Scope of consolidated financial statements

Chapter 33 – Business Combinations Page 432 arrangements should be recognised in accordance with IAS 19 Employee benefits, not at fair value;  indemnification assets – where the seller in a business combination agrees to indemnify the acquirer for the uncertain outcome of an event or item, the indemnification asset should be recognised at the same time as the recognition of the indemnified item. This will usually be measured at fair value at the acquisition date;  reacquired rights – an example of a reacquired right is where an acquirer had previously given the acquiree the right to use the acquirer’s trade name. As a result of the business combination the acquirer reacquires this right that it had previously given up. The reacquired right should be recognised at the date of acquisition on the basis of the remaining contractual term of the related contract, even if the normal fair value rule would require the likelihood of the rights being renewed for another term to be considered;  share-based payment awards – where the acquirer has replaced share-based payment awards in the acquiree with those in the acquirer, these should be measured in accordance with IFRS 2 Share-based payment, not at fair value; and  assets held for sale – where the acquired entity holds a non-current asset, or disposal group, that is classified as held for sale at the acquisition date in accordance with IFRS 5 Non-current assets held for sale and discontinued operations, the acquirer should measure it at fair value less costs to sell at the date of acquisition, not at fair value. Application of the acquisition method may result in new assets and liabilities being identified and recognised that did not previously form part of the acquiree’s net assets, for example brands, licences and trademarks. Illustration 6 At the acquisition date an acquirer has established fair values for items recognised as an expense in profit or loss by the acquiree and is trying to decide whether they can be classified as identifiable assets. 1 In-process development of new compounds for food flavouring – CU500,000 2 Patents developed internally – CU2.5 million 3 Selling efforts leading to an order backlog – CU3 million 4. Franchise agreements developed internally – CU700,000. All of the above items could be sold to another buyer and are therefore separable, hence they should all be recognised as identifiable intangible assets.

7.3 Initial recognition and subsequent adjustments

Every effort should be made by an acquirer to complete its assessment of the identifiable assets and liabilities acquired by the end of the reporting period in which the combination takes place. However, it is sometimes not practicable for the assessment to be finalised in this time scale, especially when the valuation of non-current assets including intangibles is required, or the transaction occurred near the end of the acquirer’s reporting period. In such circumstances, the acquirer is required to make a provisional assessment at the end of the first reporting period. These provisional values should subsequently be finalised within the measurement period and adjustments should be made directly to the identifiable net assets and the consideration transferred and hence to goodwill – see below accordingly. [IFRS 3.45]