Accounting Standards Codification (“ASC”) 350 Intangibles – Goodwill and Other states that “an intangible asset with a finite useful life shall be amortized; an intangible asset with an indefinite useful life shall not be amortized […] but should be tested for impairment at least annually.” Since I begin this article by quoting accounting standards, I imagine everyone is now appropriately on the edge of their seats...
Under the guidance, the term “indefinite useful life” means that “that life extends beyond the foreseeable horizon – that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the reporting entity.” The term “indefinite” should not be confused with “infinite.”
Company trademarks are one type of intangible asset that will sometimes be attributed an indefinite life. For example, it would be very difficult to determine that the life of the NIKE trademark would be anything but indefinite when considering the long history and positive recognition that the trademark has enjoyed within the athletic apparel industry. On the other hand, a trademark representing an obscure technology might not have an indefinite life, because technology often becomes obsolete over time. For example, if it is well known that a certain type of technology has an average lifecycle of 5-10 years before being replaced by a newer technology, the argument could be made that the life of a trademark representing that technology (and no other products/services) would not extend beyond 10 years.
The indefinite-lived intangible asset will remain on the balance sheet at its acquired value (unless value is determined to be impaired at some point in the future; further discussion of impairment is beyond the scope of this article). The finite-lived intangible asset’s value will be reduced each year by amortization expense until the end of its life. The useful lives attributed to a company’s intangible assets will affect the financial statements for the company and should be thoroughly understood by management.
Schneider Downs has significant experience valuing intangible assets for financial reporting purposes, and we work with clients’ management teams to help them determine the useful lives of these assets. For more information about Schneider Downs’ business valuation and other business advisory services, please contact Joel Rosenthal at 412.697.5387 or [email protected] or Steve Thimons at 412.697.5281 or [email protected].
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