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Goodwill and Intangible Assets David Cairns
© 2006 David Cairns www.cairns.co.uk Business Combinations Parent’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
© 2006 David Cairns www.cairns.co.uk 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
© 2006 David Cairns www.cairns.co.uk 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
© 2006 David Cairns www.cairns.co.uk 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
© 2006 David Cairns www.cairns.co.uk 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
© 2006 David Cairns www.cairns.co.uk 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
© 2006 David Cairns www.cairns.co.uk Goodwill Cost of acquisition less Acquirer’s interest in the fair value of acquiree’s identifiable assets less liabilities and contingent liabilities equals Goodwill
© 2006 David Cairns www.cairns.co.uk “Negative Goodwill” Acquirer’s interest in the fair value of acquiree’s identifiable assets less liabilities and contingent liabilities less Cost of acquisition equals “Negative goodwill” Note: IFRS 3 does not use the term ‘negative goodwill’
© 2006 David Cairns www.cairns.co.uk ‘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
© 2006 David Cairns www.cairns.co.uk 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
© 2006 David Cairns www.cairns.co.uk 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
© 2006 David Cairns www.cairns.co.uk 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
© 2006 David Cairns www.cairns.co.uk 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 licence product developments costs acquired customer contract Intangible asset with indefinite useful life no amortisation annual review of useful life Examples acquired brand or newspaper masthead
© 2006 David Cairns www.cairns.co.uk Impairment of Intangible Assets Intangible asset with finite useful life when indication of impairment Examples broadcasting or telecoms licence product developments costs acquired customer contract
© 2006 David Cairns www.cairns.co.uk Impairment of Intangible Assets Intangible asset with finite useful life when indication of impairment Examples broadcasting or telecoms licence product developments costs acquired customer contract Intangible asset with indefinite useful life annual impairment test Examples acquired brand or newspaper masthead
© 2006 David Cairns www.cairns.co.uk Subsequent Measurement: Goodwill Cost model historical cost less any impairment losses amortisation prohibited Revaluation model prohibited
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