Acquisition as part of a business combination

Learning objectives

• Explain why an intangible asset acquired in a business combination is recognised separately from goodwill (identifiability) and measured at fair value.L2, L3
• Analyse the recognition of a brand or an in-process research and development project acquired in a business combination, compared with the same item generated internally.L3, L4

Normative references

• IAS 38 §33The cost of an intangible asset acquired in a business combination (IFRS 3) is its fair value at the acquisition date. That fair value reflects market participants' expectations about the probability of the future benefits: the probability criterion (para. 21(a)) is always considered to be satisfied; if the asset is separable or arises from contractual or other legal rights, the reliable measurement criterion (para. 21(b)) is also satisfied.
• IAS 38 §34The acquirer recognises an in-process research and development project of the acquiree separately from goodwill if the project meets the definition of an intangible asset.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

11 questions

• The Alto group obtains control of Brio in a business combination. Brio is carrying out a research and development project on a new material; it has always expensed this expenditure and the project is not on its balance sheet. The project is protected by patent filings and an expert estimates its fair value at 4,000,000 at the acquisition date. Alto's finance director proposes to subsume it in goodwill, since it does not appear on Brio's balance sheet. Which treatment should be used in Alto's consolidated financial statements?L4
• True or false? For an intangible asset acquired in a business combination, the cost used at initial measurement is its fair value at the acquisition date.L2
• The Asteval group obtains control of Briven in a business combination and recognises a Briven patent separately from goodwill. In Briven's accounts, the patent cost 200,000 and is carried at 80,000. An independent valuer estimates its fair value at the acquisition date at 350,000. At what amount does Asteval initially recognise the patent?L2
• In a business combination, the acquirer takes over a brand owned by the acquiree. How is the cost of this brand determined for the acquirer?L2
• On obtaining control of Nexo, the Aldra group takes over an in-process research and development project, protected by patents filed by Nexo. Why does Aldra recognise this project separately from goodwill?L2
• The Ferval group acquires Lumis, which is carrying out an in-process research and development project that meets the definition of an intangible asset. Lumis has never recognised this project as an asset. Which statements are correct for Ferval's consolidated financial statements?L3
• The Pavane group obtains control of Selva in a business combination. Selva runs a registered clothing brand, created internally and absent from its balance sheet; it has spent 600,000 on advertising it over the years. An independent valuer estimates the fair value of the brand at 2,500,000 at the acquisition date. At what amount is the brand recognised in Pavane's consolidated financial statements?L3
• The Teodor group has owned for twenty years a confectionery brand that it created and developed itself. This year, it acquires Mielina in a business combination; Mielina's brand is measured at 1,800,000 at the acquisition date, and an expert estimates that Teodor's historical brand would be worth 5,000,000. The finance director wishes to present both brands consistently. Which treatment should be adopted in the consolidated financial statements?L4
• The laboratory Cerevia acquires the biotech Ostrea in a business combination. Ostrea is running a molecule project protected by patents, which it has always expensed; an expert measures its fair value at 3,000,000 at the acquisition date. After the acquisition, Cerevia continues the project: part of the work consists of exploring new scientific avenues, another part of finalising a process whose feasibility has been demonstrated. The management accountant proposes to subsume the project in goodwill and to capitalise all future expenditure, since the project is now an asset. Write a position paper.L4
• Two research projects on composite materials are at the same stage. The first has been run internally by Arvelle from the outset; the second is taken over by Arvelle when it acquires Duna in a business combination, and it meets the definition of an intangible asset. Which comparison is correct in Arvelle's consolidated financial statements?L4
• In 20X1, the Tessin group acquires Brivo in a business combination; the Brivo brand is recognised at its fair value at the acquisition date, i.e. 1,200,000. In 20X2, Tessin spends 300,000 on advertising campaigns to relaunch the Brivo brand and 200,000 to promote its own Tessin brand, created internally. Which treatment is correct in 20X2?L3