Special purpose entities FOREIGN EXCHANGE

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] Chapter 33 – Business Combinations Page 433 The measurement period ends as soon as the acquirer obtains enough information to finalise the provisional amounts, but in any event does not exceed one year from the date of acquisition. [IFRS 3.45] Adjustments that arise after the end of the measurement period should be recognised as revisions of estimates in accordance with IAS 8 Accounting policies, changes in accounting estimates and errors and therefore recognised in profit or loss in the current and future periods. Where an error is identified, retrospective treatment is required in accordance with IAS 8. The adjustment of provisional figures should reflect new information about facts and circumstances that existed at the acquisition date. This also extends to the recognition of new assets or liabilities if this new information would have led to their recognition, had it been known at the acquisition date. [IFRS 3.45] Illustration 7 XYZ acquired ABC on 30 June 2007. By 31 December 2007, the end of its 2007 reporting period, XYZ had provisional fair values for the following: 1 trademarks effective in certain foreign territories of CU400,000. These had an average remaining useful life of 10 years at the acquisition date. The acquisition date fair value was finalised at CU500,000 on 31 March 2008. 2 trading rights in other foreign territories of CU600,000. These had an average remaining useful life of 5 years at the acquisition date. The acquisition date fair value was finalised at CU300,000 on 30 September 2008. XYZ’s 2007 financial statements: Recognised in profit or loss in 2007: Amortisation of trademarks and trading rights for 6 months based on their provisional values Intangible assets: Trademarks and trading rights at provisional values less 2007 amortisation XYZ’s 2008 financial statements: The finalisation of the fair value of the trademarks is made within the measurement period 12 months from the acquisition date, so it is related back to that date. The finalisation in respect of the trading rights is made after the end of that period, so it is recognised in profit or loss prospectively from 30 September 2008. For the trademarks, the 2007 comparative figures will be restated for the revised amortisation and carrying amount.

7.4 Subsequent measurement

The assets and liabilities identified and recognised, along with any equity instrument issued as a result of a business combination, should be measured in accordance with the relevant standard following the recognition of the business combination. However, IFRS 3 provides specific guidance in the area of: [IFRS 3.54]  reacquired rights – where a reacquired right is recognised as an intangible asset, it should be amortised over its remaining contractual period;