FASB Statement of Financial Accounting Standards #142

SUMMARY OF FASB 142, ISSUED BY THE FINANCIAL ACCOUNTING STANDARDS BOARD, JUNE 2001

THESE RULES APPLY ONLY TO FINANCIAL REPORTING UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, NOT TAX ACCOUNTING.

Statement of Financial Accounting Standards No. 142–Goodwill and Other Intangible Assets:

This statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.

An intangible asset that is either acquired individually or with a group of other assets (but not those acquired in a business combination) shall be initially recognized and measured based on its fair value. The cost of a group of assets acquired in a transaction other than a business combination shall be allocated to the individual assets based on their relative fair values and shall not give rise to goodwill.

The costs for internally developed intangible assets should be expensed as incurred.

An intangible asset with a finite life is to be amortized. An intangible asset with an indefinite life is not amortized. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. 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 shall be considered to be indefinite, which does not mean “infinite.” If an intangible asset’s life is finite, but the precise length is not known, it shall be amortized over the best estimate of its useful life.

The method of amortization shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method shall be used.

The amount of an intangible asset to be amortized shall be the amount initially assigned to that asset, less any residual value.

An entity shall evaluate the remaining useful life of an intangible asset that is being amortized each reporting period to determine whether the remaining period of amortization should be revised. Any change in life shall be dealt with prospectively only, using the rules of this Statement.

Intangible assets being amortized shall be reviewed for value loss (impairment), with writedowns in value being mandatory. Any write-up in value is not allowed.

An intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss shall be recognized in an amount equal to the excess.

Goodwill shall not be amortized. Goodwill shall be tested for impairment at a level of reporting referred to as a reporting unit. The fair value of goodwill can be measured only as a residual and cannot be measured directly.

The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is not necessary. If the carrying value exceeds the fair value, the second step is performed.

A reporting unit is an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. Similar components can be aggregated into a single reporting unit.

The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount is greater, there will be a write down to the implied fair value. Write-ups of goodwill, after initial booking of it, are not allowed.

The implied fair value of goodwill shall be determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, an entity shall allocate the fair value of a reporting unit to all of the assets and liabilities of that unit (including any 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. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If this value is below the carrying value of goodwill on the entity’s financial statements, a writedown should occur.

Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available. However, this need not be the sold measurement basis of the fair value of a reporting unit.

If quoted market prices are not available, the estimate of fair value shall be based on the best information available. The income approach is often the best technique available. A market approach can also be used.

Goodwill of a reporting unit shall be tested for impairment on an annual basis and between annual tests in certain circumstances.

NOTE: A detailed determination of the fair value of a reporting unit may be carried forward from one year to the next if all of the following criteria have been met:

(1) The assets and liabilities that make up the reporting unit have not changed significantly since the most recent fair value determination. (A recent significant acquisition or a reorganization of an entity’s segment reporting structure is an example of an event that might significantly change the composition of a reporting unit.)

(2) The most recent fair value determination resulted in an amount that exceeded the carrying amount of the reporting unit by a substantial margin.

(3) 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.

Goodwill should be tested in between if major events might adversely affect the fair value of goodwill.

The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not been issued. This statement is required to be applied at the beginning of an entity’s fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the nonamortization and amortization provisions of this Statement.

Goodwill in each reporting unit shall be tested for impairment as of the beginning of the fiscal year in which this Statement is initially applied. An entity has six months from the date it initially applies this Statement to complete the first step of that transitional goodwill impairment test. If 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 transitional goodwill impairment test must be completed as soon as possible, but no later than the end of the year of initial application.