Which hierarchy is used for impairment testing according to accounting standards?

In impairment testing, the appropriate hierarchy established by accounting standards is essential for assessing the recoverability of various asset categories. The correct approach prioritizes indefinite-lived intangible assets first, followed by definite-lived intangible assets, and finally, goodwill.

Indefinite-lived intangible assets, such as certain trademarks or brand names, are tested first since their lifespan does not have a set expiration, and they may carry significant value. Testing these assets first allows for early identification of any impairment that could affect their perceived worth.

Next in the hierarchy, definite-lived intangible assets are examined. These assets have a finite useful life, such as patents, and are tested for impairment based on their amortization and anticipated future benefits.

Goodwill, representing the excess purchase price over the fair value of net identifiable assets when a company is acquired, is tested last. It is often associated with the overall value a business brings through its brand reputation, customer relationships, and synergies expected from a merger. By assessing goodwill after the other two classes of intangible assets, the assessment can more accurately focus on the value attributed specifically to these other intangible assets.

Understanding this hierarchy is critical for compliance with accounting standards such as FASB ASC 350, providing a structured approach to assess potential impairments