right in this section of the course we
are talking about long-lived assets and to be honest we are making excellent
progress so far whenever we consider intangible assets there is one important
distinction we have to make there are intangible assets with a finite life and
there are also intangible assets with an infinite life examples of intangible
assets with a finite life are software licenses concessions sport contracts and
so on and examples of intangible assets with an infinite life are brand names
logos and even a company’s website ok why is it important to make this
distinction well depending on the type of intangible asset we have one with
finite or infinite life we are going to either amortize the cost for the asset
in the same way we depreciate tangible assets in a specific number of years or
alternatively we are not going to amortize the intangible asset at all and
we are only going to test it for impairment that is we are going to test
if the assets value decreased or not of course amortization is applied for
intangible assets with a finite life if we have a beach concession on our books
and it ends in 4 years we would want the concession to be off our books once the
concession ends in 4 years every year a fraction of the concessions cost will be
reported as an amortization cost if on the other hand our company has an
important and well renowned brand name on its books it wouldn’t be able to
amortize it because a brand name has an infinite life it doesn’t cease to exist
so according to the IFRS and US GAAP the firm will have to test the brand name
for impairment every year this is carried out by a specialist who
basically values the brand names worth and then compares the brand names value
to the value reported on the firm’s balance sheet if the current market
value of the brand is lower then the company will have to
report a loss in the current year and decrease the value on its balance sheet
that’s quite dangerous for listed companies as this potentially erodes
earnings in a very significant way a very interesting case which highlights
the importance of impairment testing is a project I worked on a few years ago I
was part of a financial advisory team whose role was to investigate if the
impairment tests carried out for companies brands throughout the years
were performed correctly the company operated in the fashion industry and the
fact that it owned world famous brands valued in a really expensive way on its
balance sheet allowed it to continue to operate for several years without
declaring bankruptcy every year the impairment test defended the valuation
of these brands and showed that they are not worth less than their balance sheet
value however the suspicion was that the impairment tests were carried out with a
very aggressive hypothesis and hence the actuary was carrying out the valuation
in a company friendly way if he or she had come up with values that are lower
than the ones the company had on the balance sheet then the company would
have had to recognize a loss in its P&L and its equity which was quite low would
have become negative which would have meant bankruptcy instead the company
continued to operate for several years until it declared bankruptcy these
several years of additional accumulated losses resulted in even higher losses
for the company’s creditors so yes impairment tests can be quite important
in certain situations in our next lesson we’ll discuss the revaluation model
thanks for watching