effectiveness and the measurement of ineffectiveness because, so far as the acquirer is
concerned, it has started a new hedge relationship with a hedging instrument that is
likely to have a non-zero fair value. This may mean that although the acquiree can
continue to account for the relationship as a cash flow hedge, the acquirer is unable to
account for it as a cash flow hedge in its financial statements.
In the situations discussed above, the effect of applying the principle in IFRS 3 only
affects the post-business combination accounting for the financial instruments
concerned. The financial instruments that are recognised as at the acquisition date, and
their measurement at their fair value at that date, do not change.
However, the requirement for the acquirer to assess whether an embedded derivative
should be separated from the host contract based on acquisition date conditions could
result in additional assets or liabilities being recognised (and measured at their
acquisition-date fair value) that differ from those recognised by the acquiree.
Embedded derivatives are discussed in Chapter 42.
5.5
Recognising and measuring particular assets acquired and
liabilities assumed
IFRS 3 gives some application guidance on recognising and measuring particular assets
acquired and liabilities assumed in a business combination, discussed below.
5.5.1 Operating
leases
Although existing leases of the acquiree are new leases from the perspective of the
acquirer, the classification of the leases between operating and finance in accordance
with IAS 17 is not revisited (see 5.4 above). If the acquiree is the lessee to an operating
lease and the terms of the lease are favourable (asset) or unfavourable (liability) relative
to market terms and prices, the acquirer is required to recognise either an intangible
asset or a liability. [IFRS 3.B28-B29].
An operating lease at market terms may be associated with an identifiable intangible
asset if market participants are willing to pay a price for the lease. A lease of gates at an
airport or of retail space in a prime shopping centre may provide entry into a market or
other future economic benefits that qualify as identifiable intangible assets, for example,
as a customer relationship (see 5.5.2 below). [IFRS 3.B30].
For entities applying IFRS 16, as a result of consequential amendments to IFRS 3, the
above guidance in paragraphs B28-B29 of IFRS 3 has been removed and a new
exception in paragraphs 28A-28B has been introduced to the recognition and
measurement principles of IFRS 3 for leases in which the acquiree is the lessee
(see 5.6.8 below). IFRS 16 and its consequential amendments are mandatory for annual
periods beginning on or after 1 January 2019, although early adoption is permitted,
provided IFRS 15 has been applied, or is applied at the same date as IFRS 16 (for further
guidance on IFRS 16, see Chapter 24).
If the acquiree is a lessor in an operating lease, i.e. it has an item of property, plant
and equipment that is leased to another party, there is no requirement for the
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acquirer to recognise intangible assets or liabilities if the terms of the lease are
favourable or unfavourable relative to market terms and prices. Instead, off-market
terms are reflected in the acquisition-date fair value of the asset (such as a building
or a patent) subject to the lease. [IFRS 3.B42]. The IASB sought to avoid any
inconsistency with the fair value model in IAS 40, which requires the fair value of
investment property to take into account rental income from current leases.
[IFRS 3.BC146].
The requirement to reflect the off-market terms in the fair value of the asset subject
to an operating lease in which the acquiree is the lessor applies to any type of asset,
to the extent market participants would take them into consideration when pricing
the asset, and is not restricted to investment properties accounted for under the fair
value model in IAS 40. Based on the requirements of IAS 16 and IAS 38, an entity
would be required to adjust the depreciation or amortisation method for the leased
asset so as to reflect the timing of the cash flows attributable to the underlying
leases. [IFRS 3.BC148].
For entities applying IFRS 16, this guidance in paragraph B42 of IFRS 3 for leases where
the acquiree is a lessor effectively remains unchanged, since for lessors the new
standard introduces little change to the existing accounting in IAS 17.
5.5.2 Intangible
assets
Identifiable intangible assets may have to be recognised by an acquirer although they
have not previously been recognised by the acquiree. [IFRS 3.B31]. IFRS 3 and IAS 38 give
guidance on the recognition of intangible assets acquired in a business combination.
IFRS 3 and IAS 38 both define an ‘intangible asset’ as ‘an identifiable non-monetary
asset without physical substance’. [IFRS 3 Appendix A, IAS 38.8]. The definition requires an
intangible asset to be ‘identifiable’ to distinguish it from goodwill. [IAS 38.11]. Both
standards regard an asset as identifiable if it:
(a) is separable, i.e. capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a
related contract, identifiable asset or liability, regardless of whether the entity
intends to do so (the ‘separability’ criterion); or
(b) arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations (the
‘contractual-legal’ criterion). [IFRS 3 Appendix A, IAS 38.12].
IFRS 3 provides the following application guidance.
• Separability
An intangible asset is separable even if the acquirer has no intention of selling,
licensing or otherwise exchanging it. An acquired intangible asset is separable if
there is evidence of exchange transactions for that type of asset or an asset of a
similar type, even if those transactions are infrequent and regardless of whether the
acquirer is involved in them. For example, customer and subscriber lists are
frequently licensed and thus separable. Even if an acquiree believes its customer
lists have characteristics that distinguish them from others, this would not generally
prevent the acquired customer list being considered separable. However, if
Business
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confidentiality terms or other agreements prohibit an entity from selling, leasing or
otherwise exchanging information about its customers, then the customer list would
not be separable. [IFRS 3.B33].
An intangible asset may be separable from goodwill in combination with a related
contract, identifiable asset or liability. Two examples are given by IFRS 3:
(a) market participants exchange deposit liabilities and related depositor relationship
intangible assets in observable exchange transactions. Therefore, the acquirer should
recognise the depositor relationship intangible asset separately from goodwill;
(b) an acquiree owns a registered trademark and documented but unpatented
technical expertise used to m
anufacture the trademarked product. When it sells
the trademark, the owner must also transfer everything else necessary for the new
owner to produce a product or service indistinguishable from that produced by
the former owner. Because the unpatented technical expertise must be separated
from the acquiree or combined entity and sold if the related trademark is sold, it
meets the separability criterion. [IFRS 3.B34].
• Contractual-legal
An intangible asset that meets the contractual-legal criterion is identifiable, and hence
accounted for separately from goodwill, even if the asset is not transferable or separable
from the acquiree or from other rights and obligations. For example:
(a) an acquiree leases a manufacturing facility under an operating lease; its terms are
favourable relative to market. The lease terms explicitly prohibit transfer, whether
by sale or sublease. The amount by which the lease terms are favourable compared
to market transactions is an intangible asset that meets the contractual-legal
criterion for recognition separately, even though the lease contract cannot be sold
or transferred by the acquirer;
(b) an acquiree owns and operates a nuclear power plant. The licence to operate the
power plant is a separate intangible asset, even if the acquirer cannot sell or
transfer it separately from the power plant itself. IFRS 3 goes on to say that an
acquirer may recognise the operating licence and the power plant as a single asset
for financial reporting purposes if their useful lives are similar;
(c) an acquiree owns a technology patent that it has licensed to others for their
exclusive use outside the domestic market, for which it has received a specified
percentage of future foreign revenue. Both the technology patent and the related
licence agreement meet the contractual-legal criterion for separate recognition
even if it would not be practical to sell or exchange them separately from one
another. [IFRS 3.B32].
Accordingly, under IFRS 3, intangible assets are recognised separately from goodwill if
they are identifiable, i.e. they either are separable or arise from contractual or other
legal rights. [IFRS 3.B31]. They must be assigned an acquisition-date fair value.
For entities applying IFRS 16, as a result of consequential amendments, the above
example (a) has been removed from paragraph B32 of IFRS 3. This is because IFRS 16
requires the off-market nature of the lease to be captured in the right-of-use asset,
rather than recognised separately as an intangible asset or liability (see 5.6.8 below).
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IFRS 16 and its consequential amendments are mandatory for annual periods beginning
on or after 1 January 2019, although early adoption is permitted, provided IFRS 15 has
been applied, or is applied at the same date as IFRS 16 (for further guidance on IFRS 16,
see Chapter 24).
5.5.2.A
Examples of identifiable intangible assets
We have considered above a number of different types of identifiable intangible assets
that are recognised separately from goodwill, such as customer and subscriber lists,
depositor relationships, registered trademarks, unpatented technical expertise,
favourable operating leases under IAS 17, licences and technology patents.
IAS 38 also explicitly requires an acquirer to recognise as a separate intangible asset
in-process research and development of the acquiree, in accordance with IFRS 3, if
the project meets the definition of an intangible asset. [IAS 38.34]. IFRS 3 itself only
refers to this in its Basis for Conclusions. [IFRS 3.BC149-BC156]. This is discussed
at 5.5.2.D below.
IFRS 3’s Illustrative Examples list items acquired in a business combination that are
identifiable intangible assets, noting that the examples are not intended to be all-
inclusive. [IFRS 3.IE16-IE44]. The assets listed are designated as being ‘contractual’, or ‘non-
contractual’, in which case they do not arise from contractual or other legal rights but
are separable. It emphasises that assets do not have to be separable to meet the
contractual-legal criterion.
The table below summarises the items included in the Illustrative Examples. See the
Illustrative Examples for further explanations.
Intangible assets arising from contractual or
Other intangible assets
other legal rights (regardless of being separable)
that are separable
Marketing-related
– Trademarks, trade names, service marks, collective marks and
certification marks
– Trade dress (unique colour, shape or package design)
– Newspaper
mastheads
– Internet domain names
– Non-competition
agreements
Customer-related
– Order or production backlog
– Customer lists
– Customer contracts and the related customer relationships
– Non-contractual customer
relationships
Artistic-related
– Plays, operas and ballets
– Books, magazines, newspapers and other literary works
– Musical works such as compositions, song lyrics and advertising jingles
– Pictures and photographs
– Video and audiovisual material, including motion pictures or films, music
videos and television programmes
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Contract-based
– Licensing, royalty and standstill agreements
– Advertising, construction, management, service or supply contracts
– Lease
agreements
– Construction
permits
– Franchise
agreements
– Operating and broadcast rights
– Servicing contracts such as mortgage servicing contracts
– Employment
contracts
– Use rights such as drilling, water, air, mineral, timber-cutting and route
authorities
Technology-based
– Patented
technology
– Unpatented
technology
– Computer software and mask works
– Databases, including title plants
– Trade secrets, such as secret formulas, processes or recipes
Some items have been designated as being ‘contractual’ due to legal protection, for
example, trademarks and trade secrets. The guidance explains that even without that
legal protection, they would still normally meet the separability criterion.
Customer relationships established through contracts are deemed identifiable as they
meet the contractual-legal criterion. However, there need not be a current contract or
any outstanding orders at the date of acquisition for customer relationships to meet the
identifiability criteria. Customer relationships can also be recognised as intangible
assets if they arise outside a contract but in this case they must be separable to be
recognised. This is discussed further in 5.5.2.B below.
IFRS 3’s Illustrative Examples clarify that for contracts with terms that are favourable
or unfavourable relative to the market terms, the acquirer recognises either a liability
assumed or an asset acquired in a
business combination. For example, if the terms of a
customer contract are unfavourable in comparison to market terms, the acquirer should
recognise a corresponding liability. [IFRS 3.IE34]. Conversely, for supply contracts
acquired in a business combination that are beneficial from the perspective of the
acquiree because the pricing of those contracts is favourable in comparison to market
terms, the acquirer recognises a contract-based intangible asset.
5.5.2.B Customer
relationship intangible assets
Further guidance on customer relationships acquired in a business combination is
provided in IFRS 3’s Illustrative Examples, which form the basis of the example below.
These demonstrate how an entity should interpret the contractual-legal and
separability criteria in the context of acquired customer relationships. [IFRS 3.IE30].
Example 9.10: Customer relationship intangible assets
(i) Supply
agreement
Acquirer Company (AC) acquires Target Company (TC) in a business combination on 31 December 2019.
TC has a five-year agreement to supply goods to Customer. Both TC and AC believe that Customer will
renew the agreement at the end of the current contract. The agreement is not separable.
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The agreement, whether cancellable or not, meets the contractual-legal criterion. Because TC establishes its
relationship with Customer through a contract, both the agreement itself and also TC’s customer relationship
with Customer meet the contractual-legal criterion.
(ii)
Sporting goods and electronics
AC acquires TC in a business combination on 31 December 2019. TC manufactures goods in two distinct
lines of business: sporting goods and electronics. Customer purchases both sporting goods and electronics
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 123
