Intangible Assets and Goodwill

9 Months Ended

Dec. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

6. Intangible Assets and Goodwill

The following table reflects the components of intangible assets as of:



	December 31, 2016			March 31, 2016
Amortizable intangible asset management contracts and other
Cost	$	405,509		$	259,513
Accumulated amortization	(187,672		)	(171,169		)
Net⁽¹⁾	217,837			88,344
Indefinite–life intangible assets
U.S. domestic mutual fund management contracts	2,106,351			2,106,351
Clarion Partners fund management contracts	505,200			—
EnTrustPermal fund management contracts⁽²⁾	596,404			334,104
Other fund management contracts	533,537			560,499
Trade names⁽¹⁾	69,481			57,187
	3,810,973			3,058,141
Intangible assets, net	$	4,028,810		$	3,146,485


(1)	As of December 31, 2016, Amortizable intangible asset management contracts, net and Trade names include $95,560 and $23,100, respectively, related to the acquisition of Clarion Partners and $60,042 and $7,400, respectively, related to the acquisition of EnTrust. See Note 3 for additional information.

(2)

As of December 31, 2016, includes $262,300 related to the acquisition of EnTrust. As further discussed below, the indefinite-life funds-of-hedge funds management contracts asset related to the legacy Permal business was combined with the indefinite-life funds-of-hedge funds management contracts asset related to EnTrust as of December 31, 2016. See Note 3 for additional information regarding the EnTrust acquisition.

Certain of Legg Mason's intangible assets are denominated in currencies other than the U.S. dollar and balances related to these assets will fluctuate with changes in the related foreign currency exchange rates.

During the nine months ended December 31, 2016, revenues related to the RARE Infrastructure separate account contracts asset declined. Based on revised attrition estimates, the remaining useful life of the acquired contracts was decreased from 11 years to eight years at December 31, 2016. As a result of the client attrition, the related decline in revenues, and the revised estimate of the remaining useful life, the amortized carrying value of the management contracts asset was determined to exceed its fair value and an impairment charge of $18,000 was recorded during the three months ended December 31, 2016. Management estimated the fair value of this asset based upon a discounted cash flow analysis using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in the cash flow analysis included projected AUM growth/(attrition) rates of 7%/(13)% and a discount rate of 15.5%.

Legg Mason completed its annual impairment testing process of goodwill and indefinite-life intangible assets as of December 31, 2016, and determined that the carrying value of the Permal trade name indefinite-life asset exceeded its fair value, which resulted in an impairment charge of $17,000. The impairment charge was primarily the result of a decrease in revenues and a reduction in the royalty rate, reflecting a decline in the value of the Permal trade name due to a change in branding and decline in the use of the separate Permal name following the combination with EnTrust. Management estimated the fair value of the Permal trade name based upon a discounted cash flow analysis using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in the cash flow analysis included projected annual revenue growth rates of 3% to 9% (average: 7%), a royalty rate of 1.5% and a discount rate of 16.0%.

Projected revenue, AUM growth rates and client attrition are most dependent on client AUM flows, changes in market conditions, and product investment performance. Discount rates are also influenced by changes in market conditions, as well as interest rates and other factors. Decreases in the projected revenue or AUM growth rates and/or increases in the discount rates could result in lower fair value measurements and potential additional impairments in these intangible assets.

There were no other impairments to indefinite-life intangible assets, amortizable management contracts intangible assets, or goodwill as of December 31, 2016.

As of December 31, 2016, the assessed fair value of the indefinite-life funds-of-hedge funds management contracts asset related to the legacy Permal business exceeded the carrying value by 4%. As further discussed in Note 3, EnTrust has been combined with Permal to form EnTrustPermal, through common management, shared resources (including infrastructure, employees, and processes) and branding initiatives. Accordingly, after completing the annual impairment testing process as of December 31, 2016, the indefinite-life funds management contracts asset related to the EnTrust acquisition was combined with the indefinite-life funds-of-hedge funds management contracts asset related to the legacy Permal business. Legg Mason completed a qualitative impairment test for the combined asset and no impairment indicators were noted. The related carrying values and cash flows of the funds will continue to be aggregated for future impairment testing.

The current assessed fair value of the indefinite-life domestic mutual funds contracts asset related to the Citigroup Asset Management acquisition exceeds the carrying value by a material amount.

Legg Mason's annual impairment testing process in the prior fiscal year determined that the carrying value of the legacy Permal indefinite-life funds-of-hedge funds management contracts intangible asset and the Permal trade name asset exceeded their respective fair values, and the assets were impaired by an aggregate amount of $371,000. The impairment charges resulted from a number of then current trends and factors. These changes resulted in a reduction of the projected cash flows and Legg Mason's overall assessment of fair value of the assets such that the fair values of the Permal funds-of-hedge funds contracts asset and Permal trade name declined below their carrying values, and accordingly were impaired by $364,000 and $7,000, respectively. Management estimated the fair values of these assets based upon discounted cash flow analyses using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in these cash flow analyses included projected revenue growth rates and discount rates. Total revenues related to the Permal funds-of-hedge funds contracts were assumed to have annual growth rates ranging from (6)% to 6% (average: 5%), and the projected cash flows from the Permal funds-of-hedge funds contracts were discounted at 16.5%.

As of December 31, 2016, amortizable intangible asset management contracts and other are being amortized over a weighted-average remaining life of 8.3 years.

Estimated amortization expense for each of the next five fiscal years and thereafter is as follows:



Remaining fiscal 2017	$	6,871
2018	27,414
2019	27,414
2020	26,949
2021	26,949
Thereafter	102,240
Total	$	217,837

The change in the carrying value of goodwill is summarized below:



	Gross Book Value			Accumulated Impairment			Net Book Value
Balance as of March 31, 2016	$	2,641,416		$	(1,161,900	)	$	1,479,516
Impact of excess tax basis amortization	(15,622		)	—			(15,622		)
Business acquisitions (disposition), net⁽¹⁾	498,778			—			498,778
Changes in foreign exchange rates and other	(35,220		)	—			(35,220		)
Balance as of December 31, 2016	$	3,089,352		$	(1,161,900	)	$	1,927,452

(1) See Note 3 for additional information.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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