Abstract:

Intangible assets, like also tangible assets, are used in the business to earn a profit. Any individual investor wants to know which are the risks of the business he invests his money in, the depreciation methods and the politics of his investment, the correspondence between accountancy and taxation ant its implication in the business, so that the risk of misstatement of financial statements is minimal. A long-lived asset with a finite life is expected to provide benefits for a limited amount of time. Benefits will eventually decline to zero, either because of physical use, obsolescence, or disposal. In most cases, companies estimate the finite life and also depreciate or amortize assets taking into consideration this period. U.S. GAAP and IFRS require that the assets have an indefinite life, to be tested annually for possible asset impairment (for example, goodwill is the most prominent example of an intangible asset with an indefinite life). U.S. GAAP compares the undiscounted cash flows from an asset to its carrying value to determine if an impairment loss has occurred. The rationale is that an impairment loss has not occurred if a firm will receive cash flows in the future at least equal to the carrying value of the asset. Receiving such cash flows will permit the firm to recover the carrying value. An asset impairment loss that arises during a period results from a decline in fair value due to some external events. Fair values are based on discounted cash flows, not undiscounted cash flows. Therefore, using undiscounted cash flows to signal an impairment loss ignores the actual decline in fair value that occurred. Companies will not recognize the asset impairment loss as long as the undiscounted cash flows exceed the carrying value of the asset.