The introduction of IFRS represents a major shift in the way that companies undertake their financial reporting.
Although differences remain, the new standards in this area achieve a high degree of convergence with US GAAP. FAS 141 "Business Combinations" and FAS 142 "Goodwill and Other Intangible Assets" in the US have already had important implications for brand owners and the way trademarks are valued and accounted for.
For the first time, trademarks and other acquired intangibles had to be separately recognised on the balance sheet following an acquisition.
IFRS 3 also requires identifiable assets to be recognised on the balance sheet of the acquiring entity, provided that certain conditions are met. This is a significant change from most existing (non-US) national accounting standards.
These and other significant new disclosures in respect of the cost of acquisition and the main classes of assets and liabilities will mean greater transparency and will require a much more detailed due diligence process.
Following recognition, the requirements of the new standards are more onerous than before. Goodwill and intangibles assets with indefinite useful economic lives will need to be tested at least annually for impairment. Assets with finite useful lives are required to be restated where there is evidence of impairment to the particular asset.
It seems likely that many companies will require independent specialist valuation assistance in order to withstand the market scrutiny that greater transparency will bring and to satisfy the need for objectivity and auditor independence.
IFRS 3 Overview
The purchase method of accounting (or acquisition accounting) must be used.
Assets and liabilities acquired
Recognition of more intangible assets and contingent liabilities at fair value at acquisition date.
Not amortised but tested for impairment at least annually.
Recognised in the profit and loss account immediately.
Detailed disclosures about transactions, useful economic life and impairment testing are required.