What is the difference between finite-life and indefinite-life intangible assets?
For CFA Level I, I need to understand how intangible assets are treated after initial recognition. My notes say finite-life intangibles are amortized but indefinite-life ones are not. How do you determine the classification, and what are the impairment testing differences?
Intangible assets are classified based on the expected period over which they generate economic benefits. This classification drives whether the asset is amortized and how it is tested for impairment.
Finite-Life Intangibles:
These have a determinable useful life and are amortized systematically over that period.
| Example | Typical Life | Amortization |
|---|---|---|
| Patents | Legal life (20 years) or economic life | Straight-line or pattern of benefit |
| Customer lists | 3-7 years | Straight-line |
| Software (internally developed) | 3-5 years | Straight-line |
| Franchise rights (fixed term) | Contract term | Straight-line |
| Copyrights | Legal life or economic life | Pattern of benefit |
Indefinite-Life Intangibles:
These have no foreseeable limit on the period over which they generate cash flows. They are not amortized but are tested for impairment at least annually.
| Example | Why Indefinite |
|---|---|
| Goodwill | No contractual expiry, reflects ongoing synergies |
| Certain trademarks | Renewable indefinitely (e.g., Coca-Cola brand) |
| Broadcasting licenses | Renewable at minimal cost |
| Perpetual franchise rights | No expiration date |
Important: "Indefinite" does not mean "infinite." It means you cannot currently foresee when the benefits will end. If circumstances change (e.g., a brand loses value, a regulation changes), the classification can shift from indefinite to finite, triggering amortization going forward.
Impairment testing comparison:
| Feature | Finite Life | Indefinite Life |
|---|---|---|
| Amortization | Yes | No |
| Impairment trigger | Indicators of impairment | At least annually |
| IFRS test | Carrying amount vs. recoverable amount | Same |
| US GAAP test | Two-step (recoverability, then fair value) | Fair value vs. carrying amount |
Example: Calloway Brands acquires a trademark for its luxury watch line for $12 million. Management determines the brand has no foreseeable expiration and classifies it as indefinite-life. Each year, Calloway performs an impairment test comparing fair value to the $12M carrying amount. If fair value drops to $9M, Calloway records a $3M impairment loss in P&L.
Meanwhile, Calloway also acquires a 10-year licensing agreement for $2 million (finite life). This is amortized at $200,000 per year and only tested for impairment when indicators arise.
Exam tip: Goodwill is always indefinite-life and never amortized (under both IFRS and GAAP for public companies). The annual impairment test for goodwill and indefinite-life intangibles is a favorite exam topic.
Explore our CFA Level I intangible assets section for more practice.
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