Accounting Standard Codification 350 – Intangibles, Goodwill and Other Indefinite-Lived Assets (“ASC 350”) govern the accounting treatment for goodwill and indefinite-lived intangible assets previously accounted for as part of a business combination. Increased merger and acquisition activity has resulted in a significant upturn in the number of intangible assets recognized in companies’ financial statements. Additionally, changes in the regulatory and economic environment within the healthcare industry have expanded the necessity for the impairment testing of indefinite-lived intangible assets.
Under the Standard, these assets are not amortized, but rather, are tested annually for impairment at the reporting unit level, as well as an interim basis if an adverse triggering event is recognized. If the test is passed, no impairment is recognized, and no further analysis is required. If the test fails, additional analyses must be performed to determine the magnitude of impairment, if any, which is attributable to the particular intangible asset. Triggering events that cause testing on an interim basis could include, but are not limited to, the following:
- Significant adverse change in legal factors or in business climate;
- Regulator actions having a potential adverse financial impact;
- Unanticipated competition;
- Loss of key personnel; and
- An expectation of sale or disposal of a reporting unit, or a significant portion of the reporting unit
In 2011, the Financial Accounting Standards Board (the “FASB”) approved an Accounting Standard Update that would allow a qualitative assessment of impairment before any quantification of a reporting unit’s fair value. Qualitative factors used to assess impairment include the following:
- Macroeconomic conditions;
- Industry and market considerations (e.g., deterioration in the environment or regulatory development);
- Reporting unit’s financial performance (e.g., negative cash flows); and
- Consideration of any economic factors that may mitigate any of the above, and lessen the likelihood of a triggering event.
Ultimately, ASC 350 provides the guidance necessary to determine if an impairment charge is necessary and the regulations essential to accurately report an impairment of indefinite-lived assets.
In recent periods new legislation has been passed which can have adverse effects on the healthcare industry and could result in a triggering event as defined by the FASB. One example relates to reductions in government payments to Medicare Advantage, the private health plan alternative to traditional Medicare. The government currently pays the private plan an average of 14% more than traditional Medicare. The new bill reduces payments overall as well as shifts funding within the plan. Companies operating within the Medicare Advantage marketplace who have previously recorded intangible assets should consider whether a triggering event has occurred. These intangible assets include, but are not limited to goodwill, trademarks, non-compete agreements and certificates of need.