goodwill and intangible assets david cairns. © 2006 david cairns business combinations parent’s...

Goodwill and Intangible Assets

David Cairns

© 2006 David Cairns www.cairns.co.uk

Business CombinationsParent’s legal entity financial

statements

Assets Investment in acquiree

(subsidiary)

Consolidated financial statements

Assets Acquired, identifiable assets

of acquiree Goodwill Liabilities Acquired, identifiable

liabilities and contingent liabilities of acquiree

Equity Minority interest in acquiree


Intangible Assets

Identifiable non-monetary asset without physical substance

Identifiable separable or arises from contractual or legal rights

Separable capable of being separated or divided from entity can be sold, transferred, licensed, rented or exchanged

either individually or together with related contract, asset or liability


Acquired Intangible Assets Recognise an intangible asset acquired on business

combination as an asset if: it meets the definition of an intangible asset its fair value at the date of acquisition can be measured

reliably

business combination is usually evidence that the acquirer will receive future economic benefits from an acquired intangible asset

the acquirer can usually measure reliably the fair value of an acquired intangible asset with a finite useful life


Acquired Intangible Assets

Marketing related trademarks, trade

names, service marks .... internet domain names newspaper mastheads

Customer related customer lists order backlog contractual relationships

Artistic plays, operas, ballets,

books, musical works, pictures, films ….

Contract-based licences, royalties,

leases, agreements, rights, contracts

Technology-based patents, software,

databases, trade secrets


Acquired Intangible Assets Fair value

quoted market price in an active market for that asset if such a market exists or

if an active market for that asset does not exist, purchase price in arm’s length transaction between willing, knowledgeable buyer/seller


Business Combinations

Parent’s legal entity financial statements

Investment in acquiree (subsidiary)

amount of cash or cash equivalents paid or

fair value of the other consideration given

Consolidated financial statements

Acquired assets, liabilities and

contingent liabilities

fair value

Goodwill

residual item


Goodwill

Cost of acquisition

less

Acquirer’s interest in the fair value of acquiree’s identifiable assets less liabilities

and contingent liabilities

equals

Goodwill


“Negative Goodwill”

Acquirer’s interest in the fair value of acquiree’s identifiable assets less liabilities

and contingent liabilitiesless

Cost of acquisitionequals

“Negative goodwill”

Note: IFRS 3 does not use the term ‘negative goodwill’


‘Negative Goodwill’

Review fair values assigned to assets and liabilities recognition of identifiable liabilities and contingent

liabilities cost of acquisition

If any ‘negative goodwill’ remains after this review recognise as gain in income statement

capitalisation/deferral is prohibited


Other Intangible Assets

Separately acquired recognise as intangible

asset because purchase transaction is evidence of:

• cost and

• likelihood of future economic benefits

Internally developed recognise costs as an

intangible asset only if• arise from development

phase of project

• meet specific criteria and

• incurred after meeting those criteria


Subsequent Measurement: Intangible Assets

Cost model historical cost less any

amortisation and any impairment losses

Revaluation model fair value less any

subsequent amortisation and impairment losses

allowed only if active market for intangible assets

hence, very rare in practice


Amortisation of Intangible Assets

Intangible asset with finite useful life

amortise on systematic basis over useful life

annual review of useful life

Examples broadcasting or telecoms

licences product developments costs acquired customer contract


Amortisation of Intangible Assets


amortise on systematic basis over useful life



licence product developments costs acquired customer contract

Intangible asset with indefinite useful life

no amortisation


Examples acquired brand or

newspaper masthead


Impairment of Intangible Assets


when indication of impairment




Impairment of Intangible Assets


when indication of impairment



Intangible asset with indefinite useful life

annual impairment test

Examples acquired brand or

newspaper masthead


Subsequent Measurement: Goodwill

Cost model historical cost less any

impairment losses

amortisation prohibited

Revaluation model prohibited

Goodwill and Intangible Assets

David Cairns

goodwill and intangible assets david cairns. © 2006 david cairns business combinations parent’s...

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