1. Goodwill and Intangible Assets David Cairns

2. © 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

3. © 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

4. © 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

5. © 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

6. © 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

7. © 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

8. © 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

9. © 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’

10. © 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

11. © 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

12. © 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

13. © 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

14. © 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

15. © 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

16. © 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

17. © 2006 David Cairns www.cairns.co.uk Subsequent Measurement: Goodwill  Cost model  historical cost less any impairment losses  amortisation prohibited  Revaluation model  prohibited

18. Goodwill and Intangible Assets David Cairns