Accounting (Basics) - Lecture 4
Intangible assets, business combinations and goodwill


Contents
nRecognition
nInitial and subsequent measurement
nAmortization over useful life
nRecoverability of the carrying amount – impairment losses ????
nDerecognition
nBusiness combinations
nDisclosures
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Recognition
nAn entity shall recognize an intangible asset as an asset if, and only if:
a)it is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity;
b)the cost or value of the asset can be measured reliably; and
c)the asset does not result from expenditure incurred internally on an intangible item.
nAn entity shall assess the probability of expected future economic benefits using reasonable and
supportable assumptions that represent management’s best estimate of the economic conditions that
will exist over the useful life of the asset. An entity uses judgement to assess the degree of
certainty attached to the flow of future economic benefits that are attributable to the use of the
asset on the basis of the evidence available at the time of initial recognition, giving greater
weight to external evidence.
n
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Recognition
nThe probability recognition criterion is always considered satisfied for intangible assets that
are separately acquired.
nWhen an intangible asset is acquired in a business combination, it is normally recognized as an
asset because its fair value can be measured with sufficient reliability. However, an intangible
asset acquired in a business combination is not recognized when it arises from legal or other
contractual rights and its fair value cannot be measured reliably because the asset either
a)is not separable from goodwill, or
b)is separable from goodwill but there is no history or evidence of exchange transactions for the
same or similar assets, and otherwise estimating fair value would be dependent on immeasurable
variables.
nAn entity shall measure an intangible asset initially at cost. The cost of a separately acquired
intangible asset comprises:
n
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Initial and subsequent measurement
a)its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates, and
b)any directly attributable cost of preparing the asset for its intended use.
nIf an intangible asset is acquired in a business combination, the cost of that intangible asset is
its fair value at the acquisition date.
nIf an intangible asset is acquired in exchange for a non-monetary asset or assets, or a
combination of monetary and non-monetary assets, the cost of that intangible asset is its fair
value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of
neither the asset received nor the asset given up is reliably measurable. In that case, the asset’s
cost is measured at the carrying amount of the asset given up.
n
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Initial and subsequent measurement
nIf an intangible asset is internally generated, the cost of that intangible asset is not
recognized, but there are recognized all expenditures incurred internally for creation of that
intangible item, including all expenditure for both research and development activities, unless it
forms part of the cost of another asset that meets the recognition criteria in these IFRS. An
entity shall recognize expenditure on the following items as an expense and shall not recognize
such expenditure as intangible assets:
a)internally generated brands, logos, publishing titles, customer lists and items similar in
substance.
b)start-up activities such as establishment costs (i.e. legal and secretarial costs incurred in
establishing a legal entity), expenditure to open a new facility or business (i.e. pre-opening
costs) and expenditure for starting new operations or launching new products or processes (i.e.
pre-operating costs).
n
n
n
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Initial and subsequent measurement
c)training activities.
d)advertising and promotional activities.
e)relocating or reorganizing part or all of an entity.
f)internally generated goodwill.
nExpenditure on an intangible item that was initially recognized as an expense shall not be
recognized at a later date as part of the cost of an asset.
nSubsequently an entity shall measure intangible assets at cost less any accumulated amortization
and any accumulated impairment losses.
n
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Amortization over useful life
nAll intangible assets shall be considered to have a finite useful life. The useful life of an
intangible asset that arises from contractual or other legal rights shall not exceed the period of
the contractual or other legal rights, but may be shorter depending on the period over which the
entity expects to use the asset. If the contractual or other legal rights are conveyed for a
limited term that can be renewed, the useful life of the intangible asset shall include the renewal
period(s) only if there is evidence to support renewal by the entity without significant cost.
nIf an entity is unable to make a reliable estimate of the useful life of an intangible asset, the
life shall be presumed to be ten years.
nAn entity shall allocate the depreciable amount of an intangible asset on a systematic basis over
its useful life. The amortization charge for each period shall be recognized as an expense.
nAmortization begins when the intangible asset is available for use. Amortization ceases when the
asset is derecognized.
n
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Amortization over useful life
nThe entity shall choose an amortization method that reflects the pattern in which it expects to
consume the asset’s future economic benefits. If the entity cannot determine that pattern reliably,
it shall use the straight-line method.
nAn entity shall assume that the residual value of an intangible asset is zero unless:
a)there is a commitment by a third party to purchase the asset at the end of its useful life, or
b)there is an active market for the asset and:
i.residual value can be determined by reference to that market, and
ii.it is probable that such a market will exist at the end of the asset’s useful life.
n
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Amortization over useful life
nFactors such as a change in how an intangible asset is used, technological advancement, and
changes in market prices may indicate that the residual value or useful life of an intangible asset
has changed since the most recent annual reporting date. If such indicators are present, an entity
shall review its previous estimates and, if current expectations differ, amend the residual value,
amortization method or useful life. The entity shall account for the change in residual value,
amortization method or useful life as a change in an accounting estimate.
n
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Recoverability of the carrying amount – impairment losses
nTo determine whether an intangible asset is impaired, an entity shall apply Section “Impairment of
Assets”. That section explains when and how an entity reviews the carrying amount of its assets,
how it determines the recoverable amount of an asset, and when it recognizes or reverses an
impairment loss.
n
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Derecognition
nAn entity shall derecognize an intangible asset, and shall recognize a gain or loss in profit or
loss:
a)on disposal, or
b)when no future economic benefits are expected from its use or disposal.
n
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Business combinations
nA business combination is the bringing together of separate entities or businesses into one
reporting entity. The result of nearly all business combinations is that one entity, the acquirer,
obtains control of one or more other businesses, the acquiree. The acquisition date is the date on
which the acquirer effectively obtains control of the acquiree.
nA business combination may be structured in a variety of ways: the purchase by an entity of the
equity of another entity, the purchase of all the net assets of another entity, the assumption of
the liabilities of another entity, or the purchase of some of the net assets of another entity that
together form one or more businesses. A business combination may be effected by the issue of equity
instruments, the transfer of cash, cash equivalents or other assets, or a mixture of these.
nAll business combinations shall be accounted for by applying the purchase method (under IFRS 3
(2004), but not under
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Business combinations
nIFRS 3 (2008), whereby purchase method is renamed as acquisition method). Applying the purchase
method involves the following steps:
a)identifying an acquirer and acquisition date;
b)recognizing the assets acquired and liabilities assumed at fair value; and
c)measuring the cost of the business combination as aggregate of the fair value of assets given,
liabilities assumed and equity issued including transaction costs;
d)allocating the cost of the business combination to the assets acquired and liabilities and
provisions for contingent liabilities assumed;
e)recognizing any difference between the cost of the business combination and the fair value of
assets acquired and liabilities assumed. If the difference is negative (“negative goodwill”), it is
a gain from bargain purchase.
n
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Business combinations
nApplication of the purchase method starts from identification of acquirer. An acquirer shall be
identified for all business combinations. The acquirer is the combining entity that obtains control
of the other combining entities or businesses. Control is the power to govern the financial and
operating policies of an entity or business so as to obtain benefits from its activities.
nAlthough it may sometimes be difficult to identify an acquirer, there are usually indications that
one exists. For example:
a)if the fair value of one of the combining entities is significantly greater than that of the
other combining entity, the entity with the greater fair value is likely to be the acquirer.
b)if the business combination is effected through an exchange of voting ordinary equity instruments
for cash or other assets, the entity giving up cash or other assets is likely to be the acquirer.
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Business combinations
c)if the business combination results in the management of one of the combining entities being able
to dominate the selection of the management team of the resulting combined entity, the entity whose
management is able so to dominate is likely to be the acquirer.
nAfter acquirer has been identified, there is identified the acquisition date, which is the date on
which the acquirer obtains control of the acquiree.
nFurther the acquirer shall measure the cost of a business combination as the aggregate of:
a)the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and
equity instruments issued by the acquirer, in exchange for control of the acquiree, plus
b)any costs directly attributable to the business combination.
n
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Business combinations
nWhen a business combination agreement provides for an adjustment to the cost of the combination
contingent on future events, the acquirer shall include the estimated amount of that adjustment in
the cost of the combination at the acquisition date if the adjustment is probable and can be
measured reliably. However, if the potential adjustment is not recognized at the acquisition date
but subsequently becomes probable and can be measured reliably, the additional consideration shall
be treated as an adjustment to the cost of the combination.
nThe acquirer shall, at the acquisition date, allocate the cost of a business combination by
recognizing the acquiree’s identifiable assets and liabilities and a provision for those contingent
liabilities that satisfy the recognition criteria at their fair values at that date. Any difference
between the cost of the business combination and the acquirer’s interest in the net fair value of
the identifiable assets, liabilities and provisions for contingent liabilities so recognized shall
be accounted as ‘negative goodwill’ or gain from bargain purchase.
n
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Business combinations
nThe acquirer shall recognize separately the acquiree’s identifiable assets, liabilities and
contingent liabilities at the acquisition date only if they satisfy the following criteria at that
date:
a)In the case of an asset other than an intangible asset, it is probable that any associated future
economic benefits will flow to the acquirer, and its fair value can be measured reliably.
b)In the case of a liability other than a contingent liability, it is probable that an outflow of
resources will be required to settle the obligation, and its fair value can be measured reliably.
c)In the case of an intangible asset or a contingent liability, its fair value can be measured
reliably.
nThe acquirer’s statement of comprehensive income shall incorporate the acquiree’s profits and
losses after the acquisition date by including the acquiree’s income and expenses based on the cost
of the business combination to the acquirer.
n
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Business combinations
nIf the initial accounting for a business combination is incomplete by the end of the reporting
period in which the combination occurs, the acquirer shall recognize in its financial statements
provisional amounts for the items for which the accounting is incomplete. Within twelve months
after the acquisition date, the acquirer shall retrospectively adjust the provisional amounts
recognized as assets and liabilities at the acquisition date to reflect new information obtained.
Beyond twelve months after the acquisition date, adjustments to the initial accounting for a
business combination shall be recognized only to correct an error in accordance with Section
“Accounting Policies, Estimates and Errors”.
nAn acquirer recognizes separately a provision for a contingent liability of the acquiree only if
its fair value can be measured reliably. If its fair value cannot be measured reliably:
a)there is a resulting effect on the amount recognized as goodwill or accounted for; and
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Business combinations
b)the acquirer shall disclose the information about that contingent liability.
nAfter their initial recognition, the acquirer shall measure contingent liabilities that are
recognized separately at the higher of:
a)the amount that would be recognized in accordance with Section “Provisions and Contingencies”,
and
b)the amount initially recognized less amounts previously recognized as revenue in accordance with
Section “Revenue”.
nThe acquirer shall, at the acquisition date:
a)recognize goodwill acquired in a business combination as an asset, and
b)initially measure that goodwill at its cost, being the excess of the cost of the business
combination over the acquirer’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities recognized.
n
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Business combinations
nAfter initial recognition, the acquirer shall measure goodwill acquired in a business combination
at cost less accumulated amortization and accumulated impairment losses. An entity shall follow the
principles for amortization of goodwill as an intangible asset. If an entity is unable to make a
reliable estimate of the useful life of goodwill, the life shall be presumed to be ten years. An
entity shall follow Section “Impairment of Assets” for recognizing and measuring the impairment of
goodwill.
nIf the acquirer’s interest in the net fair value of the identifiable assets, liabilities and
provisions for contingent liabilities recognized exceeds the cost of the business combination (i.e.
there is ‘negative goodwill’), the acquirer shall:
a)reassess the identification and measurement of the acquiree’s assets, liabilities and provisions
for contingent liabilities and the measurement of the cost of the combination, and
b)recognize immediately in profit or loss any excess remaining after that reassessment.
n
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Disclosures
nAn entity shall disclose the following for each class of intangible assets:
a)the useful lives or the amortization rates used.
b)the amortization methods used.
c)the gross carrying amount and any accumulated amortization (aggregated with accumulated
impairment losses) at the beginning and end of the reporting period.
d)the line item(s) in the statement of comprehensive income in which any amortization of intangible
assets is included.
e)a reconciliation of the carrying amount at the beginning and end of the reporting period.
nThis reconciliation need not be presented for prior periods.
a)
n
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Disclosures
nFor business combinations an acquirer shall disclose a reconciliation of the carrying amount of
goodwill at the beginning and end of the reporting period, showing separately:
a)changes arising from new business combinations.
b)impairment losses.
c)disposals of previously acquired businesses.
d)other changes.
nThis reconciliation need not be presented for prior periods.
n
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