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• Be part of the business acquired (the acquiree) rather than the result of a separate transaction (IFRS 3.12).
Costs that the acquirer expects but is not obliged to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate
an acquiree’s employees are not liabilities at the acquisition date. (IFRS 3.11).Thus any agreed restructuring provisions would generally not be recognized unless the
acquiree has at the acquisition date an existing liability for restructuring that has been recognized in accordance with IAS 37. Identifiable assets, liabilities, and
contingent liabilities must be measured initially at full fair value, which includes any noncontrolling interest share of those items. The acquirer should not recognize any
liabilities for future losses or other costs expected to be incurred as a result 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 obligation, nor is it a contingent liability.
The acquirer may recognize some assets and liabilities that the acquiree had not previously recognized in its financial statements. For example, intangible assets
acquired must be recognized as assets separately from goodwill. These intangible assets must meet the definition of an asset in that they should be controlled and there
should be an unconditional right or obligation.
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 licensing and royalty agreements and lease agreements may meet the definition of an intangible asset for the purpose of IFRS 3.
Similarly, in applying the acquisition method, all contingent liabilities assumed must be recognized if their fair value can be measured reliably. After their initial
recognition, the contingent liabilities must be remeasured at the higher of the amount that will be recognized in accordance with IAS 37 and the amount initially
recognized less cumulative amortization (where appropriately recognized in accordance with IAS 18). Any contingent liability recognized under IFRS 3 continues to
be recognized subsequently, even though it may not qualify for recognition under IAS 37.
IFRS 3 requires that, at the acquisition date, the identifiable assets acquired and liabilities assumed should be classified or designated as necessary to apply other
IFRS subsequently.
The acquirer makes those classifications or designations on the basis of contractual terms, economic conditions, its operating or accounting policies, and other
pertinent conditions as they exist at the acquisition date. (IFRS 3.15)
Examples of classifications or designations made at the acquisition date include classification of financial assets and designation of a derivative as a hedging
instrument.
The Standard provides two exceptions to the principle that classifications or designations are based on the terms of instruments and conditions at the acquisition date.
The two exceptions relate to
1. The classification of a lease contract as either an operating lease or a finance lease in accordance with IAS 17, Leases.
2. The classification of a contract as an insurance contract in accordance with IFRS 4, Insurance Contracts.
Identifiable assets acquired and liabilities assumed are measured at their acquisition-date fair values.
For each business combination, any noncontrolling interest in the acquiree is measured either (IFRS 3.19):
• At fair value
• At the noncontrolling interest’s proportionate share of the acquiree’s identifiable net assets.
This choice is available for each business combination, so an entity may use fair value for one business combination and the proportionate share of the acquiree’s
identifiable net assets for another. For the purpose of measuring noncontrolling interests at fair value, it may be possible to determine the acquisition-date fair value on
the basis of active market prices for the equity shares not held by the acquirer. When a market price for the equity shares is not available because the shares are not
publicly traded, the acquirer should measure the fair value of the noncontrolling interests using other valuation techniques.
If the acquirer and acquiree were parties to a preexisting relationship (for instance, the acquirer had granted the acquiree a right to use its intellectual property), this
must be accounted for separately from the business combination. In most cases, this will lead to the recognition of a gain or loss for the amount of the consideration
transferred to the vendor, which effectively represents a “settlement” of the preexisting relationship. The amount of the gain or loss is measured as follows:
1. For preexisting noncontractual relationships (for example, a lawsuit): by reference to fair value.
2. For preexisting contractual relationships: at the lesser of (a) the favorable/unfavorable contract position and (b) any stated settlement provisions in the contract
available to the counterparty to whom the contract is unfavorable.
However, where the transaction effectively represents a reacquired right, an intangible asset is recognized and measured on the basis of the remaining contractual
term of the related contract excluding any renewals. The asset is then subsequently amortized over the remaining contractual term, again excluding any renewals.
Facts
CASE STUDY 4
X PLC $m
Cost of acquisition 700
Less fair value of net assets 300
Less restructuring provision (70)
Goodwill 470
Statement of comprehensive income at year-end
Profit before amortization 140
Amortization of goodwill (47)