417 / 488
Chapter
35 /
Business Combinations (IFRS 3)
405
suit of the acquisition. If the acquiree ' s restructuring plan is conditional on it being acquired, then
just before the acquisition, the provision does not represent a present ob ligation, nor is it a contin–
gent liability.
5.4 Intangible assets acquired must be recognized as assets separately from goodwill. These in–
tangible assets must meet the definition of an asse t in that they shou ld be controlled and provide
economic benefits and are
(I)
Either separable or arise from contractual or other legal rights;
and
(2) Their fair value can be measured reliably.
5.5 Thus , such items as trademarks, trade names, customer lists, order or production backlogs,
customer contracts, artistic-related intangible assets , and contract-based intangible assets such as li–
censing and royalty agreements and lease agreements may meet the definition of an intangible asset
for the purpose of IFRS 3.
5.6 Similarly, in applying the purchase met hod , all contingent liabilities assumed must be recog–
nized if their fair value can be measured reliably. After their initial recognition, the contingent li–
abilities must be remeasured at the higher of the amo unt that will be recognized in accordance with
lAS 37 and the amount initially recognized less cumulative amortization (where appropriately rec –
ognized in accordance with lAS 18). Any contingent liability recognized under IFRS 3 continues to
be recognized subsequently, even though it may not qualify for recognition under lAS 37 .
Case Study 3
Facts
X pic
Cost of acquisition
less fair value of net assets
less restructuring provision
Goodwill
Income statement at year end
Profit before amortization
Amortization of goodwill
Interest
Profit before tax
1JJ:L
700
300
(70)
470
140
(47)
93
(U)
80
Thi s information relates to the acquisition of X, a public limited company, by Z, a public limited com–
pany. At the date of acquisition, the fair value of the intangible assets and the contingent liabi lities of X
were $100 million and $30 million respectively. At the date of the preparation of the financial state–
ments, the value of the net assets of X had increased significantly. The intangible assets have a life of 10
years.
Required
How would the acquisition be accounted for under IFRS 3?
Solution
Cost of acquisition
less fair value of net assets
less fair value of intangibles
Contingent liabilities
Goodwill
Income statement at year-end
Profit before amortization
Amortization of intangibles
Goodwill impairment
Interest
Profit before tax
:£ill
700
(300)
(100)
30
330
140
(10)
-.J2
130
.c.ru
ill