FSP FAS 142-3 Determination of the Useful Life of Intangible Assets
By Linda Cavanaugh, CPA - The FASB issued this FSP on April 25, 2008 with the intent to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under Statement 141R. It is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets.
Paragraph 9 of the FSP “amends paragraph 11(d) of FAS 142 so that a company will use its own assumptions about renewal or extension of an arrangement, adjusted for the company-specific factors in paragraph 11, even when there is likely to be substantial cost or material modifications.”
The FSP also states that there might continue to be a difference between the estimated useful life of the intangible asset and the period of expected cash flows under FAS 141R. It states that this could be due to different assumptions held by the company than a market participant would hold. This situation is considered appropriate because amortization of an intangible asset should reflect the period over which the asset will contribute both directly and indirectly to the expected future cash flows of the company.
Basically this FSP is recognizing that the assumptions used to estimate the useful life are different than the assumptions used to calculate fair value and that a company should use their own assumptions and not a market participant.
Three new disclosures were added with this FSP:
1. The company’s accounting policy on the treatment of costs incurred to renew or extend the term of a recognized intangible asset.
2. In the period of acquisition or renewal, the weighted-average period prior to the next renewal or extension (both explicit and implicit) by major intangible asset class.
3. For an company that capitalizes renewal or extension costs, the total amount of costs incurred in the period to renew or extend the term or a recognized intangible asset for each period for which an income statement is presented, by major intangible asset class.
Good Luck and if you need some examples, look up this FSP on the FASB website at www.fasb.org.
Linda is a CPA living in Southwestern Ohio, working as a research accountant for an investor-owned publicly traded utility company. She specializes in implementing new FASB and SEC requirements and FAS 133 derivative issues. In her role at the utility she has encountered many issues and written many memos, so send in your implementation and derivative issues and Linda will help figure out an answer.