Allocating the cost of a business combination.
At the date of acquisition, the acquirer must measure the cost of the business combination by recognising the acquiree's identifiable assets, liabilities and contingent liabilities (including any proportion attributable to minority interests) at their fair value. Any difference between the total of net assets acquired and cost of acquisition is treated as goodwill or negative goodwill.
All identifiable intangible assets of the acquired business must be recorded at their fair values.
To be recognised as an intangible asset, it must meet the following criteria:
- Separately identifiable (an asset is identifiable when it either arises from contractual or other legal rights or is separable. An asset is separable if it could be sold, on its own or with other assets)
- Controlled by the entity
- A source of future economic benefits
- It can be reliably measured in terms of its fair value
IFRS 3 includes a list of assets that are expected to be separately recognised from goodwill. In many instances the valuation of such assets is a complex undertaking and companies may prefer to outsource this activity to independent specialists.
After initial recognition of goodwill, IFRS 3 requires that goodwill be recorded at cost less accumulated impairment charges. Whereas previously under IAS 22 goodwill was amortised over its useful economic life (presumed not to exceed 20 years), it is now subject to impairment testing at least once a year. Amortisation is not permitted.
Impairment of Assets
A revised IAS 36 "Impairment of Assets" was issued at the same time as IFRS 3. Previously an impairment test was only required if a triggering event indicated that impairment might have occurred. Under the new rules, an annual impairment test is required for certain assets, namely:
- Goodwill - tested annually and at any other time when an indicator of impairment exists
- Intangible assets with an indefinite useful economic life and intangible assets not yet available for use
The recoverable amount of these assets must be measured annually (regardless of the existence or otherwise of an indicator of impairment) and at any other time when an indicator of impairment exists.
Brands are one type of intangible asset, which are frequently claimed to have indefinite useful economic lives. Where acquired brands are recognised on the balance sheet post-acquisition it will be important to establish a robust and supportable valuation model using best practice valuation techniques that can be consistently applied at each annual impairment review.
The revised IAS 36 also introduces new disclosure requirements, the principle one being the disclosure of the key assumptions used in the calculation.
Increased disclosure is required where a reasonably possible change in a key assumption would result in actual impairment.
The requirement for separate balance sheet recognition of intangible assets, together with impairment testing of those assets and also goodwill, is expected to result in a significant increase in the involvement of independent specialist valuers to assist with actual valuation and also on appropriate disclosure.