain or
loss on disposal. [JAN. 2002]
.45     ¨ When a portion of a reporting unit that constitutes a business is to be disposed of,
goodwill associated with that business should be included in the carrying amount of the
business in determining the gain or loss on disposal. The amount of goodwill to be included
in the carrying amount should be based on the relative fair values of the business to be
disposed of and the portion of the reporting unit to be retained. When only a portion of
goodwill is allocated to a business to be disposed of, the goodwill remaining in the portion of
the reporting unit to be retained should be tested for impairment in accordance with
paragraph 3062.27. [JAN. 2002]
.46     For example, if a business is being sold for $100 and the fair value of the reporting
unit excluding the business being sold is $300, 25 percent of the reporting unit goodwill is
included in the carrying amount of the business to be sold.
.47     When the business to be disposed of was never integrated into the reporting unit after
its acquisition and the benefits of the acquired goodwill were never realized by the rest of the
reporting unit, the current carrying amount of that acquired goodwill is included in the
carrying amount of the business to be disposed of. This situation might occur when the
acquired business is operated as a stand-alone entity or when the business is to be disposed of
shortly after it is acquired.

PRESENTATION
.48     ¨ The aggregate amount of goodwill should be presented as a separate line item in an
enterprise's balance sheet. [JAN. 2002]
.49     ¨ The aggregate amount of goodwill impairment losses should be presented as a
separate line item in the income statement before extraordinary items and discontinued
operations, unless a goodwill impairment loss is associated with a discontinued operation. A
goodwill impairment loss associated with a discontinued operation should be included on a
net-of-tax basis within the results of discontinued operations. [JAN. 2002]
.50     ¨ Intangible assets should be aggregated and presented as a separate line item in an
enterprise's balance sheet. [JAN. 2002]
DISCLOSURES
.51      ¨ The financial statements should disclose the following information:
(a)      The changes in the carrying amount of goodwill during the period including:
(i)      the aggregate amount of goodwill acquired;
(ii)     the aggregate amount of impairment losses recognized; and
(iii) the amount of goodwill included in the gain or loss on disposal of all or a portion of a
reporting unit.
         Enterprises that report segment information in accordance with SEGMENT
DISCLOSURES, Section 1701, should provide the above information about goodwill in total
and for each reportable segment and should disclose any significant changes in the allocation
of goodwill by reportable segment. When any portion of goodwill has not yet been allocated
to a reporting unit at the date the financial statements are issued, the unallocated amount and
the reasons for not allocating that amount should be disclosed.
(b)      For intangible assets subject to amortization:
(i)      the gross carrying amount and accumulated amortization in total and by major
intangible asset class;
(ii)     the aggregate amount of intangible assets subject to amortization that were acquired
during the period;
(iii) the aggregate amortization expense for the period; and
(iv)     the amortization method used, including the amortization period or rate.
(c)      For intangible assets not subject to amortization:
(i)      the carrying amount in total and by major intangible asset class; and
(ii)     the aggregate amount of intangible assets not subject to amortization that were
acquired during the period. [JAN. 2002]
.52      An intangible asset class is a group of intangible assets that are similar, either by their
nature or by their use in the operations of an enterprise.
.53      ¨ For each goodwill impairment loss recognized, the following information should be
disclosed in the financial statements that include the period in which the impairment loss is
recognized:
(a)      a description of the facts and circumstances leading to the impairment;
(b)      the amount of the impairment loss; and
(c)      when a recognized impairment loss is an estimate that has not yet been finalized, that
fact and the reasons therefor and, in subsequent periods, the nature and amount of any
significant adjustments made to the initial estimate of the impairment loss.
         When the carrying amount of a reporting unit exceeds its fair value, but the second
step of the impairment test is not complete and a reasonable estimate of the goodwill
impairment loss cannot be determined (see paragraph 3062.28), that fact and the reasons
therefor should be disclosed. [JAN. 2002]
.54      ¨ For each impairment loss recognized related to an intangible asset, the following
information should be disclosed in the financial statements that include the period in which
the impairment loss is recognized:
(a)      a description of the impaired intangible asset and the facts and circumstances leading
to the impairment;
(b)      the amount of the impairment loss;
(c)      the caption in the income statement in which the impairment loss is included; and
(d)      when applicable, the segment in which the impaired intangible asset is reported under
SEGMENT DISCLOSURES, Section 1701. [JAN. 2002]
DIFFERENTIAL REPORTING

Goodwill
.55      ¨ An enterprise that qualifies under DIFFERENTIAL REPORTING, Section 1300,
may, subject to paragraph 3062.57 below, elect to test goodwill for impairment only when an
event or circumstance occurs that indicates that the fair value of a reporting unit may be less
than its carrying amount, whereas goodwill would otherwise be tested for impairment on an
annual basis in accordance with paragraph 3062.39. [JAN. 2003]
.56      Examples of such events or circumstances include:
(a)      a significant adverse change in legal factors or in the business climate;
(b)      an adverse action or assessment by a regulator;
(c)      unanticipated competition;
(d)      a loss of key personnel;
(e)      a more-likely-than-not expectation that a significant portion or all of a reporting unit
will be sold or otherwise disposed of;
(f)      the testing for write-down or impairment of a significant asset group within a
reporting unit; or
(g)      the recognition of a goodwill impairment loss in its separate financial statements by a
subsidiary that is a component of the reporting unit.
         There may be other indications that goodwill is impaired.
.57      ¨ Upon initial application of this Section, an enterprise that qualifies under
DIFFERENTIAL REPORTING, Section 1300, and that has previously recognized goodwill
in its balance sheet, may elect to apply the provision in paragraph 3062.55 to previously
recognized goodwill when such goodwill would otherwise be tested for impairment as of the
beginning of the fiscal year in which this Section is initially applied in accordance with
paragraph 3062.72. When such an enterprise does not elect to apply the provision in
paragraph 3062.55 to existing goodwill on initial application of this Section, it is precluded
from applying that provision to goodwill arising from subsequent acquisitions. [JAN. 2003]
.58      ¨ When an enterprise elects to apply the provision in paragraph 3062.55 to existing
goodwill on initial application of this Section, it should disclose the fact that the transitional
impairment test otherwise required by paragraph 3062.72 has not been performed. This
disclosure should be maintained in the subsequent years until an impairment test is
performed. The entire amount of any impairment should be charged to income in the year the
loss is recognized. The treatment set out in paragraph 3062.74 is not applicable. [JAN. 2003]
Intangible assets not subject to amortization
Intangible assets not subject to amortization
.59      ¨ An enterprise that qualifies under DIFFERENTIAL REPORTING, Section 1300,
may, subject to paragraph 3062.61 below, elect to test an intangible asset not subject to
amortization for impairment, only when events or changes in circumstances indicate that its
carrying amount may not be recoverable, whereas such an asset would otherwise be tested for
impairment annually in accordance with paragraph 3062.19. [JAN. 2003]
.60      Examples of such events or changes in circumstances are listed in IMPAIRMENT OF
LONG-LIVED ASSETS, paragraph 3063.10. There may be other indications that intangible
assets not subject to amortization are impaired.
.61      ¨ Upon initial application of this Section, an enterprise that qualifies under
DIFFERENTIAL REPORTING, Section 1300, and that has previously recognized intangible
assets deemed to have an indefinite life in its balance sheet, may elect to apply the provision
in paragraph 3062.59 to those assets when they would otherwise be tested for impairment as
of the beginning of the fiscal year in which this Section is initially applied in accordance with
paragraph 3062.70. When such an enterprise does not elect to apply the provision in
paragraph 3062.59 to existing intangible assets not subject to amortization on initial
application of this Section, it is precluded from applying that provision to such intangible
assets arising from subsequent acquisitions. [JAN. 2003]
.62     ¨ When an enterprise elects to apply the provision in paragraph 3062.59 to existing
intangible assets not subject to amortization on initial application of this Section, it should
disclose the fact that the transitional impairment test otherwise required by paragraph
3062.70 has not been performed. This disclosure should be maintained in subsequent years
until an impairment test is performed. The entire amount of any impairment loss should be
charged to income in the year the loss is recognized. The treatment set out in paragraph
3062.74 is not applicable. [JAN. 2003]

TRANSITIONAL PROVISIONS
.63      ¨ This Section should be applied for fiscal years beginning on or after January 1,
2002. Co-operative enterprises should not apply this Section until interpretive guidance
related to the application of the purchase method by these enterprises is issued. Enterprises
other than public enterprises, co-operative enterprises, deposit-taking institutions and life
insurance enterprises may defer the application of this Section, including paragraph 3062.66,
until fiscal years beginning on or after January 1, 2003. Public enterprises are those
enterprises that have issued debt or equity securities that are traded in a public market (a
domestic or foreign stock exchange or an over-the-counter market, including local or regional
markets), that are required to file financial statements with a securities commission, or that
provide financial statements for the purpose of issuing any class of securities in a public
market. Early adoption is permitted only for enterprises with a fiscal year beginning on or
after April 1, 2001, provided the first interim period financial statements have not been
previously issued. In all cases, this Section should be initially applied at the beginning of a
fiscal year. Retroactive application is not permitted. [JAN. 2002]
.64      ¨ Goodwill acquired in a business combination for which the acquisition date is after
June 30, 2001 should not be amortized. Intangible assets other than goodwill acquired in a
business combination or other transaction for which the acquisition date is after June 30,
2001 should be amortized or not amortized in accordance with paragraphs 3062.10-.17.
[JAN. 2002]
.65      Goodwill and intangible assets acquired on or after July 1, 2001 are tested for
impairment in the same manner as previously recognized goodwill and intangible assets until
this Section is adopted in its entirety. The financial statement presentation and disclosure
provisions of paragraphs 3062.48-.54 do not apply to goodwill and intangible assets acquired
after June 30, 2001 until this Section is adopted in its entirety. For example, an enterprise
with a December 31, 2001 fiscal year end is required to apply this Section initially on January
1, 2002. If that enterprise completes a business combination on October 15, 2001 that gives
rise to goodwill, it does not amortize the goodwill acquired in that business combination,
even though goodwill arising from any business combinations completed before July 1, 2001
continues to be amortized until January 1, 2002. However, the impairment testing provisions
of this Section are not applicable to the newly acquired goodwill until January 1, 2002. In the
interim, the newly acquired goodwill is tested for impairment in the same manner as
previously recognized goodwill.
.66      ¨ Upon initial application of this Section, goodwill and other intangible assets arising
from transactions for which the acquisition date is before July 1, 2001 (previously recognized
goodwill and intangible assets) should be accounted for in accordance with the provisions of
this Section. [JAN. 2002]
.67      Reporting units are established by an enterprise using its reporting structure at the
date of initial application of this Section and the guidance in paragraph 3062.05(d) and
paragraphs 3062.33-.35. Recognized assets and liabilities that do not relate to a reporting
unit, such as an environmental liability for an operation previously disposed of, need not be
assigned to a reporting unit. All goodwill recognized in an enterprise's financial statements
when this Section is adopted is assigned to one or more reporting units. The sources of
previously recognized goodwill are considered in making that initial assignment as well as
the reporting units to which the related net assets were assigned. Goodwill is assigned in a
reasonable and supportable manner. The guidance in paragraphs 3062.36-.37 may be useful
in assigning goodwill to reporting units upon initial application of this Section.
.68      Previously recognized intangible assets deemed to have indefinite useful lives and
previously recognized goodwill are no longer amortized.
.69      Transitional provisions related to classification of intangible assets, including those
initially reported as part of goodwill, acquired in business combinations for which the
acquisition date is before July 1, 2001 are described in BUSINESS COMBINATIONS,
Section 1581.
.70      ¨ Previously recognized intangible assets that are deemed to have indefinite useful
lives should be tested for impairment, in accordance with paragraph 3062.19, as of the
beginning of the fiscal year in which this Section is initially applied. [JAN. 2002]
.71      A transitional impairment loss for a previously recognized intangible asset is
recognized in the first interim period of the fiscal year in which this Section is initially
applied.
.72      ¨ Goodwill in each reporting unit should be tested for impairment, in accordance with
paragraph 3062.27, as of the beginning of the fiscal year in which this Section is initially
applied. [JAN. 2002]
.73      The amounts used in the transitional goodwill impairment test are measured as of the
beginning of the year this Section is initially applied and the first step of the impairment test
is completed within six months of that date. When the carrying amount of the net assets of a
reporting unit (including goodwill) exceeds the fair value of that reporting unit, the second
step of the impairment test is completed as soon as possible, but no later than the end of the
year of initial application. In addition to the transitional goodwill impairment test, an
enterprise performs the required annual goodwill impairment test in the year of initial
application. The transitional impairment test is not considered the first year's annual test
unless an enterprise designates the beginning of its fiscal year as the date for its annual
goodwill impairment test.
.74      An impairment loss recognized as a result of the transitional impairment test of either
goodwill or intangible assets not subject to amortization is recognized as the effect of a
change in accounting policy and charged to opening retained earnings for the fiscal year in
which this Section is initially applied, without restatement of prior periods, in accordance
with ACCOUNTING CHANGES, Section 1506.
.75      When, before completion of the transitional goodwill impairment test, events or
changes in circumstances indicate that goodwill of a reporting unit might be impaired,
goodwill is tested for impairment when the impairment indicator arises. An impairment loss
related to non-amortized intangible assets, or to goodwill that does not result from a
transitional impairment test, is recognized in accordance with paragraph 3062.49 and is not
recognized as the effect of a change in accounting policy.
.76      ¨ Upon completion of the first step of the transitional impairment test, the reportable
segment or segments in which an impairment loss might have to be recognized and the period
in which that potential loss will be measured should be disclosed in interim financial
statements. [JAN. 2002]
.77      ¨ In the period of adoption and thereafter until all periods presented are accounted for
in accordance with this Section, the following information should be disclosed:
(a)     Income before extraordinary items and net income for all periods presented, adjusted
to exclude amortization expense (including any related tax effects) recognized in those
periods related to goodwill, intangible assets that will no longer be amortized, any deferred
credit related to an excess over cost, and equity method goodwill.
(b)     A reconciliation of reported net income to the adjusted net income.
(c)     Adjusted earnings per share amounts for all periods presented, which may be
presented either on the face of the income statement or in the notes to the financial
statements. [JAN. 2002]

APPENDIX A
IMPLEMENTATION GUIDANCE
         This Appendix is an integral part of this Section. It provides additional guidance in
determining the accounting for intangible assets.
         Each of the following examples describe an acquired intangible asset, the facts and
circumstances surrounding the determination of the useful life of the intangible asset and the
subsequent accounting based on that determination. The facts and circumstances unique to
each acquired intangible need to be considered in making similar determinations.
Examples of acquired intangible assets
         1. An acquired customer list. A direct-mail marketing company acquired the customer
list and expects that it will be able to derive benefit from the information on the acquired
customer list for at least one year but for no more than three years.
         The customer list is amortized over 18 months, management's best estimate of its
useful life, following the pattern in which the expected benefits will be consumed or
otherwise used up. Although the acquiring enterprise may intend to add customer names and
other information to the list in the future, the expected benefits of the acquired customer list
apply only to the customers on that list at the date of acquisition. The customer list is
reviewed for impairment in accordance with the provisions of IMPAIRMENT OF LONG-
LIVED ASSETS, Section 3063.
         2. An acquired patent that expires in 15 years. The product protected by that patented
technology is expected to be a source of cash flows for at least 15 years. The reporting
enterprise has a commitment from a third party to purchase that patent in five years for 60
percent of the amount the acquiring enterprise paid for the patent and the enterprise intends to
sell the patent at that time.
         The patent is amortized over its five-year useful life to the reporting enterprise
following the pattern in which the expected benefits will be consumed or otherwise used up.
The amount to be amortized is 40 percent of the value assigned to the patent at the acquisition
date (since the residual value is 60 percent). The patent is reviewed for impairment in
accordance with the provisions of IMPAIRMENT OF LONG-LIVED ASSETS, Section
3063.
         3. An acquired copyright that has a remaining legal life of 50 years. An analysis of
consumer habits and market trends provides evidence that the copyrighted material will
generate cash flows for approximately 30 more years.
         The copyright is amortized over its 30-year estimated useful life following the pattern
in which the expected benefits will be consumed or otherwise used up. It is reviewed for
impairment in accordance with IMPAIRMENT OF LONG-LIVED ASSETS, Section 3063.
         4. An acquired broadcast license that expires in five years. The broadcast license is
renewable every 10 years provided the company complies with regulatory requirements and
provides an acceptable level of service to its customers. The license may be renewed
indefinitely at little cost and was renewed twice prior to its recent acquisition. The acquiring
enterprise intends to renew the license indefinitely, and evidence supports its ability to do so.
Historically, there has been no compelling challenge to the renewal of the license. It is not
expected that the technology used in broadcasting will be replaced by another technology any
time in the foreseeable future. Therefore the cash flows from that license are expected to
continue indefinitely.
         The broadcast license is deemed to have an indefinite useful life because cash flows
are expected to continue indefinitely. Therefore the license is not amortized until its useful
life is deemed to be no longer indefinite. The license is tested for impairment in accordance
with paragraph 3062.19.
         5. The broadcast license in example 4. The regulator subsequently decides that it will
no longer renew broadcast licenses but will auction them off. At the time the regulator's
decision is made, the broadcast license has three years until it expires. The cash flows from
the license are expected to continue until the license expires.
         Because the broadcast license can no longer be renewed, its useful life is no longer
indefinite. Thus the acquired license is tested for impairment in accordance with paragraph
3062.19. The license is then amortized over its remaining three-year useful life following the
pattern in which the expected benefits will be consumed or otherwise used up. Because the
license is subject to amortization, in the future it will be reviewed for impairment in
accordance with the provisions of IMPAIRMENT OF LONG-LIVED ASSETS, Section
3063.
         6. An acquired airline route authority to the United Kingdom that expires in three
years. The route authority may be renewed every five years and the acquiring enterprise
intends to comply with the applicable rules and regulations surrounding renewal. Route
authority renewals are routinely granted at a minimal cost and have historically been renewed
when the airline has complied with the applicable rules and regulations. The acquiring
enterprise expects to provide service to the United Kingdom from its hub airports for an
indefinite period and expects that the related supporting infrastructure (airport gates, slots,
and terminal facility leases) will remain in place at those airports for as long as it has the
route authority. An analysis of demand and cash flows supports those assumptions.
         Because the facts and circumstances support the acquiring enterprise's ability to
continue providing air service to the United Kingdom from its hub airports indefinitely, the
intangible asset related to the route authority is considered to have an indefinite useful life.
Therefore the route authority is not amortized until its useful life is deemed to be no longer
indefinite and it is tested for impairment in accordance with paragraph 3062.19.
         7. An acquired trademark that is used to identify and distinguish a leading consumer
product that has been a market-share leader for the past eight years. The trademark has a
remaining legal life of five years but is renewable every 10 years at little cost. The acquiring
enterprise intends to continuously renew the trademark, and evidence supports its ability to
do so. An analysis of product life-cycle studies, market, competitive, and environmental
trends, and brand extension opportunities provide evidence that the trademarked product will
generate cash flows for the acquiring enterprise for an indefinite period of time.
         The trademark is deemed to have an indefinite useful life because it is expected to
contribute to cash flows for an indefinite period of time. Therefore the trademark is not
amortized until its useful life is no longer indefinite. The trademark is tested for impairment
in accordance with paragraph 3062.19.
         8. A trademark that distinguished a leading consumer product was acquired 10 years
ago. When it was acquired, the trademark was considered to have an indefinite useful life
because the product was expected to generate cash flows indefinitely. During the annual
impairment test of the intangible asset, the enterprise determines that unexpected competition
has entered the market that will reduce future sales of the product. Management estimates
that cash flows generated by the product will be 20 percent less for the foreseeable future;
however, management expects that the product will continue to generate cash flows
indefinitely at those reduced amounts.
        As a result of the projected decrease in future cash flows, the enterprise determines
that the fair value of the trademark is less than its carrying amount and an impairment loss is
recognized. Because it is still deemed to have an indefinite useful life, the trademark
continues not to be amortized and continues to be tested for impairment in accordance with
paragraph 3062.19.
        9. A trademark for a line of automobiles that was acquired several years ago with an
acquisition of an automobile company. The line of automobiles had been produced by the
acquired company for 35 years with numerous new models developed under the trademark.
At the acquisition date, the acquiring company expected to continue to produce the line of
automobiles and an analysis of various economic factors indicated there was no limit to the
period of time the trademark would contribute to cash flows. Because cash flows were
expected to continue indefinitely, the trademark has not been amortized. Management
recently decided to phase out production of that automobile line over the next four years.
        Because the useful life of that acquired trademark is no longer deemed to be
indefinite, the trademark is tested for impairment in accordance with paragraph 3062.19. The
carrying amount of the trademark, after any impairment write-down, is then amortized over
its remaining four-year useful life following the pattern in which the expected benefits will be
consumed or otherwise used up. Because the trademark is subject to amortization, in the
future it will be reviewed for impairment in accordance with IMPAIRMENT OF LONG-
LIVED ASSETS, Section 3063.

APPENDIX B
EXAMPLES OF DISCLOSURE
        This Appendix provides illustrative examples of the financial statement disclosure
requirements of this Section. The material is illustrative only; actual disclosures should be
based on the application of the requirements of the Section to the particular circumstances of
the reporting enterprise.
SUMMARY OF EXAMPLES
        Example 1 — Disclosure requirements in periods subsequent to a business
combination
        Example 2 — Transitional disclosures
Example 1 — Disclosure requirements in periods subsequent to a business combination
Example 1 — Disclosure requirements in periods subsequent to a business combination
        In accordance with paragraphs 3062.51 and 3062.53, the following disclosures would
be made by Theta Company in its December 31, 20X3 financial statements relating to
intangible assets and goodwill. Theta Company has two reporting units with goodwill —
Technology and Communications — that are also reportable segments. (For simplicity, this
example does not show comparative data.)
Note B: Acquired intangible assets

       As of December 31, 20X3
              Gross carrying amount           Accumulated amortization      20X3 additions

              (in $000's)
Amortized intangible assets
Trademark                   1,078                            (66)                           50
Unpatented technology         475                           (380)                          10

Other                          90                             (30)                          —

                              1,643                         (476)                          60

                              =====                        =====                   ====
                                      Unamortized intangible assets

Broadcast licenses            1,400                         350
Trademark                       600                         100
                              2,000                         450
                              =====                         ====

       The aggregate amortization expense for the year ended December 31, 20X3 was $319.
Note C: Goodwill
       The changes in the carrying amount of goodwill for the year ended December 31,
20X3 are as follows:

       Technology segment Communications segment           Total
               (in $000's)
Balance as of January 1, 20X3          1,413 904     2,317
Goodwill acquired during year          189    115    304
Impairment losses     —       (46) (46)
Goodwill written off related to sale of business unit (484) —         (484)
Balance as of December 31, 20X3 1,118 973            2,091
       ===== ==== =====

        The Communications segment is tested for impairment in the third quarter, after the
annual forecasting process. Due to an increase in competition in the cable industry, operating
profits and cash flows were lower than expected in the fourth quarter of 20X2 and the first
and second quarters of 20X3. Based on that trend, the earnings forecast for the next five years
was revised. In September 20X3, a goodwill impairment loss of $46 was recognized in the
Communications reporting unit. The fair value of that reporting unit was estimated using the
expected present value of future cash flows.

Example 2 — Transitional disclosures
         Paragraph 3062.77 requires disclosure of what reported income before extraordinary
items and net income would have been in all periods presented exclusive of amortization
expense (including any related tax effects) recognized in those periods related to goodwill,
intangible assets that will no longer be amortized, any deferred credit related to an excess
over cost, and equity method goodwill (including any related tax effects). Adjusted per-share
amounts also are required to be disclosed for all periods presented. Omega Corporation
initially applies Section 3062 on January 1, 2002. The amortization expense and net income
of Omega Corporation for the year of adoption of Section 3062 and the prior two years
follow. (Omega Corporation recognized no extraordinary items in these years.):

        For the year ended December 31,
        2002 2001 2000
                (in $000's)
Goodwill amortization         —     (40)     (40)
Trademark amortization        —     (20)     (20)
Copyright amortization        (12) (12)      (12)
Net income 1,223 1,450        1,360

        The trademark is deemed to have an indefinite life because it is expected to generate
cash flows indefinitely. Thus, Omega Corporation ceases amortizing the trademark on
January 1, 2002.
        The following disclosure would be made by Omega Corporation in its December 31,
2002 financial statements.
Note D: Goodwill and other intangible assets — adoption of Section 3062

       For the year ended December 31,
(in $000's except for earnings per share amounts)
       2002 2001 2000
Reported net income 1,223 1,450 1,360
Add back: Goodwill amortization       —      40    40
Add back: Trademark amortization          —     20    20

Adjusted net income 1,223 1,510 1,420
       ==== ==== ====
Basic earnings per share:
Reported net income 2.45 2.90 2.72
Goodwill amortization     —     0.08 0.08
Trademark amortization        — 0.04 0.04

Adjusted net income 2.45 3.02 2.84
       ==== ==== ====
Diluted earnings per share:
Reported net income 2.23 2.64 2.47
Goodwill amortization       —   0.07 0.07
Trademark amortization        — 0.04 0.04

Adjusted net income 2.23 2.75        2.58
       ==== ==== ====

								
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