International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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The process of identifying intangible assets in a business combination might involve,
for example:
• reviewing the list of items that meet the definition of an intangible asset in IFRS 3
(see 5.2 below);
• a review of documents such as those related to the acquisition, other internal
documents produced by the entity, public filings, press releases, analysts’ reports,
and other externally available documents; and
• comparing the acquired business to similar businesses and their intangible assets.
Intangible assets that are used differ considerably between industries and between
individual entities. Therefore, considerable expertise and careful judgement is
required in determining whether there are intangible assets that need to be recognised
and valued separately.
IFRS 3 provides a long list of items that should be recognised separately from goodwill
(see 5.2 below). The list is not intended to be exhaustive.
1234 Chapter 17
5.1
Recognition of intangible assets acquired in a business
combination
As noted at 3.1 above, an intangible asset should only be recognised if: [IAS 38.21]
(a) it is probable that the expected future economic benefits that are attributable to
the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.
5.1.1
Probable inflow of benefits
In the case of a business combination, the probability recognition criterion is always
considered to be satisfied. The cost of the intangible asset is its fair value at the acquisition
date. The standard indicates that the fair value reflects expectations about the probability
that the future economic benefits embodied in the asset will flow to the entity. [IAS 38.33].
In other words, the existence of a fair value means that an inflow of economic benefits is
considered to be probable, in spite of any uncertainties about timing or amount.
5.1.2
Reliability of measurement
Under IFRS 3, the cost of the intangible asset acquired in a business combination can
always be measured reliably. [IAS 38.BC19A].
In developing IFRS 3, the Board concluded that the needs of users were better served
by recognising intangible assets, on the basis of an estimate of fair value, rather than
subsuming them in goodwill, even if a significant degree of judgement is required to
estimate fair value. [IAS 38.BC19B]. Accordingly, if an asset acquired in a business
combination is separable or arises from contractual or other legal rights, there is
sufficient information to measure reliably the fair value of the asset. Thus, the
requirement at 3.1 above for reliable measurement of cost is always considered to be
satisfied for intangible assets acquired in business combinations. [IAS 38.33].
5.1.3
Identifiability in relation to an intangible asset acquired in a business
combination
Intangible assets need to be identifiable to distinguish them from goodwill and the two
elements of identifiability are the existence of contractual or other legal rights and
separability. Separability means that the asset is capable of being sold, transferred,
licensed, rented or exchanged without having to dispose of the whole business. An
intangible asset is considered to be separable regardless of whether the entity intends
to sell or otherwise transfer it. [IAS 38.12].
The IASB recognised that an intangible asset acquired in a business combination might
be separable, but only together with a related contract, identifiable asset or liability. In
such cases, IAS 38 requires the acquirer to recognise the intangible asset separately from
goodwill, but together with the related contract, asset or liability. [IAS 38.36].
Acquirers are permitted to recognise a group of complementary intangible assets as a
single asset provided the individual assets in the group have similar useful lives. For
example, the terms ‘brand’ and ‘brand name’ are often used as synonyms for trademarks
and other marks. However, ‘brands’ are regarded as general marketing terms that are
typically used to refer to a group of complementary assets such as a trademark or service
Intangible
assets
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mark and its related trade name, formulas, recipes and technological expertise. [IAS 38.37].
Heineken, for example, acknowledges the relationship between brands and customer-
related intangible assets acquired in business combinations.
Extract 17.4: Heineken N.V. (2017)
Notes to the Consolidated Financial Statements [extract]
3. Significant accounting policies [extract]
(g) Intangible assets [extract]
(ii) Brands [extract]
Brands acquired, separately or as part of a business combination, are capitalised if they meet the definition of an
intangible asset and the recognition criteria are satisfied.
(iii) Customer-related, contract-based intangibles and reacquired rights [extract]
Customer-related and contract-based intangibles are capitalised if they meet the definition of an intangible asset and
the recognition criteria are satisfied. If the amounts are not material, these are included in the brand valuation. The
relationship between brands and customer-related intangibles is carefully considered so that brands and customer-
related intangibles are not both recognised on the basis of the same cash flows.
IFRS 3 contains additional guidance on the application of the contractual-legal and
separability criteria that indicate how far the IASB expects entities to go to ensure that
intangible assets acquired in a business combination are recognised separately from goodwill.
5.1.3.A Contractual-legal
rights
An intangible asset that arises from contractual or other legal rights is recognised
separately from goodwill even if it is not transferable or separable from the acquiree or
from other rights and obligations. For example:
(a) an acquiree leases a manufacturing facility from a lessor under an operating lease
that has terms that are favourable relative to market terms. The lease terms explicitly
prohibit transfer of the lease (through either sale or sublease). The amount by which
the lease terms are favourable compared with the terms of current market
transactions for the same or similar items is an intangible asset that meets the
contractual-legal criterion for recognition separately from goodwill, even though the
acquirer cannot sell or otherwise transfer the lease contract. See Chapter 9;
(b) an acquiree owns and operates a nuclear power plant. The licence to operate that
power plant is an intangible asset that meets the contractual-legal criterion for
recognition separately from goodwill, even if the acquirer cannot sell or transfer it
separately from the acquired power plant. However, IFRS 3 goes on to say that an
acquirer may recognise the fair value of the operating licence and the fair value of
the power plant as a single asset for financial reporting purposes if the useful lives
of those assets are similar;
(c) an acquiree owns a technology patent. It has licensed that patent to others for their
exclusive use outside the domestic market, receiving a specified percentage of
future foreign revenue
in exchange. Both the technology patent and the related
licence agreement meet the contractual-legal criterion for recognition separately
from goodwill even if selling or exchanging the patent and the related licence
agreement separately from one another would not be practical. [IFRS 3.B32].
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5.1.3.B Separability
IFRS 3 emphasises that the separability criterion means that an acquired intangible asset
is capable of being separated or divided from the acquiree, regardless of the intentions
of the acquirer. It adds that an acquired intangible asset is recognised separately from
goodwill if there is evidence of exchange transactions for that type of asset or an asset
of a similar type, even if those transactions are infrequent and regardless of whether the
acquirer is involved in them. For example, customer and subscriber lists are frequently
licensed and thus merit recognition as intangible assets. The standard acknowledges that
an acquiree might try to distinguish its customer lists from those that are frequently
licensed generally, in order to justify no recognition. However, in the absence of a truly
distinguishing feature, such as confidentiality or other agreements that prohibit an entity
from selling, leasing or otherwise exchanging information about its customers, these
non-contractual rights should be recognised separately from goodwill. [IFRS 3.B33].
An intangible asset that is not individually separable from the acquiree or combined
entity should still be recognised separately from goodwill if it could be separable in
combination with a related contract, identifiable asset or liability. For example, an
acquiree owns a registered trademark and documented but unpatented technical
expertise used to manufacture the trademarked product. The entity could not transfer
ownership of the trademark without everything else necessary for the new owner to
produce an identical product or service. Because the unpatented technical expertise
must be transferred if the related trademark is sold, it is separable and not included in
the carrying value of goodwill. [IFRS 3.B34].
The requirements described above demonstrate how IFRS 3 and IAS 38 define
intangible assets in a way that eliminates as much as possible any barrier to recognising
them separately from goodwill.
5.2
Examples of intangible assets acquired in a business combination
IFRS 3 provides a long list of examples of items acquired in a business combination that
meet the definition of an intangible asset and should therefore be recognised separately
from goodwill. [IFRS 3.IE16-44]. The list is not intended to be exhaustive and other items
acquired in a business combination might still meet the definition of an intangible asset.
[IFRS 3.IE16].
The table below summarises the items included in the IASB’s Illustrative Example.
Reference should be made to the Illustrative Example itself for any further explanation
about some of these items.
Intangible assets arising from contractual or
Other intangible assets
other legal rights (regardless of being separable)
that are separable
Marketing-related
– Trademarks, trade names, service marks, collective marks and
certification marks
– Internet domain names
– Trade dress (unique colour, shape or package design)
– Newspaper
mastheads
– Non-competition
agreements
Intangible
assets
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Customer-related
– Order or production backlog
–
Customer lists
– Customer contracts and the related customer relationships
–
Non-contractual customer
relationships
Artistic-related
– Plays, operas and ballets
– Books, magazines, newspapers and other literary works
– Musical works such as compositions, song lyrics and advertising jingles
– Pictures and photographs
– Video and audiovisual material, including films, music videos and
television programmes
Contract-based
– Licensing, royalty and standstill agreements
– Advertising, construction, management, service or supply contracts
– Lease
agreements
– Construction
permits
– Franchise
agreements
– Operating and broadcast rights
– Servicing contracts such as mortgage servicing contracts
– Employment contracts that are beneficial contracts from the
perspective of the employer because the pricing of those contracts
is below their current market value
– Use rights such as drilling, water, air, mineral, timber-cutting and
route authorities
Technology-based
– Patented
technology
– Unpatented
technology
– Computer software and mask works
–
Databases, including title plants
– Trade secrets such as secret formulas, processes and recipes
Further details on the requirements relating to intangible assets acquired as part of a
business combination are covered in Chapter 9.
5.3
Measuring the fair value of intangible assets acquired in a
business combination
IFRS 3 assumes that there will always be sufficient information to measure reliably the
fair value of an intangible asset acquired in a business combination if it is separable or
arises from contractual or other legal rights.
The issues underlying the initial measurement of these intangible assets are discussed
further in Chapter 9. The requirements of IFRS 13 are discussed in Chapter 14, which
also addresses the challenges of applying IFRS 13 at initial recognition since fair value is
defined as an exit price. In particular, the selection of appropriate valuation techniques,
inputs to those valuation techniques and the application of the fair value hierarchy are
discussed in Chapter 14.
5.4
Customer relationship intangible assets acquired in a business
combination
Further guidance on customer relationships acquired in a business combination is
provided by IFRS 3 in the Illustrative Examples, which form the basis of the
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example below. These demonstrate how the contractual-legal and separability
criteria, discussed at 2.1.1 above, interact in the recognition of acquired customer
relationships. [IFRS 3.IE30].
Example 17.5: Customer relationship intangible assets acquired in a business
combination
Supply agreement
Acquirer Company (A) acquires Target Company (T) in a business combination. T has a five-year agreement
to supply goods to Customer (C). Both T and A believe that C will renew the supply agreement at the end of
the current contract. The supply agreement is not separable.
Because T establishes its relationship with C through a contract, not only the supply agreement (whether
cancellable or not) but also T’s customer relationship with C meet the contractual-legal criterion for
identification as an intangible asset
. Therefore, both the supply agreement and the customer relationship
intangible asset are recognised separately from goodwill.
Sporting goods and electronics
A acquires T in a business combination. T manufactures goods in two distinct lines of business: sporting
goods and electronics. Customer (C) purchases both sporting goods and electronics from T. T has a contract
with C to be its exclusive provider of sporting goods, but has no contract for the supply of electronics to C.
Both T and A believe that there is only one overall customer relationship between T and C.
As in the previous example, both the contract for the exclusive supply of sporting goods (whether cancellable
or not) and the related customer relationship qualify for identification as an intangible asset because the
contractual-legal criterion is met. Because T and A believe that there is only one customer relationship, the
fair value of the intangible asset incorporates assumptions regarding T’s relationship with C for both sporting
goods and electronics.
However, if A determined that there were two customer relationships with C – one for sporting goods and
another for electronics – the customer relationship for electronics would only be recognised if it meets the
separability criterion for identification as an intangible asset (because there is not a current or past contract it
can be linked to).
Order backlog and recurring customers
A acquires T in a business combination on 31 December 2018. T does business with its customers solely
through purchase and sales orders. At 31 December 2018, T has a backlog of customer purchase orders from
60 per cent of its customers, all of whom are recurring customers. The other 40 per cent of T’s customers are
also recurring customers. However, as of 31 December 2018, T has no open purchase orders or other contracts