Question

Braxton Inc. is considering the write-off of a limited-life intangible because of its lack of profitability. Explain to the management of Braxton how to determine whether a write-off is permitted.

Short answer

As a matter of accounting policy, if events or circumstances indicate that the business entity cannot recover an asset's carrying value, that particular asset's carrying value needs to be reassessed.

Step-by-step solution

Meaning of Intangible Asset

Intangible assets are assets that do not have a physical form. Organizations that have spent significant money to establish brands may find that the value of their intangible assets much outweighs the worth of their physical assets. Many physical resources, such as buildings, land, and machinery, are frequently present in an organization.

Explaining to the management of Braxton how to determine whether a write-off is permitted

Events or changes in circumstances suggest that if the business entity cannot recover the carrying amount of such assets results in accounting principles requiring that the carrying amount of such assets be evaluated.

Typically, the assessment or review takes the form of a recoverability test, where the carrying amount is compared with the sum of expected future cash flows from the asset.

An asset is impaired when its cash flow is less than its carrying value. An impairment loss occurs when the carrying amount of an asset exceeds its fair value. If there is a market for the asset, the price will define its fair worth. If no market price is known, a present value can be calculated using the asset's estimated future net cash flows.