Section 73 - AASB 3 - Business Combinations - July 2004 - To give effect to the principle in paragraph 72, the acquirer shall disclose the following information: | Zoe
73 To give effect to the principle in paragraph 72, the acquirer shall disclose the following information:
(a) the amount and an explanation of any gain or loss recognised in the current period that:
(i) relates to the identifiable assets acquired or liabilities or contingent liabilities assumed in a business combination that was effected in the current or a previous period; and
(ii) is of such size, nature or incidence that disclosure is relevant to an understanding of the combined entity’s financial performance;
(b) if the initial accounting for a business combination that was effected in the immediately preceding period was determined only provisionally at the end of that period, the amounts and explanations of the adjustments to the provisional values recognised during the current period;
(c) the information about error corrections required to be disclosed by AASB 108 for any of the acquiree’s identifiable assets, liabilities or contingent liabilities, or changes in the values assigned to those items, that the acquirer recognises during the current period in accordance with paragraphs 63 and 64.
74 An entity shall disclose information that enables users of its financial statements to evaluate changes in the carrying amount of goodwill during the period.
75 To give effect to the principle in paragraph 74, the entity shall disclose a reconciliation of the carrying amount of goodwill at the beginning and end of the period, showing separately:
(a) the gross amount and accumulated impairment losses at the beginning of the period;
(b) additional goodwill recognised during the period except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale in accordance with AASB 5;
(c) adjustments resulting from the subsequent recognition of deferred tax assets during the period in accordance with paragraph 65;
(d) goodwill included in a disposal group classified as held for sale in accordance with AASB 5 and goodwill derecognised during the period without having previously been included in a disposal group classified as held for sale;
(e) impairment losses recognised during the period in accordance with AASB 136;
(f) net exchange differences arising during the period in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates;
(g) any other changes in the carrying amount during the period; and
(h) the gross amount and accumulated impairment losses at the end of the period.
76 The entity discloses information about the recoverable amount and impairment of goodwill in accordance with AASB 136 in addition to the information required to be disclosed by paragraph 75(e).
77 If in any situation the information required to be disclosed by this Standard does not satisfy the objectives set out in paragraphs 66, 72 and 74, the entity shall disclose such additional information as is necessary to meet those objectives.
Restructures of Local Governments Restructures of Local Governments
Restructures of Local Governments
Aus77.1 Where assets and liabilities are transferred to a local government from another local government at no cost, or for nominal consideration, pursuant to legislation, ministerial directive or other externally imposed requirement, the transferee local government shall recognise assets and liabilities and any gain or loss.
Aus77.2 Assets transferred to a local government from another local government at no cost, or for nominal consideration, by virtue of legislation, ministerial directive or other externally imposed requirement shall be recognised initially either at the amounts at which the assets were recognised by the transferor local government as at the date of the transfer, or at their fair values.
Aus77.3 A restructure of local governments involves the transfer of assets and liabilities of a local government to another local government, at no cost or for nominal consideration, by virtue of legislation, ministerial directive or other externally imposed requirement. This gives rise to assets and liabilities and a gain or loss of the transferee local government. A restructure of local governments may take the form of a new local government being constituted and other local governments being abolished as a result of a State government’s policy to effectively amalgamate a number of local governments.
Aus77.4 A restructure of local governments involves a change in the resources controlled by the local governments involved in the restructure. The transferor local government will decrease its assets by the carrying amount of the assets transferred. The transferred assets will usually be recognised by the transferee at their carrying amounts in the books of the transferor at the time of the transfer. Such amounts provide a practical basis for recognising the transfer of assets, particularly when many assets are involved, as is usually the case in a restructure of local governments. However, the recognition of transferred assets at fair value is permitted by this Standard.
Aus77.5 The restructures of local governments referred to in paragraphs Aus77.3 and Aus77.4 do not involve transfers between the local government and its ownership group but give rise to a gain or loss that is recognised in the operating statement.
Aus77.6 Assets and liabilities transferred during the reporting period and recognised in accordance with paragraph Aus77.1 shall be disclosed separately, by class, by way of note or otherwise, and the transferor local government shall be identified.
Aus77.7 The disclosures required by paragraph Aus77.6 will assist users to identify the assets and liabilities recognised as a result of a restructure separately from other assets and liabilities and to identify the transferor local government.
Transitional Provisions and Effective Da Transitional Provisions and Effective Date of IFRS 3
Transitional Provisions and Effective Date of IFRS 3
78 [Deleted by the AASB]
79 [Deleted by the AASB]
80 [Deleted by the AASB]
81 [Deleted by the AASB]
82 [Deleted by the AASB]
83 [Deleted by the AASB]
84 [Deleted by the AASB]
85 [Deleted by the AASB]
Withdrawal of Other IASB Pronouncements Withdrawal of Other IASB Pronouncements
Withdrawal of Other IASB Pronouncements
86 [Deleted by the AASB]
87 [Deleted by the AASB]
Appendix A Appendix A
Appendix A
Defined terms
acquisition date
The date on which the acquirer effectively obtains control of the acquiree.
agreement date
The date that a substantive agreement between the combining parties is reached and, in the case of publicly listed entities, announced to the public. In the case of a hostile takeover, the earliest date that a substantive agreement between the combining parties is reached is the date that a sufficient number of the acquiree’s owners have accepted the acquirer’s offer for the acquirer to obtain control of the acquiree.
business
An integrated set of activities and assets conducted and managed for the purpose of providing:(a) a return to investors; or(b) lower costs or other economic benefits directly and proportionately to policyholders or participants.A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business.
business combination
The bringing together of separate entities or businesses into one reporting entity.
business combination involving entities or businesses under common control
A business combination in which all of the combining entities or businesses ultimately are controlled by the same party or parties both before and after the combination, and that control is not transitory.
contingent liability
Contingent liability has the meaning given to it in AASB 137 Provisions, Contingent Liabilities and Contingent Assets, that is:
(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or(b) a present obligation that arises from past events but is not recognised because:(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or(ii) the amount of the obligation cannot be measured with sufficient reliability.
control
The power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities.
date of exchange
When a business combination is achieved in a single exchange transaction, the date of exchange is the acquisition date. When a business combination involves more than one exchange transaction, for example when it is achieved in stages by successive share purchases, the date of exchange is the date that each individual investment is recognised in the financial statements of the acquirer.
fair value
The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
goodwill
Future economic benefits arising from assets that are not capable of being individually identified and separately recognised.
government
The Australian Government, the Government of the Australian Capital Territory, New South Wales, the Northern Territory, Queensland, South Australia, Tasmania, Victoria or Western Australia.
government department
A government controlled entity, created pursuant to administrative arrangements or otherwise designated as a government department by the government which controls it.
intangible asset
Intangible asset has the meaning given to it in AASB 138 Intangible Assets, that is, an identifiable non-monetary asset without physical substance.
joint venture
Joint venture has the meaning given to it in AASB 131 Interests in Joint Ventures, that is, a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.
local government
An entity comprising all entities controlled by a governing body elected or appointed pursuant to a Local Government Act or similar legislation.
minority interest
That portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.
mutual entity
An entity other than an investor-owned entity, such as a mutual insurance company or a mutual cooperative entity, that provides lower costs or other economic benefits directly and proportionately to its policyholders or participants.
parent
An entity that has one or more subsidiaries.
probable
More likely than not.
reporting entity
An entity in respect of which it is reasonable to expect the existence of users who rely on the entity’s general purpose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of resources. A reporting entity can be a single entity or a group comprising a parent and all of its subsidiaries.Clarification of the definition of reporting entity in the context of the Australian public sectorIn respect of public sector entities, local governments, governments and most, if not all, government departments are reporting entities.
subsidiary
An entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).
Additional Australian Defined Terms
[Deleted by the AASB]
Defined terms Defined terms
Defined terms
acquisition date
The date on which the acquirer effectively obtains control of the acquiree.
agreement date
The date that a substantive agreement between the combining parties is reached and, in the case of publicly listed entities, announced to the public. In the case of a hostile takeover, the earliest date that a substantive agreement between the combining parties is reached is the date that a sufficient number of the acquiree’s owners have accepted the acquirer’s offer for the acquirer to obtain control of the acquiree.
business
An integrated set of activities and assets conducted and managed for the purpose of providing:(a) a return to investors; or(b) lower costs or other economic benefits directly and proportionately to policyholders or participants.A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business.
business combination
The bringing together of separate entities or businesses into one reporting entity.
business combination involving entities or businesses under common control
A business combination in which all of the combining entities or businesses ultimately are controlled by the same party or parties both before and after the combination, and that control is not transitory.
contingent liability
Contingent liability has the meaning given to it in AASB 137 Provisions, Contingent Liabilities and Contingent Assets, that is:
(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or(b) a present obligation that arises from past events but is not recognised because:(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or(ii) the amount of the obligation cannot be measured with sufficient reliability.
control
The power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities.
date of exchange
When a business combination is achieved in a single exchange transaction, the date of exchange is the acquisition date. When a business combination involves more than one exchange transaction, for example when it is achieved in stages by successive share purchases, the date of exchange is the date that each individual investment is recognised in the financial statements of the acquirer.
fair value
The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
goodwill
Future economic benefits arising from assets that are not capable of being individually identified and separately recognised.
government
The Australian Government, the Government of the Australian Capital Territory, New South Wales, the Northern Territory, Queensland, South Australia, Tasmania, Victoria or Western Australia.
government department
A government controlled entity, created pursuant to administrative arrangements or otherwise designated as a government department by the government which controls it.
intangible asset
Intangible asset has the meaning given to it in AASB 138 Intangible Assets, that is, an identifiable non-monetary asset without physical substance.
joint venture
Joint venture has the meaning given to it in AASB 131 Interests in Joint Ventures, that is, a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control.
local government
An entity comprising all entities controlled by a governing body elected or appointed pursuant to a Local Government Act or similar legislation.
minority interest
That portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.
mutual entity
An entity other than an investor-owned entity, such as a mutual insurance company or a mutual cooperative entity, that provides lower costs or other economic benefits directly and proportionately to its policyholders or participants.
parent
An entity that has one or more subsidiaries.
probable
More likely than not.
reporting entity
An entity in respect of which it is reasonable to expect the existence of users who rely on the entity’s general purpose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of resources. A reporting entity can be a single entity or a group comprising a parent and all of its subsidiaries.Clarification of the definition of reporting entity in the context of the Australian public sectorIn respect of public sector entities, local governments, governments and most, if not all, government departments are reporting entities.
subsidiary
An entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).
Additional Australian Defined Terms Additional Australian Defined Terms
Additional Australian Defined Terms
[Deleted by the AASB]
Appendix B Appendix B
Appendix B
Application supplement
Reverse acquisitions
B1 As noted in paragraph 21, in some business combinations, commonly referred to as reverse acquisitions, the acquirer is the entity whose equity interests have been acquired and the issuing entity is the acquiree. This might be the case when, for example, a private entity arranges to have itself ‘acquired’ by a smaller public entity as a means of obtaining a stock exchange listing. Although legally the issuing public entity is regarded as the parent and the private entity is regarded as the subsidiary, the legal subsidiary is the acquirer if it has the power to govern the financial and operating policies of the legal parent so as to obtain benefits from its activities.
B2 An entity shall apply the guidance in paragraphs B3-B15 when accounting for a reverse acquisition.
B3 Reverse acquisition accounting determines the allocation of the cost of the business combination as at the acquisition date and does not apply to transactions after the combination.
Cost of the business combination
B4 When equity instruments are issued as part of the cost of the business combination, paragraph 24 requires the cost of the combination to include the fair value of those equity instruments at the date of exchange. Paragraph 27 notes that, in the absence of a reliable published price, the fair value of the equity instruments can be estimated by reference to the fair value of the acquirer or the fair value of the acquiree, whichever is more clearly evident.
B5 In a reverse acquisition, the cost of the business combination is deemed to have been incurred by the legal subsidiary (i.e. the acquirer for accounting purposes) in the form of equity instruments issued to the owners of the legal parent (i.e. the acquiree for accounting purposes). If the published price of the equity instruments of the legal subsidiary is used to determine the cost of the combination, a calculation shall be made to determine the number of equity instruments the legal subsidiary would have had to issue to provide the same percentage ownership interest of the combined entity to the owners of the legal parent as they have in the combined entity as a result of the reverse acquisition. The fair value of the number of equity instruments so calculated shall be used as the cost of the combination.
B6 If the fair value of the equity instruments of the legal subsidiary is not otherwise clearly evident, the total fair value of all the issued equity instruments of the legal parent before the business combination shall be used as the basis for determining the cost of the combination.
Preparation and presentation of consolidated financial statements
B7 Consolidated financial statements prepared following a reverse acquisition shall be issued under the name of the legal parent, but described in the notes as a continuation of the financial statements of the legal subsidiary (i.e. the acquirer for accounting purposes). Because the consolidated financial statements represents a continuation of the financial statements of the legal subsidiary:
(a) the assets and liabilities of the legal subsidiary shall be recognised and measured in those consolidated financial statements at their pre-combination carrying amounts.
(b) the retained earnings and other equity balances recognised in those consolidated financial statements shall be the retained earnings and other equity balances of the legal subsidiary immediately before the business combination.
(c) the amount recognised as issued equity instruments in those consolidated financial statements shall be determined by adding to the issued equity of the legal subsidiary immediately before the business combination the cost of the combination determined as described in paragraphs B4-B6. However, the equity structure appearing in those consolidated financial statements (i.e. the number and type of equity instruments issued) shall reflect the equity structure of the legal parent, including the equity instruments issued by the legal parent to effect the combination.
(d) comparative information presented in those consolidated financial statements shall be that of the legal subsidiary.
B8 Reverse acquisition accounting applies only in the consolidated financial statements. Therefore, in the legal parent’s separate financial statements, if any, the investment in the legal subsidiary is accounted for in accordance with the requirements in AASB 127 on accounting for investments in an investor’s separate financial statements.
B9 Consolidated financial statements prepared following a reverse acquisition shall reflect the fair values of the assets, liabilities and contingent liabilities of the legal parent (i.e. the acquiree for accounting purposes). Therefore, the cost of the business combination shall be allocated by measuring the identifiable assets, liabilities and contingent liabilities of the legal parent that satisfy the recognition criteria in paragraph 37 at their fair values at the acquisition date. Any excess of the cost of the combination over the acquirer’s interest in the net fair value of those items shall be accounted for in accordance with paragraphs 51-55. Any excess of the acquirer’s interest in the net fair value of those items over the cost of the combination shall be accounted for in accordance with paragraph 56.
Minority interest
B10 In some reverse acquisitions, some of the owners of the legal subsidiary do not exchange their equity instruments for equity instruments of the legal parent. Although the entity in which those owners hold equity instruments (the legal subsidiary) acquired another entity (the legal parent), those owners shall be treated as a minority interest in the consolidated financial statements prepared after the reverse acquisition. This is because the owners of the legal subsidiary that do not exchange their equity instruments for equity instruments of the legal parent have an interest only in the results and net assets of the legal subsidiary, and not in the results and net assets of the combined entity. Conversely, all of the owners of the legal parent, notwithstanding that the legal parent is regarded as the acquiree, have an interest in the results and net assets of the combined entity.
B11 Because the assets and liabilities of the legal subsidiary are recognised and measured in the consolidated financial statements at their pre-combination carrying amounts, the minority interest shall reflect the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the legal subsidiary’s net assets.
Earnings per share
B12 As noted in paragraph B7(c), the equity structure appearing in the consolidated financial statements prepared following a reverse acquisition reflects the equity structure of the legal parent, including the equity instruments issued by the legal parent to effect the business combination.
B13 For the purpose of calculating the weighted average number of ordinary shares outstanding (the denominator) during the period in which the reverse acquisition occurs:
(a) the number of ordinary shares outstanding from the beginning of that period to the acquisition date shall be deemed to be the number of ordinary shares issued by the legal parent to the owners of the legal subsidiary; and
(b) the number of ordinary shares outstanding from the acquisition date to the end of that period shall be the actual number of ordinary shares of the legal parent outstanding during that period.
B14 The basic earnings per share disclosed for each comparative period before the acquisition date that is presented in the consolidated financial statements following a reverse acquisition shall be calculated by dividing the profit or loss of the legal subsidiary attributable to ordinary shareholders in each of those periods by the number of ordinary shares issued by the legal parent to the owners of the legal subsidiary in the reverse acquisition.
B15 The calculations outlined in paragraphs B13 and B14 assume that there were no changes in the number of the legal subsidiary’s issued ordinary shares during the comparative periods and during the period from the beginning of the period in which the reverse acquisition occurred to the acquisition date. The calculation of earnings per share shall be appropriately adjusted to take into account the effect of a change in the number of the legal subsidiary’s issued ordinary shares during those periods.
Allocating the cost of a business combination
B16 This Standard requires an acquirer to recognise the acquiree’s identifiable assets, liabilities and contingent liabilities that satisfy the relevant recognition criteria at their fair values at the acquisition date. For the purpose of allocating the cost of a business combination, the acquirer shall treat the following measures as fair values.
(a) For financial instruments traded in an active market the acquirer shall use current market values.
(b) For financial instruments not traded in an active market the acquirer shall use estimated values that take into consideration features such as price-earnings ratios, dividend yields and expected growth rates of comparable instruments of entities with similar characteristics.
(c) For receivables, beneficial contracts and other identifiable assets the acquirer shall use the present values of the amounts to be received, determined at appropriate current interest rates, less allowances for uncollectibility and collection costs, if necessary. However, discounting is not required for short-term receivables, beneficial contracts and other identifiable assets when the difference between the nominal and discounted amounts is not material.
(d) For inventories of:
(i) finished goods and merchandise the acquirer shall use selling prices less the sum of (1) the costs of disposal and (2) a reasonable profit allowance for the selling effort of the acquirer based on profit for similar finished goods and merchandise;
(ii) work in progress the acquirer shall use selling prices of finished goods less the sum of (1) costs to complete, (2) costs of disposal and (3) a reasonable profit allowance for the completing and selling effort based on profit for similar finished goods; and
(iii) raw materials the acquirer shall use current replacement costs.
(e) For land and buildings the acquirer shall use market values.
(f) For plant and equipment the acquirer shall use market values, normally determined by appraisal. If there is no market-based evidence of fair value because of the specialised nature of the item of plant and equipment and the item is rarely sold, except as part of a continuing business, an acquirer may need to estimate fair value using an income or a depreciated replacement cost approach.
(g) For intangible assets the acquirer shall determine fair value:
(i) by reference to an active market as defined in AASB 138; or
(ii) if no active market exists, on a basis that reflects the amounts the acquirer would have paid for the assets in arm’s length transactions between knowledgeable willing parties, based on the best information available (see AASB 138 for further guidance on determining the fair values of intangible assets acquired in business combinations).
(h) For net employee benefit assets or liabilities for defined benefit plans the acquirer shall use the present value of the defined benefit obligation less the fair value of any plan assets. However, an asset is recognised only to the extent that it is probable it will be available to the acquirer in the form of refunds from the plan or a reduction in future contributions.
(i) For tax assets and liabilities the acquirer shall use the amount of the tax benefit arising from tax losses or the taxes payable in respect of profit or loss in accordance with AASB 112, assessed from the perspective of the combined entity. The tax asset or liability is determined after allowing for the tax effect of restating identifiable assets, liabilities and contingent liabilities to their fair values and is not discounted.
(j) For accounts and notes payable, long-term debt, liabilities, accruals and other claims payable the acquirer shall use the present values of amounts to be disbursed in settling the liabilities determined at appropriate current interest rates. However, discounting is not required for short-term liabilities when the difference between the nominal and discounted amounts is not material.
(k) For onerous contracts and other identifiable liabilities of the acquiree the acquirer shall use the present values of amounts to be disbursed in settling the obligations determined at appropriate current interest rates.
(l) For contingent liabilities of the acquiree the acquirer shall use the amounts that a third party would charge to assume those contingent liabilities. Such an amount shall reflect all expectations about possible cash flows and not the single most likely or the expected maximum or minimum cash flow.
B17 Some of the above guidance requires fair values to be estimated using present value techniques. If the guidance for a particular item does not refer to the use of present value techniques, such techniques may be used in estimating the fair value of that item.
Application supplement Application supplement
Application supplement
Reverse acquisitions Reverse acquisitions
Reverse acquisitions
B1 As noted in paragraph 21, in some business combinations, commonly referred to as reverse acquisitions, the acquirer is the entity whose equity interests have been acquired and the issuing entity is the acquiree. This might be the case when, for example, a private entity arranges to have itself ‘acquired’ by a smaller public entity as a means of obtaining a stock exchange listing. Although legally the issuing public entity is regarded as the parent and the private entity is regarded as the subsidiary, the legal subsidiary is the acquirer if it has the power to govern the financial and operating policies of the legal parent so as to obtain benefits from its activities.
B2 An entity shall apply the guidance in paragraphs B3-B15 when accounting for a reverse acquisition.
B3 Reverse acquisition accounting determines the allocation of the cost of the business combination as at the acquisition date and does not apply to transactions after the combination.
Cost of the business combination Cost of the business combination
Cost of the business combination
B4 When equity instruments are issued as part of the cost of the business combination, paragraph 24 requires the cost of the combination to include the fair value of those equity instruments at the date of exchange. Paragraph 27 notes that, in the absence of a reliable published price, the fair value of the equity instruments can be estimated by reference to the fair value of the acquirer or the fair value of the acquiree, whichever is more clearly evident.
B5 In a reverse acquisition, the cost of the business combination is deemed to have been incurred by the legal subsidiary (i.e. the acquirer for accounting purposes) in the form of equity instruments issued to the owners of the legal parent (i.e. the acquiree for accounting purposes). If the published price of the equity instruments of the legal subsidiary is used to determine the cost of the combination, a calculation shall be made to determine the number of equity instruments the legal subsidiary would have had to issue to provide the same percentage ownership interest of the combined entity to the owners of the legal parent as they have in the combined entity as a result of the reverse acquisition. The fair value of the number of equity instruments so calculated shall be used as the cost of the combination.
B6 If the fair value of the equity instruments of the legal subsidiary is not otherwise clearly evident, the total fair value of all the issued equity instruments of the legal parent before the business combination shall be used as the basis for determining the cost of the combination.
Preparation and presentation of consolid Preparation and presentation of consolidated financial statements
Preparation and presentation of consolidated financial statements
B7 Consolidated financial statements prepared following a reverse acquisition shall be issued under the name of the legal parent, but described in the notes as a continuation of the financial statements of the legal subsidiary (i.e. the acquirer for accounting purposes). Because the consolidated financial statements represents a continuation of the financial statements of the legal subsidiary:
(a) the assets and liabilities of the legal subsidiary shall be recognised and measured in those consolidated financial statements at their pre-combination carrying amounts.
(b) the retained earnings and other equity balances recognised in those consolidated financial statements shall be the retained earnings and other equity balances of the legal subsidiary immediately before the business combination.
(c) the amount recognised as issued equity instruments in those consolidated financial statements shall be determined by adding to the issued equity of the legal subsidiary immediately before the business combination the cost of the combination determined as described in paragraphs B4-B6. However, the equity structure appearing in those consolidated financial statements (i.e. the number and type of equity instruments issued) shall reflect the equity structure of the legal parent, including the equity instruments issued by the legal parent to effect the combination.
(d) comparative information presented in those consolidated financial statements shall be that of the legal subsidiary.
B8 Reverse acquisition accounting applies only in the consolidated financial statements. Therefore, in the legal parent’s separate financial statements, if any, the investment in the legal subsidiary is accounted for in accordance with the requirements in AASB 127 on accounting for investments in an investor’s separate financial statements.
B9 Consolidated financial statements prepared following a reverse acquisition shall reflect the fair values of the assets, liabilities and contingent liabilities of the legal parent (i.e. the acquiree for accounting purposes). Therefore, the cost of the business combination shall be allocated by measuring the identifiable assets, liabilities and contingent liabilities of the legal parent that satisfy the recognition criteria in paragraph 37 at their fair values at the acquisition date. Any excess of the cost of the combination over the acquirer’s interest in the net fair value of those items shall be accounted for in accordance with paragraphs 51-55. Any excess of the acquirer’s interest in the net fair value of those items over the cost of the combination shall be accounted for in accordance with paragraph 56.
Minority interest Minority interest
Minority interest
B10 In some reverse acquisitions, some of the owners of the legal subsidiary do not exchange their equity instruments for equity instruments of the legal parent. Although the entity in which those owners hold equity instruments (the legal subsidiary) acquired another entity (the legal parent), those owners shall be treated as a minority interest in the consolidated financial statements prepared after the reverse acquisition. This is because the owners of the legal subsidiary that do not exchange their equity instruments for equity instruments of the legal parent have an interest only in the results and net assets of the legal subsidiary, and not in the results and net assets of the combined entity. Conversely, all of the owners of the legal parent, notwithstanding that the legal parent is regarded as the acquiree, have an interest in the results and net assets of the combined entity.
B11 Because the assets and liabilities of the legal subsidiary are recognised and measured in the consolidated financial statements at their pre-combination carrying amounts, the minority interest shall reflect the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the legal subsidiary’s net assets.
Earnings per share Earnings per share
Earnings per share
B12 As noted in paragraph B7(c), the equity structure appearing in the consolidated financial statements prepared following a reverse acquisition reflects the equity structure of the legal parent, including the equity instruments issued by the legal parent to effect the business combination.
B13 For the purpose of calculating the weighted average number of ordinary shares outstanding (the denominator) during the period in which the reverse acquisition occurs:
(a) the number of ordinary shares outstanding from the beginning of that period to the acquisition date shall be deemed to be the number of ordinary shares issued by the legal parent to the owners of the legal subsidiary; and
(b) the number of ordinary shares outstanding from the acquisition date to the end of that period shall be the actual number of ordinary shares of the legal parent outstanding during that period.
B14 The basic earnings per share disclosed for each comparative period before the acquisition date that is presented in the consolidated financial statements following a reverse acquisition shall be calculated by dividing the profit or loss of the legal subsidiary attributable to ordinary shareholders in each of those periods by the number of ordinary shares issued by the legal parent to the owners of the legal subsidiary in the reverse acquisition.
B15 The calculations outlined in paragraphs B13 and B14 assume that there were no changes in the number of the legal subsidiary’s issued ordinary shares during the comparative periods and during the period from the beginning of the period in which the reverse acquisition occurred to the acquisition date. The calculation of earnings per share shall be appropriately adjusted to take into account the effect of a change in the number of the legal subsidiary’s issued ordinary shares during those periods.
Allocating the cost of a business combin Allocating the cost of a business combination
Allocating the cost of a business combination
B16 This Standard requires an acquirer to recognise the acquiree’s identifiable assets, liabilities and contingent liabilities that satisfy the relevant recognition criteria at their fair values at the acquisition date. For the purpose of allocating the cost of a business combination, the acquirer shall treat the following measures as fair values.
(a) For financial instruments traded in an active market the acquirer shall use current market values.
(b) For financial instruments not traded in an active market the acquirer shall use estimated values that take into consideration features such as price-earnings ratios, dividend yields and expected growth rates of comparable instruments of entities with similar characteristics.
(c) For receivables, beneficial contracts and other identifiable assets the acquirer shall use the present values of the amounts to be received, determined at appropriate current interest rates, less allowances for uncollectibility and collection costs, if necessary. However, discounting is not required for short-term receivables, beneficial contracts and other identifiable assets when the difference between the nominal and discounted amounts is not material.
(d) For inventories of:
(i) finished goods and merchandise the acquirer shall use selling prices less the sum of (1) the costs of disposal and (2) a reasonable profit allowance for the selling effort of the acquirer based on profit for similar finished goods and merchandise;
(ii) work in progress the acquirer shall use selling prices of finished goods less the sum of (1) costs to complete, (2) costs of disposal and (3) a reasonable profit allowance for the completing and selling effort based on profit for similar finished goods; and
(iii) raw materials the acquirer shall use current replacement costs.
(e) For land and buildings the acquirer shall use market values.
(f) For plant and equipment the acquirer shall use market values, normally determined by appraisal. If there is no market-based evidence of fair value because of the specialised nature of the item of plant and equipment and the item is rarely sold, except as part of a continuing business, an acquirer may need to estimate fair value using an income or a depreciated replacement cost approach.
(g) For intangible assets the acquirer shall determine fair value:
(i) by reference to an active market as defined in AASB 138; or
(ii) if no active market exists, on a basis that reflects the amounts the acquirer would have paid for the assets in arm’s length transactions between knowledgeable willing parties, based on the best information available (see AASB 138 for further guidance on determining the fair values of intangible assets acquired in business combinations).
(h) For net employee benefit assets or liabilities for defined benefit plans the acquirer shall use the present value of the defined benefit obligation less the fair value of any plan assets. However, an asset is recognised only to the extent that it is probable it will be available to the acquirer in the form of refunds from the plan or a reduction in future contributions.
(i) For tax assets and liabilities the acquirer shall use the amount of the tax benefit arising from tax losses or the taxes payable in respect of profit or loss in accordance with AASB 112, assessed from the perspective of the combined entity. The tax asset or liability is determined after allowing for the tax effect of restating identifiable assets, liabilities and contingent liabilities to their fair values and is not discounted.
(j) For accounts and notes payable, long-term debt, liabilities, accruals and other claims payable the acquirer shall use the present values of amounts to be disbursed in settling the liabilities determined at appropriate current interest rates. However, discounting is not required for short-term liabilities when the difference between the nominal and discounted amounts is not material.
(k) For onerous contracts and other identifiable liabilities of the acquiree the acquirer shall use the present values of amounts to be disbursed in settling the obligations determined at appropriate current interest rates.
(l) For contingent liabilities of the acquiree the acquirer shall use the amounts that a third party would charge to assume those contingent liabilities. Such an amount shall reflect all expectations about possible cash flows and not the single most likely or the expected maximum or minimum cash flow.
B17 Some of the above guidance requires fair values to be estimated using present value techniques. If the guidance for a particular item does not refer to the use of present value techniques, such techniques may be used in estimating the fair value of that item.
Illustrative Examples Illustrative Examples
The following guidance provides examples of items acquired in a business combination that meet the definition of an intangible asset and are therefore recognised under AASB 3 separately from goodwill, provided that their fair values can be measured reliably. To meet the definition of an intangible asset a non-monetary asset without physical substance must be identifiable, that is, it must arise from contractual or other legal rights or be separable.
The examples provided below are not intended to be an exhaustive list of items acquired in a business combination that meet the definition of an intangible asset. A non-monetary asset without physical substance acquired in a business combination might meet the identifiability criterion for identification as an intangible asset but not be included in this guidance.
Assets designated with the symbol are those that meet the definition of an intangible asset because they arise from contractual or other legal rights. Assets designated with the symbol do not arise from contractual or other legal rights, but meet the definition of an intangible asset because they are separable. Assets designated with the symbol might also be separable; however, separability is not a necessary condition for an asset to meet the contractual-legal criterion.
Trademarks are words, names, symbols or other devices used in trade to indicate the source of a product and to distinguish it from the products of others. A service mark identifies and distinguishes the source of a service rather than a product. Collective marks are used to identify the goods or services of members of a group. Certification marks are used to certify the geographical origin or other characteristics of a good or service.
Trademarks, trade names, service marks, collective marks and certification marks may be protected legally through registration with governmental agencies, continuous use in commerce, or by other means. Provided it is protected legally through registration or other means, a trademark or other mark acquired in a business combination is an intangible asset that meets the contractual-legal criterion. Otherwise, a trademark or other mark acquired in a business combination can meet the definition of an intangible asset provided the separability criterion is met, which would normally be the case.
The terms ‘brand’ and ‘brand name’ are often used as synonyms for trademarks and other marks. However, the former are general marketing terms that are typically used to refer to a group of complementary assets such as a trademark (or service mark) and its related trade name, formulas, recipes and technological expertise.
An Internet domain name is a unique alphanumeric name that is used to identify a particular numeric Internet address. Registration of a domain name creates an association between that name and a designated computer on the Internet for the period of the registration. Those registrations are renewable. A registered domain name acquired in a business combination is an intangible asset that meets the contractual-legal criterion.
A customer list consists of information about customers, such as their name and contact information. A customer list may also be in the form of a database that includes other information about the customers such as their order history and demographic information. A customer list does not generally arise from contractual or other legal rights. However, customer lists are valuable and are frequently leased or exchanged. Therefore, a customer list acquired in a business combination normally meets the separability criterion for identification as an intangible asset. However, a customer list acquired in a business combination would not meet that criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing or otherwise exchanging information about its customers.
An order or production backlog arises from contracts such as purchase or sales orders. An order or production backlog acquired in a business combination meets the contractual-legal criterion for identification as an intangible asset, even if the purchase or sales orders are cancellable.
If an entity establishes relationships with its customers through contracts, those customer relationships arise from contractual rights. Therefore, customer contracts and the related customer relationships acquired in a business combination meet the contractual-legal criterion for identification as intangible assets. This will be the case even if confidentiality or other contractual terms prohibit the sale or transfer of a contract separately from the acquired entity or business.
Customer relationships also meet the contractual-legal criterion for identification as intangible assets when an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date.
As noted in B2, an order or a production backlog arises from contracts such as purchase or sales orders, and is therefore also considered a contractual right. Consequently, if an entity has customer relationships with its customers through these types of contracts, the customer relationships also arise from contractual rights, and therefore meet the contractual-legal criterion for identification as intangible assets.
If a customer relationship acquired in a business combination does not arise from a contract, the relationship is an intangible asset if it meets the separability criterion. Exchange transactions for the same asset or a similar asset provide evidence of separability of a non-contractual customer relationship and might also provide information about exchange prices that should be considered when estimating fair value.
Artistic-related assets acquired in a business combination meet the criteria for identification as intangible assets if they arise from contractual or legal rights such as those provided by copyright. Copyrights can be transferred either in whole through assignments or in part through licensing agreements. An entity is not precluded from recognising a copyright intangible asset and any related assignments or licence agreements as a single asset, provided they have similar useful lives.
Contracts to service financial assets are one particular type of contract-based intangible asset. While servicing is inherent in all financial assets, it becomes a distinct asset (or liability):
(a) when contractually separated from the underlying financial asset by sale or securitisation of the assets with servicing retained; or
If mortgage loans, credit card receivables or other financial assets are acquired in a business combination with servicing retained, the inherent servicing rights are not a separate intangible asset because the fair value of those servicing rights is included in the measurement of the fair value of the acquired financial asset.
9 Employment contracts that are beneficial contracts from the perspective of the employer because the pricing of those contracts is below their current market value
If computer software and program formats acquired in a business combination are protected legally, such as by patent or copyright, they meet the contractual-legal criterion for identification as intangible assets.
Mask works are software permanently stored on a read-only memory chip as a series of stencils or integrated circuitry. Mask works may have legal protection. Mask works with legal protection that are acquired in a business combination also meet the contractual-legal criterion for identification as intangible assets.
Databases are collections of information, often stored in electronic form (such as on computer disks or files). A database that includes original works of authorship may be entitled to copyright protection. If a database acquired in a business combination is protected by copyright, it meets the contractual-legal criterion for identification as an intangible asset. However, a database typically includes information created as a consequence of an entity’s normal operations, such as customer lists, or specialised information such as scientific data or credit information. Databases that are not protected by copyright can be, and often are, exchanged, licensed or leased to others in their entirety or in part. Therefore, even if the future economic benefits from a database do not arise from legal rights, a database acquired in a business combination meets the separability criterion for identification as an intangible asset.
If the future economic benefits from a trade secret acquired in a business combination are legally protected, that asset meets the contractual-legal criterion for identification as an intangible asset. Otherwise, trade secrets acquired in a business combination meet the definition of an intangible asset only if the separability criterion is met, which is often likely to be the case.
The following examples illustrate the recognition in accordance with AASB 3 of customer relationship intangible assets acquired in a business combination.
Parent obtained control of Supplier in a business combination on 31 December 20X4. Supplier has a five-year agreement to supply goods to Buyer. Both Supplier and Parent believe that Buyer will renew the supply agreement at the end of the current contract. The supply agreement is not separable.
The supply agreement (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and therefore is recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Supplier establishes its relationship with Buyer through a contract, the customer relationship with Buyer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably. In determining the fair value of the customer relationship, Parent considers assumptions such as the expected renewal of the supply agreement.
Parent obtained control of Subsidiary in a business combination on 31 December 20X4. Subsidiary manufactures goods in two distinct lines of business – sporting goods and electronics. Customer purchases from Subsidiary both sporting goods and electronics. Subsidiary has a contract with Customer to be its exclusive provider of sporting goods. However, there is no contract for the supply of electronics to Customer. Both Subsidiary and Parent believe that there is only one overall customer relationship between Subsidiary and Customer.
The contract to be Customer’s exclusive supplier of sporting goods (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and is therefore recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Subsidiary establishes its relationship with Customer through a contract, the customer relationship with Customer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill, provided its fair value can be measured reliably. Because there is only one customer relationship with Customer, the fair value of that relationship incorporates assumptions regarding Subsidiary's relationship with Customer related to both sporting goods and electronics.
However, if both Parent and Subsidiary believed there were separate customer relationships with Customer – one for sporting goods and another for electronics – the customer relationship with respect to electronics would be assessed by Parent to determine whether it meets the separability criterion for identification as an intangible asset.
Entity A obtained control of Entity B in a business combination on 31 December 20X4. Entity B does business with its customers solely through purchase and sales orders. At 31 December 20X4, Entity B has a backlog of customer purchase orders from 60% of its customers, all of whom are recurring customers. The other 40% of Entity B's customers are also recurring customers. However, as of 31 December 20X4, Entity B does not have any open purchase orders or other contracts with those customers.
The purchase orders from 60% of Entity B's customers (whether cancellable or not) meet the contractual-legal criterion for identification as intangible assets, and are therefore recognised separately from goodwill, provided their fair values can be measured reliably. Additionally, because Entity B has established its relationship with 60% of its customers through contracts, those customer relationships meet the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably.
Because Entity B has a practice of establishing contracts with the remaining 40% of its customers, its relationship with those customers also arises through contractual rights, and therefore meets the contractual-legal criterion for identification as an intangible asset. Entity A recognises this customer relationship separately from goodwill, provided its fair value can be measured reliably, even though Entity B does not have contracts with those customers at 31 December 20X4.
Parent obtained control of Insurer in a business combination on 31 December 20X4. Insurer has a portfolio of one-year motor insurance contracts that are cancellable by policyholders. A reasonably predictable number of policyholders renew their insurance contracts each year.
Because Insurer establishes its relationships with policyholders through insurance contracts, the customer relationship with policyholders meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is recognised separately from goodwill, provided its fair value can be measured reliably. In determining the fair value of the customer relationship intangible asset, Parent considers estimates of renewals and cross-selling. AASB 136 Impairment of Assets and AASB 138 Intangible Assets apply to the customer relationship intangible asset.
In determining the fair value of the liability relating to the portfolio of insurance contracts, Parent considers estimates of cancellations by policyholders. AASB 4 Insurance Contracts permits, but does not require, an expanded presentation that splits the fair value of acquired insurance contracts into two components:
(a) a liability measured in accordance with the insurer’s accounting policies for insurance contracts that it issues; and
(b) an intangible asset, representing the fair value of the contractual rights and obligations acquired, to the extent that the liability does not reflect that fair value. This intangible asset is excluded from the scope of AASB 136 and AASB 138. After the business combination, Parent is required to measure that intangible asset on a basis consistent with the measurement of the related insurance liability.
The following example illustrates the application of the guidance on reverse acquisition accounting provided as an application supplement in paragraphs B1‑B15 of Appendix B of AASB 3.
This example illustrates the accounting for a reverse acquisition in which Entity A, the entity issuing equity instruments and therefore the legal parent, is acquired in a reverse acquisition by Entity B, the legal subsidiary, on 30 September 20X1. The accounting for any income tax effects is ignored in this example:
(a) On 30 September 20X1, A issues 2½ shares in exchange for each ordinary share of B. All of B’s shareholders exchange their shares in B. Therefore, A issues 150 ordinary shares in exchange for all 60 ordinary shares of B.
(b) The fair value of each ordinary share of B at 30 September 20X1 is CU40. The quoted market price of A’s ordinary shares at that date is CU12.
(c) The fair values of A’s identifiable assets and liabilities at 30 September 20X1 are the same as their carrying amounts, with the exception of non-current assets. The fair value of A’s non-current assets at 30 September 20X1 is CU1,500.
As a result of the issue of 150 ordinary shares by A, B’s shareholders own 60% of the issued shares of the combined entity (i.e. 150 shares out of 250 issued shares). The remaining 40% are owned by A’s shareholders. If the business combination had taken place in the form of B issuing additional ordinary shares to A’s shareholders in exchange for their ordinary shares in A, B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. B’s shareholders would then own 60 out of the 100 issued shares of B and therefore 60% of the combined entity.
Goodwill is measured as the excess of the cost of the business combination over the net fair value of A’s identifiable assets and liabilities. Therefore, goodwill is measured as follows:
CU
CU
Cost of the business combination
1,600
Net fair value of A’s identifiable assets and liabilities:Current assetsNon-current assetsCurrent liabilitiesNon-current liabilities
5001,500(300)(400)
1,300
Goodwill
300
Assume that B’s profit for the annual period ending 31 December 20X0 was CU600, and that the consolidated profit for the annual period ending 31 December 20X1 is CU800. Assume also that there was no change in the number of ordinary shares issued by B during the annual period ending 31 December 20X0 and during the period from 1 January 20X1 to the date of the reverse acquisition (30 September 20X1).
Number of shares deemed to be outstanding for the period from 1 January 20X1 to the acquisition date (i.e. the number of ordinary shares issued by A in the reverse acquisition)
150
Number of shares outstanding from the acquisition date to 31 December 20X1
250
Weighted average number of ordinary shares outstanding [(150 x 9/12) + (250 x 3/12)]
175
Earnings per share [800/175]
CU4.57
Restated earnings per share for the annual period ending 31 December 20X0 is 4.00 (i.e. the profit of B of 600 divided by the number of ordinary shares issued by A in the reverse acquisition).
In the above example, assume that only 56 of B’s ordinary shares are tendered for exchange rather than all 60. Because A issues 2½ shares in exchange for each ordinary share of B, A issues only 140 (rather than 150) shares. As a result, B’s shareholders own 58.3% of the issued shares of the combined entity (i.e. 140 shares out of 240 issued shares).
The cost of the business combination is calculated by assuming that the combination had taken place in the form of B issuing additional ordinary shares to the shareholders of A in exchange for their ordinary shares in A. In calculating the number of shares that would have to be issued by B, the minority interest is ignored. The majority shareholders own 56 shares of B. For this to represent a 58.3% ownership interest, B would have had to issue an additional 40 shares. The majority shareholders would then own 56 out of the 96 issued shares of B and therefore 58.3% of the combined entity.
As a result, the cost of the business combination is CU1,600 (i.e. 40 shares each with a fair value of CU40). This is the same amount as when all 60 of B’s ordinary shares are tendered for exchange. The cost of the combination does not change simply because some of B’s shareholders do not participate in the exchange.
The minority interest is represented by the 4 shares of the total 60 shares of B that are not exchanged for shares of A. Therefore, the minority interest is 6.7%. The minority interest reflects the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the net assets of the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a minority interest of 6.7% of the pre-combination carrying amounts of B’s net assets (i.e. CU134 or 6.7% of CU2,000).
The following example illustrates the application of the guidance on business combinations achieved in stages in paragraphs 58-60 of AASB 3. In particular, it deals with successive share purchases that result in an investee previously accounted for at fair value being included as a subsidiary in the consolidated financial statements.
Immediately following the example is a discussion of the outcome of applying the guidance in paragraphs 58-60 of AASB 3 to the example assuming the investee had previously been accounted for at cost or by applying the equity method, rather than at fair value.
Investor acquires a 20% ownership interest in Investee (a service company) on 1 January 20X1 for CU3,500,000 cash. At that date, the fair value of Investee’s identifiable assets is CU10,000,000, and the carrying amount of those assets is CU8,000,000. Investee has no liabilities or contingent liabilities at that date. The following shows Investee’s statement of financial position at 1 January 20X1 together with the fair values of the identifiable assets:
During the year ended 31 December 20X1, Investee reports a profit of CU6,000,000 but does not pay any dividends. In addition, the fair value of Investee’s land increases by CU3,000,000 to CU11,000,000. However, the amount recognised by Investee in respect of the land remains unchanged at CU6,000,000. The following shows Investee’s statement of financial position at 31 December 20X1 together with the fair values of the identifiable assets:
On 1 January 20X2, Investor acquires a further 60% ownership interest in Investee for CU22,000,000 cash, thereby obtaining control. Before obtaining control, Investor does not have significant influence over Investee, and accounts for its initial 20% investment at fair value with changes in value included in profit or loss. Investee’s ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share.[2]
Throughout the period 1 January 20X1 to 1 January 20X2, Investor’s issued equity was CU30,000,000. Investor’s only asset apart from its investment in Investee is cash.
Investor’s initial 20% investment in Investee is measured at CU3,500,000. However, Investee’s 1,000,000 ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share. Therefore, the carrying amount of Investor’s initial 20% investment is remeasured in Investor’s financial statements to CU6,000,000 at 31 December 20X1, with the CU2,500,000 increase recognised in profit or loss for the period. Therefore, Investor’s statement of financial position at 31 December 20X1, before the acquisition of the additional 60% ownership interest, is as follows:
Paragraph 25 of AASB 3 states that when a business combination involves more than one exchange transaction, the cost of the combination is the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). This means that for this example, the cost to Investor of the business combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000), irrespective of the fact that the carrying amount of the initial 20% interest has changed.
In addition, and in accordance with paragraph 58 of AASB 3, each transaction must be treated separately to determine the goodwill on that transaction, using cost and fair value information at the date of each exchange transaction. Therefore, Investor recognises the following amounts for goodwill in its consolidated financial statements:
The following shows Investor’s consolidation worksheet (all amounts in CU) immediately after the acquisition of the additional 60% ownership interest in Investee, together with consolidation adjustments and associated explanations:
To recognise goodwill on the initial 20% investment in Investee and record the elimination of that investment against associated equity balances
To recognise goodwill on the subsequent 60% investment in Investee and record elimination of that investment against associated equity balances
(a) investee’s identifiable net assets being stated at their full fair values at the date Investor obtains control of Investee. This means that the 20% minority interest in Investee also is stated at the minority’s 20% share of the fair values of Investee’s identifiable net assets;
(b) goodwill being recognised from the acquisition date at an amount based on treating each exchange transaction separately and using cost and fair value information at the date of each exchange transaction;
(d) an asset revaluation reserve of CU600,000. This amount reflects that part of the increase in the fair value of Investee’s identifiable net assets after the acquisition of the initial 20% interest that is attributable to that initial 20% interest [20% × CU3,000,000];
(e) a retained earnings balance of CU1,200,000. This amount reflects the changes in Investee’s retained earnings after Investor acquired its initial 20% interest that is attributable to that 20% interest [20% × CU6,000,000].
Therefore, the effect of applying the requirements in AASB 3 to business combinations involving successive share purchases for which the investment was previously accounted for at fair value with changes in value included in profit or loss is to cause:
changes in the fair value of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
As discussed above, paragraph 25 of AASB 3 requires the cost of a business combination involving more than one exchange transaction to be measured as the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). Therefore, irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, the cost to Investor of the combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000).
In addition, and again irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, each transaction must be treated separately for the purpose of determining the amount of goodwill on that transaction, using cost and fair value information at the date of each exchange transaction.
any changes in the carrying amount of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
Consequently, the consolidated financial statements immediately after Investor acquires the additional 60% ownership interest and obtains control of Investee would be the same irrespective of the method used to account for the initial 20% investment in Investee before obtaining control.
The following example illustrates the application of the guidance in paragraph 62 of AASB 3 on completing the initial accounting for a business combination when the acquirer has, at the end of the first period after the combination, accounted for the combination using provisional values. This example does not address the accounting for any income tax effects arising from the adjustments.
AASB 3 requires the acquirer to account for a business combination using provisional values if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination is effected. The acquirer is required to recognise any adjustments to those provisional values as a result of completing the initial accounting:
(i) the carrying amount of an identifiable asset, liability or contingent liability that is recognised or adjusted as a result of completing the initial accounting is calculated as if its fair value at the acquisition date had been recognised from that date;
(ii) goodwill or any gain recognised in accordance with paragraph 56 is adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognised or adjusted;
(iii) comparative information presented for the periods before the initial accounting for the combination is complete is presented as if the initial accounting had been completed from the acquisition date. This includes any additional depreciation, amortisation or other profit or loss effects recognised as a result of completing the initial accounting.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X4. The entity sought an independent appraisal for an item of property, plant and equipment acquired in the combination. However, the appraisal was not finalised by the time the entity completed its 20X4 annual financial statements. The entity recognised in its 20X4 annual financial statements a provisional fair value for the asset of CU30,000, and a provisional value for acquired goodwill of CU100,000. The item of property, plant and equipment had a remaining useful life at the acquisition date of five years.
Four months after the acquisition date, the entity received the independent appraisal, which estimated the asset’s fair value at the acquisition date at CU40,000.
As outlined in paragraph 62 of AASB 3, the acquirer is required to recognise any adjustments to provisional values as a result of completing the initial accounting from the acquisition date.
Therefore, in the 20X5 financial statements, an adjustment is made to the opening carrying amount of the item of property, plant and equipment. That adjustment is measured as the fair value adjustment at the acquisition date of CU10,000, less the additional depreciation that would have been recognised had the asset’s fair value at the acquisition date been recognised from that date (CU500 for three months’ depreciation to 31 December 20X4). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU10,000, and the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
In accordance with paragraph 69 of AASB 3, the entity discloses in its 20X4 financial statements that the initial accounting for the business combination has been determined only provisionally, and explains why this is the case. In accordance with paragraph 73(b) of AASB 3, the entity discloses in its 20X5 financial statements the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, the entity discloses that:
the fair value of the item of property, plant and equipment at the acquisition date has been increased by CU10,000 with a corresponding decrease in goodwill; and
the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
The following examples illustrate the application of the guidance in paragraphs 63 and 64 of AASB 3 on the accounting for error corrections related to the initial accounting for a business combination. These examples do not address the accounting for any income tax effects arising from the adjustments.
With three exceptions,[4] AASB 3 requires adjustments to be made to the initial accounting for a business combination after that initial accounting is complete only to correct an error in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. After that accounting is completed, adjustments cannot be recognised for the effect of changes in accounting estimates. In accordance with AASB 108, the effect of a change in an accounting estimate is recognised prospectively. AASB 108 provides guidance on distinguishing corrections of errors from changes in accounting estimates.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X1. As part of the initial accounting for that combination, the entity recognised goodwill of CU100,000. The carrying amount of goodwill at 31 December 20X1 was CU100,000.
During 20X2, the entity becomes aware of an error relating to the amount initially allocated to property, plant and equipment assets acquired in the business combination. In particular, CU20,000 of the CU100,000 initially allocated to goodwill should be allocated to property, plant and equipment assets that had a remaining useful life at the acquisition date of five years.
As outlined in paragraph 64 of AASB 3, AASB 108 requires the correction of an error to be accounted for retrospectively, and for the financial statements to be presented as if the error had never occurred by correcting the error in the comparative information for the prior period(s) in which it occurred.
Therefore, in the 20X2 financial statements, an adjustment is made to the opening carrying amount of property, plant and equipment assets. That adjustment is measured as the fair value adjustment at the acquisition date of CU20,000 less the amount that would have been recognised as depreciation of the fair value adjustment (CU1,000 for three months’ depreciation to 31 December 20X1). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU20,000, and the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been increased by CU20,000 with a corresponding decrease in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
This example assumes the same facts as in Example 8, except that the amount initially allocated to property, plant and equipment assets is decreased by CU20,000 to correct the error, rather than increased by CU20,000. This example also assumes that the entity determines that the recoverable amount of the additional goodwill is only CU17,000 at 31 December 20X1.
In the 20X2 financial statements, the opening carrying amount of property, plant and equipment assets is reduced by CU19,000, being the fair value adjustment at the acquisition date of CU20,000 less CU1,000 in depreciation expense recognised for the three-month period to 31 December 20X1. The carrying amount of goodwill is increased by CU17,000, being the increase in value at the acquisition date of CU20,000 less a CU3,000 impairment loss to reflect that the carrying amount of the adjustment exceeds its recoverable amount. The 20X1 comparative information is restated to reflect this adjustment and to exclude the CU1,000 depreciation and include the CU3,000 impairment loss.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been decreased by CU20,000 with a corresponding increase in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to exclude CU1,000 depreciation recognised during the year ended 31 December 20X1 and include a CU3,000 impairment loss for goodwill relating to the year ended 31 December 20X1.
Contents Contents
Illustrative Examples Illustrative Examples
Examples of items acquired in a business Examples of items acquired in a business combination that meet the definition of an intangible asset
The following guidance provides examples of items acquired in a business combination that meet the definition of an intangible asset and are therefore recognised under AASB 3 separately from goodwill, provided that their fair values can be measured reliably. To meet the definition of an intangible asset a non-monetary asset without physical substance must be identifiable, that is, it must arise from contractual or other legal rights or be separable.
The examples provided below are not intended to be an exhaustive list of items acquired in a business combination that meet the definition of an intangible asset. A non-monetary asset without physical substance acquired in a business combination might meet the identifiability criterion for identification as an intangible asset but not be included in this guidance.
Assets designated with the symbol are those that meet the definition of an intangible asset because they arise from contractual or other legal rights. Assets designated with the symbol do not arise from contractual or other legal rights, but meet the definition of an intangible asset because they are separable. Assets designated with the symbol might also be separable; however, separability is not a necessary condition for an asset to meet the contractual-legal criterion.
A Marketing-related intangible assets A Marketing-related intangible assets
Trademarks are words, names, symbols or other devices used in trade to indicate the source of a product and to distinguish it from the products of others. A service mark identifies and distinguishes the source of a service rather than a product. Collective marks are used to identify the goods or services of members of a group. Certification marks are used to certify the geographical origin or other characteristics of a good or service.
Trademarks, trade names, service marks, collective marks and certification marks may be protected legally through registration with governmental agencies, continuous use in commerce, or by other means. Provided it is protected legally through registration or other means, a trademark or other mark acquired in a business combination is an intangible asset that meets the contractual-legal criterion. Otherwise, a trademark or other mark acquired in a business combination can meet the definition of an intangible asset provided the separability criterion is met, which would normally be the case.
The terms ‘brand’ and ‘brand name’ are often used as synonyms for trademarks and other marks. However, the former are general marketing terms that are typically used to refer to a group of complementary assets such as a trademark (or service mark) and its related trade name, formulas, recipes and technological expertise.
An Internet domain name is a unique alphanumeric name that is used to identify a particular numeric Internet address. Registration of a domain name creates an association between that name and a designated computer on the Internet for the period of the registration. Those registrations are renewable. A registered domain name acquired in a business combination is an intangible asset that meets the contractual-legal criterion.
B Customer-related intangible assets B Customer-related intangible assets
A customer list consists of information about customers, such as their name and contact information. A customer list may also be in the form of a database that includes other information about the customers such as their order history and demographic information. A customer list does not generally arise from contractual or other legal rights. However, customer lists are valuable and are frequently leased or exchanged. Therefore, a customer list acquired in a business combination normally meets the separability criterion for identification as an intangible asset. However, a customer list acquired in a business combination would not meet that criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing or otherwise exchanging information about its customers.
An order or production backlog arises from contracts such as purchase or sales orders. An order or production backlog acquired in a business combination meets the contractual-legal criterion for identification as an intangible asset, even if the purchase or sales orders are cancellable.
If an entity establishes relationships with its customers through contracts, those customer relationships arise from contractual rights. Therefore, customer contracts and the related customer relationships acquired in a business combination meet the contractual-legal criterion for identification as intangible assets. This will be the case even if confidentiality or other contractual terms prohibit the sale or transfer of a contract separately from the acquired entity or business.
Customer relationships also meet the contractual-legal criterion for identification as intangible assets when an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date.
As noted in B2, an order or a production backlog arises from contracts such as purchase or sales orders, and is therefore also considered a contractual right. Consequently, if an entity has customer relationships with its customers through these types of contracts, the customer relationships also arise from contractual rights, and therefore meet the contractual-legal criterion for identification as intangible assets.
If a customer relationship acquired in a business combination does not arise from a contract, the relationship is an intangible asset if it meets the separability criterion. Exchange transactions for the same asset or a similar asset provide evidence of separability of a non-contractual customer relationship and might also provide information about exchange prices that should be considered when estimating fair value.
C Artistic-related intangible assets C Artistic-related intangible assets
Artistic-related assets acquired in a business combination meet the criteria for identification as intangible assets if they arise from contractual or legal rights such as those provided by copyright. Copyrights can be transferred either in whole through assignments or in part through licensing agreements. An entity is not precluded from recognising a copyright intangible asset and any related assignments or licence agreements as a single asset, provided they have similar useful lives.
D Contract-based intangible assets D Contract-based intangible assets
Contracts to service financial assets are one particular type of contract-based intangible asset. While servicing is inherent in all financial assets, it becomes a distinct asset (or liability):
(a) when contractually separated from the underlying financial asset by sale or securitisation of the assets with servicing retained; or
If mortgage loans, credit card receivables or other financial assets are acquired in a business combination with servicing retained, the inherent servicing rights are not a separate intangible asset because the fair value of those servicing rights is included in the measurement of the fair value of the acquired financial asset.
9 Employment contracts that are beneficial contracts from the perspective of the employer because the pricing of those contracts is below their current market value
E Technology-based intangible assets E Technology-based intangible assets
If computer software and program formats acquired in a business combination are protected legally, such as by patent or copyright, they meet the contractual-legal criterion for identification as intangible assets.
Mask works are software permanently stored on a read-only memory chip as a series of stencils or integrated circuitry. Mask works may have legal protection. Mask works with legal protection that are acquired in a business combination also meet the contractual-legal criterion for identification as intangible assets.
Databases are collections of information, often stored in electronic form (such as on computer disks or files). A database that includes original works of authorship may be entitled to copyright protection. If a database acquired in a business combination is protected by copyright, it meets the contractual-legal criterion for identification as an intangible asset. However, a database typically includes information created as a consequence of an entity’s normal operations, such as customer lists, or specialised information such as scientific data or credit information. Databases that are not protected by copyright can be, and often are, exchanged, licensed or leased to others in their entirety or in part. Therefore, even if the future economic benefits from a database do not arise from legal rights, a database acquired in a business combination meets the separability criterion for identification as an intangible asset.
If the future economic benefits from a trade secret acquired in a business combination are legally protected, that asset meets the contractual-legal criterion for identification as an intangible asset. Otherwise, trade secrets acquired in a business combination meet the definition of an intangible asset only if the separability criterion is met, which is often likely to be the case.
Customer relationship intangible assets Customer relationship intangible assets acquired in a business combination
The following examples illustrate the recognition in accordance with AASB 3 of customer relationship intangible assets acquired in a business combination.
Example 1 Example 1
The following guidance provides examples of items acquired in a business combination that meet the definition of an intangible asset and are therefore recognised under AASB 3 separately from goodwill, provided that their fair values can be measured reliably. To meet the definition of an intangible asset a non-monetary asset without physical substance must be identifiable, that is, it must arise from contractual or other legal rights or be separable.
The examples provided below are not intended to be an exhaustive list of items acquired in a business combination that meet the definition of an intangible asset. A non-monetary asset without physical substance acquired in a business combination might meet the identifiability criterion for identification as an intangible asset but not be included in this guidance.
Assets designated with the symbol are those that meet the definition of an intangible asset because they arise from contractual or other legal rights. Assets designated with the symbol do not arise from contractual or other legal rights, but meet the definition of an intangible asset because they are separable. Assets designated with the symbol might also be separable; however, separability is not a necessary condition for an asset to meet the contractual-legal criterion.
Trademarks are words, names, symbols or other devices used in trade to indicate the source of a product and to distinguish it from the products of others. A service mark identifies and distinguishes the source of a service rather than a product. Collective marks are used to identify the goods or services of members of a group. Certification marks are used to certify the geographical origin or other characteristics of a good or service.
Trademarks, trade names, service marks, collective marks and certification marks may be protected legally through registration with governmental agencies, continuous use in commerce, or by other means. Provided it is protected legally through registration or other means, a trademark or other mark acquired in a business combination is an intangible asset that meets the contractual-legal criterion. Otherwise, a trademark or other mark acquired in a business combination can meet the definition of an intangible asset provided the separability criterion is met, which would normally be the case.
The terms ‘brand’ and ‘brand name’ are often used as synonyms for trademarks and other marks. However, the former are general marketing terms that are typically used to refer to a group of complementary assets such as a trademark (or service mark) and its related trade name, formulas, recipes and technological expertise.
An Internet domain name is a unique alphanumeric name that is used to identify a particular numeric Internet address. Registration of a domain name creates an association between that name and a designated computer on the Internet for the period of the registration. Those registrations are renewable. A registered domain name acquired in a business combination is an intangible asset that meets the contractual-legal criterion.
A customer list consists of information about customers, such as their name and contact information. A customer list may also be in the form of a database that includes other information about the customers such as their order history and demographic information. A customer list does not generally arise from contractual or other legal rights. However, customer lists are valuable and are frequently leased or exchanged. Therefore, a customer list acquired in a business combination normally meets the separability criterion for identification as an intangible asset. However, a customer list acquired in a business combination would not meet that criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing or otherwise exchanging information about its customers.
An order or production backlog arises from contracts such as purchase or sales orders. An order or production backlog acquired in a business combination meets the contractual-legal criterion for identification as an intangible asset, even if the purchase or sales orders are cancellable.
If an entity establishes relationships with its customers through contracts, those customer relationships arise from contractual rights. Therefore, customer contracts and the related customer relationships acquired in a business combination meet the contractual-legal criterion for identification as intangible assets. This will be the case even if confidentiality or other contractual terms prohibit the sale or transfer of a contract separately from the acquired entity or business.
Customer relationships also meet the contractual-legal criterion for identification as intangible assets when an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date.
As noted in B2, an order or a production backlog arises from contracts such as purchase or sales orders, and is therefore also considered a contractual right. Consequently, if an entity has customer relationships with its customers through these types of contracts, the customer relationships also arise from contractual rights, and therefore meet the contractual-legal criterion for identification as intangible assets.
If a customer relationship acquired in a business combination does not arise from a contract, the relationship is an intangible asset if it meets the separability criterion. Exchange transactions for the same asset or a similar asset provide evidence of separability of a non-contractual customer relationship and might also provide information about exchange prices that should be considered when estimating fair value.
Artistic-related assets acquired in a business combination meet the criteria for identification as intangible assets if they arise from contractual or legal rights such as those provided by copyright. Copyrights can be transferred either in whole through assignments or in part through licensing agreements. An entity is not precluded from recognising a copyright intangible asset and any related assignments or licence agreements as a single asset, provided they have similar useful lives.
Contracts to service financial assets are one particular type of contract-based intangible asset. While servicing is inherent in all financial assets, it becomes a distinct asset (or liability):
(a) when contractually separated from the underlying financial asset by sale or securitisation of the assets with servicing retained; or
If mortgage loans, credit card receivables or other financial assets are acquired in a business combination with servicing retained, the inherent servicing rights are not a separate intangible asset because the fair value of those servicing rights is included in the measurement of the fair value of the acquired financial asset.
9 Employment contracts that are beneficial contracts from the perspective of the employer because the pricing of those contracts is below their current market value
If computer software and program formats acquired in a business combination are protected legally, such as by patent or copyright, they meet the contractual-legal criterion for identification as intangible assets.
Mask works are software permanently stored on a read-only memory chip as a series of stencils or integrated circuitry. Mask works may have legal protection. Mask works with legal protection that are acquired in a business combination also meet the contractual-legal criterion for identification as intangible assets.
Databases are collections of information, often stored in electronic form (such as on computer disks or files). A database that includes original works of authorship may be entitled to copyright protection. If a database acquired in a business combination is protected by copyright, it meets the contractual-legal criterion for identification as an intangible asset. However, a database typically includes information created as a consequence of an entity’s normal operations, such as customer lists, or specialised information such as scientific data or credit information. Databases that are not protected by copyright can be, and often are, exchanged, licensed or leased to others in their entirety or in part. Therefore, even if the future economic benefits from a database do not arise from legal rights, a database acquired in a business combination meets the separability criterion for identification as an intangible asset.
If the future economic benefits from a trade secret acquired in a business combination are legally protected, that asset meets the contractual-legal criterion for identification as an intangible asset. Otherwise, trade secrets acquired in a business combination meet the definition of an intangible asset only if the separability criterion is met, which is often likely to be the case.
The following examples illustrate the recognition in accordance with AASB 3 of customer relationship intangible assets acquired in a business combination.
Parent obtained control of Supplier in a business combination on 31 December 20X4. Supplier has a five-year agreement to supply goods to Buyer. Both Supplier and Parent believe that Buyer will renew the supply agreement at the end of the current contract. The supply agreement is not separable.
The supply agreement (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and therefore is recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Supplier establishes its relationship with Buyer through a contract, the customer relationship with Buyer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably. In determining the fair value of the customer relationship, Parent considers assumptions such as the expected renewal of the supply agreement.
Parent obtained control of Subsidiary in a business combination on 31 December 20X4. Subsidiary manufactures goods in two distinct lines of business – sporting goods and electronics. Customer purchases from Subsidiary both sporting goods and electronics. Subsidiary has a contract with Customer to be its exclusive provider of sporting goods. However, there is no contract for the supply of electronics to Customer. Both Subsidiary and Parent believe that there is only one overall customer relationship between Subsidiary and Customer.
The contract to be Customer’s exclusive supplier of sporting goods (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and is therefore recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Subsidiary establishes its relationship with Customer through a contract, the customer relationship with Customer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill, provided its fair value can be measured reliably. Because there is only one customer relationship with Customer, the fair value of that relationship incorporates assumptions regarding Subsidiary's relationship with Customer related to both sporting goods and electronics.
However, if both Parent and Subsidiary believed there were separate customer relationships with Customer – one for sporting goods and another for electronics – the customer relationship with respect to electronics would be assessed by Parent to determine whether it meets the separability criterion for identification as an intangible asset.
Entity A obtained control of Entity B in a business combination on 31 December 20X4. Entity B does business with its customers solely through purchase and sales orders. At 31 December 20X4, Entity B has a backlog of customer purchase orders from 60% of its customers, all of whom are recurring customers. The other 40% of Entity B's customers are also recurring customers. However, as of 31 December 20X4, Entity B does not have any open purchase orders or other contracts with those customers.
The purchase orders from 60% of Entity B's customers (whether cancellable or not) meet the contractual-legal criterion for identification as intangible assets, and are therefore recognised separately from goodwill, provided their fair values can be measured reliably. Additionally, because Entity B has established its relationship with 60% of its customers through contracts, those customer relationships meet the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably.
Because Entity B has a practice of establishing contracts with the remaining 40% of its customers, its relationship with those customers also arises through contractual rights, and therefore meets the contractual-legal criterion for identification as an intangible asset. Entity A recognises this customer relationship separately from goodwill, provided its fair value can be measured reliably, even though Entity B does not have contracts with those customers at 31 December 20X4.
Parent obtained control of Insurer in a business combination on 31 December 20X4. Insurer has a portfolio of one-year motor insurance contracts that are cancellable by policyholders. A reasonably predictable number of policyholders renew their insurance contracts each year.
Because Insurer establishes its relationships with policyholders through insurance contracts, the customer relationship with policyholders meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is recognised separately from goodwill, provided its fair value can be measured reliably. In determining the fair value of the customer relationship intangible asset, Parent considers estimates of renewals and cross-selling. AASB 136 Impairment of Assets and AASB 138 Intangible Assets apply to the customer relationship intangible asset.
In determining the fair value of the liability relating to the portfolio of insurance contracts, Parent considers estimates of cancellations by policyholders. AASB 4 Insurance Contracts permits, but does not require, an expanded presentation that splits the fair value of acquired insurance contracts into two components:
(a) a liability measured in accordance with the insurer’s accounting policies for insurance contracts that it issues; and
(b) an intangible asset, representing the fair value of the contractual rights and obligations acquired, to the extent that the liability does not reflect that fair value. This intangible asset is excluded from the scope of AASB 136 and AASB 138. After the business combination, Parent is required to measure that intangible asset on a basis consistent with the measurement of the related insurance liability.
The following example illustrates the application of the guidance on reverse acquisition accounting provided as an application supplement in paragraphs B1‑B15 of Appendix B of AASB 3.
This example illustrates the accounting for a reverse acquisition in which Entity A, the entity issuing equity instruments and therefore the legal parent, is acquired in a reverse acquisition by Entity B, the legal subsidiary, on 30 September 20X1. The accounting for any income tax effects is ignored in this example:
(a) On 30 September 20X1, A issues 2½ shares in exchange for each ordinary share of B. All of B’s shareholders exchange their shares in B. Therefore, A issues 150 ordinary shares in exchange for all 60 ordinary shares of B.
(b) The fair value of each ordinary share of B at 30 September 20X1 is CU40. The quoted market price of A’s ordinary shares at that date is CU12.
(c) The fair values of A’s identifiable assets and liabilities at 30 September 20X1 are the same as their carrying amounts, with the exception of non-current assets. The fair value of A’s non-current assets at 30 September 20X1 is CU1,500.
As a result of the issue of 150 ordinary shares by A, B’s shareholders own 60% of the issued shares of the combined entity (i.e. 150 shares out of 250 issued shares). The remaining 40% are owned by A’s shareholders. If the business combination had taken place in the form of B issuing additional ordinary shares to A’s shareholders in exchange for their ordinary shares in A, B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. B’s shareholders would then own 60 out of the 100 issued shares of B and therefore 60% of the combined entity.
Goodwill is measured as the excess of the cost of the business combination over the net fair value of A’s identifiable assets and liabilities. Therefore, goodwill is measured as follows:
CU
CU
Cost of the business combination
1,600
Net fair value of A’s identifiable assets and liabilities:Current assetsNon-current assetsCurrent liabilitiesNon-current liabilities
5001,500(300)(400)
1,300
Goodwill
300
Assume that B’s profit for the annual period ending 31 December 20X0 was CU600, and that the consolidated profit for the annual period ending 31 December 20X1 is CU800. Assume also that there was no change in the number of ordinary shares issued by B during the annual period ending 31 December 20X0 and during the period from 1 January 20X1 to the date of the reverse acquisition (30 September 20X1).
Number of shares deemed to be outstanding for the period from 1 January 20X1 to the acquisition date (i.e. the number of ordinary shares issued by A in the reverse acquisition)
150
Number of shares outstanding from the acquisition date to 31 December 20X1
250
Weighted average number of ordinary shares outstanding [(150 x 9/12) + (250 x 3/12)]
175
Earnings per share [800/175]
CU4.57
Restated earnings per share for the annual period ending 31 December 20X0 is 4.00 (i.e. the profit of B of 600 divided by the number of ordinary shares issued by A in the reverse acquisition).
In the above example, assume that only 56 of B’s ordinary shares are tendered for exchange rather than all 60. Because A issues 2½ shares in exchange for each ordinary share of B, A issues only 140 (rather than 150) shares. As a result, B’s shareholders own 58.3% of the issued shares of the combined entity (i.e. 140 shares out of 240 issued shares).
The cost of the business combination is calculated by assuming that the combination had taken place in the form of B issuing additional ordinary shares to the shareholders of A in exchange for their ordinary shares in A. In calculating the number of shares that would have to be issued by B, the minority interest is ignored. The majority shareholders own 56 shares of B. For this to represent a 58.3% ownership interest, B would have had to issue an additional 40 shares. The majority shareholders would then own 56 out of the 96 issued shares of B and therefore 58.3% of the combined entity.
As a result, the cost of the business combination is CU1,600 (i.e. 40 shares each with a fair value of CU40). This is the same amount as when all 60 of B’s ordinary shares are tendered for exchange. The cost of the combination does not change simply because some of B’s shareholders do not participate in the exchange.
The minority interest is represented by the 4 shares of the total 60 shares of B that are not exchanged for shares of A. Therefore, the minority interest is 6.7%. The minority interest reflects the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the net assets of the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a minority interest of 6.7% of the pre-combination carrying amounts of B’s net assets (i.e. CU134 or 6.7% of CU2,000).
The following example illustrates the application of the guidance on business combinations achieved in stages in paragraphs 58-60 of AASB 3. In particular, it deals with successive share purchases that result in an investee previously accounted for at fair value being included as a subsidiary in the consolidated financial statements.
Immediately following the example is a discussion of the outcome of applying the guidance in paragraphs 58-60 of AASB 3 to the example assuming the investee had previously been accounted for at cost or by applying the equity method, rather than at fair value.
Investor acquires a 20% ownership interest in Investee (a service company) on 1 January 20X1 for CU3,500,000 cash. At that date, the fair value of Investee’s identifiable assets is CU10,000,000, and the carrying amount of those assets is CU8,000,000. Investee has no liabilities or contingent liabilities at that date. The following shows Investee’s statement of financial position at 1 January 20X1 together with the fair values of the identifiable assets:
During the year ended 31 December 20X1, Investee reports a profit of CU6,000,000 but does not pay any dividends. In addition, the fair value of Investee’s land increases by CU3,000,000 to CU11,000,000. However, the amount recognised by Investee in respect of the land remains unchanged at CU6,000,000. The following shows Investee’s statement of financial position at 31 December 20X1 together with the fair values of the identifiable assets:
On 1 January 20X2, Investor acquires a further 60% ownership interest in Investee for CU22,000,000 cash, thereby obtaining control. Before obtaining control, Investor does not have significant influence over Investee, and accounts for its initial 20% investment at fair value with changes in value included in profit or loss. Investee’s ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share.[2]
Throughout the period 1 January 20X1 to 1 January 20X2, Investor’s issued equity was CU30,000,000. Investor’s only asset apart from its investment in Investee is cash.
Investor’s initial 20% investment in Investee is measured at CU3,500,000. However, Investee’s 1,000,000 ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share. Therefore, the carrying amount of Investor’s initial 20% investment is remeasured in Investor’s financial statements to CU6,000,000 at 31 December 20X1, with the CU2,500,000 increase recognised in profit or loss for the period. Therefore, Investor’s statement of financial position at 31 December 20X1, before the acquisition of the additional 60% ownership interest, is as follows:
Paragraph 25 of AASB 3 states that when a business combination involves more than one exchange transaction, the cost of the combination is the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). This means that for this example, the cost to Investor of the business combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000), irrespective of the fact that the carrying amount of the initial 20% interest has changed.
In addition, and in accordance with paragraph 58 of AASB 3, each transaction must be treated separately to determine the goodwill on that transaction, using cost and fair value information at the date of each exchange transaction. Therefore, Investor recognises the following amounts for goodwill in its consolidated financial statements:
The following shows Investor’s consolidation worksheet (all amounts in CU) immediately after the acquisition of the additional 60% ownership interest in Investee, together with consolidation adjustments and associated explanations:
To recognise goodwill on the initial 20% investment in Investee and record the elimination of that investment against associated equity balances
To recognise goodwill on the subsequent 60% investment in Investee and record elimination of that investment against associated equity balances
(a) investee’s identifiable net assets being stated at their full fair values at the date Investor obtains control of Investee. This means that the 20% minority interest in Investee also is stated at the minority’s 20% share of the fair values of Investee’s identifiable net assets;
(b) goodwill being recognised from the acquisition date at an amount based on treating each exchange transaction separately and using cost and fair value information at the date of each exchange transaction;
(d) an asset revaluation reserve of CU600,000. This amount reflects that part of the increase in the fair value of Investee’s identifiable net assets after the acquisition of the initial 20% interest that is attributable to that initial 20% interest [20% × CU3,000,000];
(e) a retained earnings balance of CU1,200,000. This amount reflects the changes in Investee’s retained earnings after Investor acquired its initial 20% interest that is attributable to that 20% interest [20% × CU6,000,000].
Therefore, the effect of applying the requirements in AASB 3 to business combinations involving successive share purchases for which the investment was previously accounted for at fair value with changes in value included in profit or loss is to cause:
changes in the fair value of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
As discussed above, paragraph 25 of AASB 3 requires the cost of a business combination involving more than one exchange transaction to be measured as the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). Therefore, irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, the cost to Investor of the combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000).
In addition, and again irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, each transaction must be treated separately for the purpose of determining the amount of goodwill on that transaction, using cost and fair value information at the date of each exchange transaction.
any changes in the carrying amount of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
Consequently, the consolidated financial statements immediately after Investor acquires the additional 60% ownership interest and obtains control of Investee would be the same irrespective of the method used to account for the initial 20% investment in Investee before obtaining control.
The following example illustrates the application of the guidance in paragraph 62 of AASB 3 on completing the initial accounting for a business combination when the acquirer has, at the end of the first period after the combination, accounted for the combination using provisional values. This example does not address the accounting for any income tax effects arising from the adjustments.
AASB 3 requires the acquirer to account for a business combination using provisional values if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination is effected. The acquirer is required to recognise any adjustments to those provisional values as a result of completing the initial accounting:
(i) the carrying amount of an identifiable asset, liability or contingent liability that is recognised or adjusted as a result of completing the initial accounting is calculated as if its fair value at the acquisition date had been recognised from that date;
(ii) goodwill or any gain recognised in accordance with paragraph 56 is adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognised or adjusted;
(iii) comparative information presented for the periods before the initial accounting for the combination is complete is presented as if the initial accounting had been completed from the acquisition date. This includes any additional depreciation, amortisation or other profit or loss effects recognised as a result of completing the initial accounting.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X4. The entity sought an independent appraisal for an item of property, plant and equipment acquired in the combination. However, the appraisal was not finalised by the time the entity completed its 20X4 annual financial statements. The entity recognised in its 20X4 annual financial statements a provisional fair value for the asset of CU30,000, and a provisional value for acquired goodwill of CU100,000. The item of property, plant and equipment had a remaining useful life at the acquisition date of five years.
Four months after the acquisition date, the entity received the independent appraisal, which estimated the asset’s fair value at the acquisition date at CU40,000.
As outlined in paragraph 62 of AASB 3, the acquirer is required to recognise any adjustments to provisional values as a result of completing the initial accounting from the acquisition date.
Therefore, in the 20X5 financial statements, an adjustment is made to the opening carrying amount of the item of property, plant and equipment. That adjustment is measured as the fair value adjustment at the acquisition date of CU10,000, less the additional depreciation that would have been recognised had the asset’s fair value at the acquisition date been recognised from that date (CU500 for three months’ depreciation to 31 December 20X4). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU10,000, and the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
In accordance with paragraph 69 of AASB 3, the entity discloses in its 20X4 financial statements that the initial accounting for the business combination has been determined only provisionally, and explains why this is the case. In accordance with paragraph 73(b) of AASB 3, the entity discloses in its 20X5 financial statements the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, the entity discloses that:
the fair value of the item of property, plant and equipment at the acquisition date has been increased by CU10,000 with a corresponding decrease in goodwill; and
the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
The following examples illustrate the application of the guidance in paragraphs 63 and 64 of AASB 3 on the accounting for error corrections related to the initial accounting for a business combination. These examples do not address the accounting for any income tax effects arising from the adjustments.
With three exceptions,[4] AASB 3 requires adjustments to be made to the initial accounting for a business combination after that initial accounting is complete only to correct an error in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. After that accounting is completed, adjustments cannot be recognised for the effect of changes in accounting estimates. In accordance with AASB 108, the effect of a change in an accounting estimate is recognised prospectively. AASB 108 provides guidance on distinguishing corrections of errors from changes in accounting estimates.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X1. As part of the initial accounting for that combination, the entity recognised goodwill of CU100,000. The carrying amount of goodwill at 31 December 20X1 was CU100,000.
During 20X2, the entity becomes aware of an error relating to the amount initially allocated to property, plant and equipment assets acquired in the business combination. In particular, CU20,000 of the CU100,000 initially allocated to goodwill should be allocated to property, plant and equipment assets that had a remaining useful life at the acquisition date of five years.
As outlined in paragraph 64 of AASB 3, AASB 108 requires the correction of an error to be accounted for retrospectively, and for the financial statements to be presented as if the error had never occurred by correcting the error in the comparative information for the prior period(s) in which it occurred.
Therefore, in the 20X2 financial statements, an adjustment is made to the opening carrying amount of property, plant and equipment assets. That adjustment is measured as the fair value adjustment at the acquisition date of CU20,000 less the amount that would have been recognised as depreciation of the fair value adjustment (CU1,000 for three months’ depreciation to 31 December 20X1). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU20,000, and the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been increased by CU20,000 with a corresponding decrease in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
This example assumes the same facts as in Example 8, except that the amount initially allocated to property, plant and equipment assets is decreased by CU20,000 to correct the error, rather than increased by CU20,000. This example also assumes that the entity determines that the recoverable amount of the additional goodwill is only CU17,000 at 31 December 20X1.
In the 20X2 financial statements, the opening carrying amount of property, plant and equipment assets is reduced by CU19,000, being the fair value adjustment at the acquisition date of CU20,000 less CU1,000 in depreciation expense recognised for the three-month period to 31 December 20X1. The carrying amount of goodwill is increased by CU17,000, being the increase in value at the acquisition date of CU20,000 less a CU3,000 impairment loss to reflect that the carrying amount of the adjustment exceeds its recoverable amount. The 20X1 comparative information is restated to reflect this adjustment and to exclude the CU1,000 depreciation and include the CU3,000 impairment loss.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been decreased by CU20,000 with a corresponding increase in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to exclude CU1,000 depreciation recognised during the year ended 31 December 20X1 and include a CU3,000 impairment loss for goodwill relating to the year ended 31 December 20X1.
Parent obtained control of Supplier in a business combination on 31 December 20X4. Supplier has a five-year agreement to supply goods to Buyer. Both Supplier and Parent believe that Buyer will renew the supply agreement at the end of the current contract. The supply agreement is not separable.
The supply agreement (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and therefore is recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Supplier establishes its relationship with Buyer through a contract, the customer relationship with Buyer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably. In determining the fair value of the customer relationship, Parent considers assumptions such as the expected renewal of the supply agreement.
Example 2 Example 2
The following guidance provides examples of items acquired in a business combination that meet the definition of an intangible asset and are therefore recognised under AASB 3 separately from goodwill, provided that their fair values can be measured reliably. To meet the definition of an intangible asset a non-monetary asset without physical substance must be identifiable, that is, it must arise from contractual or other legal rights or be separable.
The examples provided below are not intended to be an exhaustive list of items acquired in a business combination that meet the definition of an intangible asset. A non-monetary asset without physical substance acquired in a business combination might meet the identifiability criterion for identification as an intangible asset but not be included in this guidance.
Assets designated with the symbol are those that meet the definition of an intangible asset because they arise from contractual or other legal rights. Assets designated with the symbol do not arise from contractual or other legal rights, but meet the definition of an intangible asset because they are separable. Assets designated with the symbol might also be separable; however, separability is not a necessary condition for an asset to meet the contractual-legal criterion.
Trademarks are words, names, symbols or other devices used in trade to indicate the source of a product and to distinguish it from the products of others. A service mark identifies and distinguishes the source of a service rather than a product. Collective marks are used to identify the goods or services of members of a group. Certification marks are used to certify the geographical origin or other characteristics of a good or service.
Trademarks, trade names, service marks, collective marks and certification marks may be protected legally through registration with governmental agencies, continuous use in commerce, or by other means. Provided it is protected legally through registration or other means, a trademark or other mark acquired in a business combination is an intangible asset that meets the contractual-legal criterion. Otherwise, a trademark or other mark acquired in a business combination can meet the definition of an intangible asset provided the separability criterion is met, which would normally be the case.
The terms ‘brand’ and ‘brand name’ are often used as synonyms for trademarks and other marks. However, the former are general marketing terms that are typically used to refer to a group of complementary assets such as a trademark (or service mark) and its related trade name, formulas, recipes and technological expertise.
An Internet domain name is a unique alphanumeric name that is used to identify a particular numeric Internet address. Registration of a domain name creates an association between that name and a designated computer on the Internet for the period of the registration. Those registrations are renewable. A registered domain name acquired in a business combination is an intangible asset that meets the contractual-legal criterion.
A customer list consists of information about customers, such as their name and contact information. A customer list may also be in the form of a database that includes other information about the customers such as their order history and demographic information. A customer list does not generally arise from contractual or other legal rights. However, customer lists are valuable and are frequently leased or exchanged. Therefore, a customer list acquired in a business combination normally meets the separability criterion for identification as an intangible asset. However, a customer list acquired in a business combination would not meet that criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing or otherwise exchanging information about its customers.
An order or production backlog arises from contracts such as purchase or sales orders. An order or production backlog acquired in a business combination meets the contractual-legal criterion for identification as an intangible asset, even if the purchase or sales orders are cancellable.
If an entity establishes relationships with its customers through contracts, those customer relationships arise from contractual rights. Therefore, customer contracts and the related customer relationships acquired in a business combination meet the contractual-legal criterion for identification as intangible assets. This will be the case even if confidentiality or other contractual terms prohibit the sale or transfer of a contract separately from the acquired entity or business.
Customer relationships also meet the contractual-legal criterion for identification as intangible assets when an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date.
As noted in B2, an order or a production backlog arises from contracts such as purchase or sales orders, and is therefore also considered a contractual right. Consequently, if an entity has customer relationships with its customers through these types of contracts, the customer relationships also arise from contractual rights, and therefore meet the contractual-legal criterion for identification as intangible assets.
If a customer relationship acquired in a business combination does not arise from a contract, the relationship is an intangible asset if it meets the separability criterion. Exchange transactions for the same asset or a similar asset provide evidence of separability of a non-contractual customer relationship and might also provide information about exchange prices that should be considered when estimating fair value.
Artistic-related assets acquired in a business combination meet the criteria for identification as intangible assets if they arise from contractual or legal rights such as those provided by copyright. Copyrights can be transferred either in whole through assignments or in part through licensing agreements. An entity is not precluded from recognising a copyright intangible asset and any related assignments or licence agreements as a single asset, provided they have similar useful lives.
Contracts to service financial assets are one particular type of contract-based intangible asset. While servicing is inherent in all financial assets, it becomes a distinct asset (or liability):
(a) when contractually separated from the underlying financial asset by sale or securitisation of the assets with servicing retained; or
If mortgage loans, credit card receivables or other financial assets are acquired in a business combination with servicing retained, the inherent servicing rights are not a separate intangible asset because the fair value of those servicing rights is included in the measurement of the fair value of the acquired financial asset.
9 Employment contracts that are beneficial contracts from the perspective of the employer because the pricing of those contracts is below their current market value
If computer software and program formats acquired in a business combination are protected legally, such as by patent or copyright, they meet the contractual-legal criterion for identification as intangible assets.
Mask works are software permanently stored on a read-only memory chip as a series of stencils or integrated circuitry. Mask works may have legal protection. Mask works with legal protection that are acquired in a business combination also meet the contractual-legal criterion for identification as intangible assets.
Databases are collections of information, often stored in electronic form (such as on computer disks or files). A database that includes original works of authorship may be entitled to copyright protection. If a database acquired in a business combination is protected by copyright, it meets the contractual-legal criterion for identification as an intangible asset. However, a database typically includes information created as a consequence of an entity’s normal operations, such as customer lists, or specialised information such as scientific data or credit information. Databases that are not protected by copyright can be, and often are, exchanged, licensed or leased to others in their entirety or in part. Therefore, even if the future economic benefits from a database do not arise from legal rights, a database acquired in a business combination meets the separability criterion for identification as an intangible asset.
If the future economic benefits from a trade secret acquired in a business combination are legally protected, that asset meets the contractual-legal criterion for identification as an intangible asset. Otherwise, trade secrets acquired in a business combination meet the definition of an intangible asset only if the separability criterion is met, which is often likely to be the case.
The following examples illustrate the recognition in accordance with AASB 3 of customer relationship intangible assets acquired in a business combination.
Parent obtained control of Supplier in a business combination on 31 December 20X4. Supplier has a five-year agreement to supply goods to Buyer. Both Supplier and Parent believe that Buyer will renew the supply agreement at the end of the current contract. The supply agreement is not separable.
The supply agreement (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and therefore is recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Supplier establishes its relationship with Buyer through a contract, the customer relationship with Buyer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably. In determining the fair value of the customer relationship, Parent considers assumptions such as the expected renewal of the supply agreement.
Parent obtained control of Subsidiary in a business combination on 31 December 20X4. Subsidiary manufactures goods in two distinct lines of business – sporting goods and electronics. Customer purchases from Subsidiary both sporting goods and electronics. Subsidiary has a contract with Customer to be its exclusive provider of sporting goods. However, there is no contract for the supply of electronics to Customer. Both Subsidiary and Parent believe that there is only one overall customer relationship between Subsidiary and Customer.
The contract to be Customer’s exclusive supplier of sporting goods (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and is therefore recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Subsidiary establishes its relationship with Customer through a contract, the customer relationship with Customer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill, provided its fair value can be measured reliably. Because there is only one customer relationship with Customer, the fair value of that relationship incorporates assumptions regarding Subsidiary's relationship with Customer related to both sporting goods and electronics.
However, if both Parent and Subsidiary believed there were separate customer relationships with Customer – one for sporting goods and another for electronics – the customer relationship with respect to electronics would be assessed by Parent to determine whether it meets the separability criterion for identification as an intangible asset.
Entity A obtained control of Entity B in a business combination on 31 December 20X4. Entity B does business with its customers solely through purchase and sales orders. At 31 December 20X4, Entity B has a backlog of customer purchase orders from 60% of its customers, all of whom are recurring customers. The other 40% of Entity B's customers are also recurring customers. However, as of 31 December 20X4, Entity B does not have any open purchase orders or other contracts with those customers.
The purchase orders from 60% of Entity B's customers (whether cancellable or not) meet the contractual-legal criterion for identification as intangible assets, and are therefore recognised separately from goodwill, provided their fair values can be measured reliably. Additionally, because Entity B has established its relationship with 60% of its customers through contracts, those customer relationships meet the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably.
Because Entity B has a practice of establishing contracts with the remaining 40% of its customers, its relationship with those customers also arises through contractual rights, and therefore meets the contractual-legal criterion for identification as an intangible asset. Entity A recognises this customer relationship separately from goodwill, provided its fair value can be measured reliably, even though Entity B does not have contracts with those customers at 31 December 20X4.
Parent obtained control of Insurer in a business combination on 31 December 20X4. Insurer has a portfolio of one-year motor insurance contracts that are cancellable by policyholders. A reasonably predictable number of policyholders renew their insurance contracts each year.
Because Insurer establishes its relationships with policyholders through insurance contracts, the customer relationship with policyholders meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is recognised separately from goodwill, provided its fair value can be measured reliably. In determining the fair value of the customer relationship intangible asset, Parent considers estimates of renewals and cross-selling. AASB 136 Impairment of Assets and AASB 138 Intangible Assets apply to the customer relationship intangible asset.
In determining the fair value of the liability relating to the portfolio of insurance contracts, Parent considers estimates of cancellations by policyholders. AASB 4 Insurance Contracts permits, but does not require, an expanded presentation that splits the fair value of acquired insurance contracts into two components:
(a) a liability measured in accordance with the insurer’s accounting policies for insurance contracts that it issues; and
(b) an intangible asset, representing the fair value of the contractual rights and obligations acquired, to the extent that the liability does not reflect that fair value. This intangible asset is excluded from the scope of AASB 136 and AASB 138. After the business combination, Parent is required to measure that intangible asset on a basis consistent with the measurement of the related insurance liability.
The following example illustrates the application of the guidance on reverse acquisition accounting provided as an application supplement in paragraphs B1‑B15 of Appendix B of AASB 3.
This example illustrates the accounting for a reverse acquisition in which Entity A, the entity issuing equity instruments and therefore the legal parent, is acquired in a reverse acquisition by Entity B, the legal subsidiary, on 30 September 20X1. The accounting for any income tax effects is ignored in this example:
(a) On 30 September 20X1, A issues 2½ shares in exchange for each ordinary share of B. All of B’s shareholders exchange their shares in B. Therefore, A issues 150 ordinary shares in exchange for all 60 ordinary shares of B.
(b) The fair value of each ordinary share of B at 30 September 20X1 is CU40. The quoted market price of A’s ordinary shares at that date is CU12.
(c) The fair values of A’s identifiable assets and liabilities at 30 September 20X1 are the same as their carrying amounts, with the exception of non-current assets. The fair value of A’s non-current assets at 30 September 20X1 is CU1,500.
As a result of the issue of 150 ordinary shares by A, B’s shareholders own 60% of the issued shares of the combined entity (i.e. 150 shares out of 250 issued shares). The remaining 40% are owned by A’s shareholders. If the business combination had taken place in the form of B issuing additional ordinary shares to A’s shareholders in exchange for their ordinary shares in A, B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. B’s shareholders would then own 60 out of the 100 issued shares of B and therefore 60% of the combined entity.
Goodwill is measured as the excess of the cost of the business combination over the net fair value of A’s identifiable assets and liabilities. Therefore, goodwill is measured as follows:
CU
CU
Cost of the business combination
1,600
Net fair value of A’s identifiable assets and liabilities:Current assetsNon-current assetsCurrent liabilitiesNon-current liabilities
5001,500(300)(400)
1,300
Goodwill
300
Assume that B’s profit for the annual period ending 31 December 20X0 was CU600, and that the consolidated profit for the annual period ending 31 December 20X1 is CU800. Assume also that there was no change in the number of ordinary shares issued by B during the annual period ending 31 December 20X0 and during the period from 1 January 20X1 to the date of the reverse acquisition (30 September 20X1).
Number of shares deemed to be outstanding for the period from 1 January 20X1 to the acquisition date (i.e. the number of ordinary shares issued by A in the reverse acquisition)
150
Number of shares outstanding from the acquisition date to 31 December 20X1
250
Weighted average number of ordinary shares outstanding [(150 x 9/12) + (250 x 3/12)]
175
Earnings per share [800/175]
CU4.57
Restated earnings per share for the annual period ending 31 December 20X0 is 4.00 (i.e. the profit of B of 600 divided by the number of ordinary shares issued by A in the reverse acquisition).
In the above example, assume that only 56 of B’s ordinary shares are tendered for exchange rather than all 60. Because A issues 2½ shares in exchange for each ordinary share of B, A issues only 140 (rather than 150) shares. As a result, B’s shareholders own 58.3% of the issued shares of the combined entity (i.e. 140 shares out of 240 issued shares).
The cost of the business combination is calculated by assuming that the combination had taken place in the form of B issuing additional ordinary shares to the shareholders of A in exchange for their ordinary shares in A. In calculating the number of shares that would have to be issued by B, the minority interest is ignored. The majority shareholders own 56 shares of B. For this to represent a 58.3% ownership interest, B would have had to issue an additional 40 shares. The majority shareholders would then own 56 out of the 96 issued shares of B and therefore 58.3% of the combined entity.
As a result, the cost of the business combination is CU1,600 (i.e. 40 shares each with a fair value of CU40). This is the same amount as when all 60 of B’s ordinary shares are tendered for exchange. The cost of the combination does not change simply because some of B’s shareholders do not participate in the exchange.
The minority interest is represented by the 4 shares of the total 60 shares of B that are not exchanged for shares of A. Therefore, the minority interest is 6.7%. The minority interest reflects the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the net assets of the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a minority interest of 6.7% of the pre-combination carrying amounts of B’s net assets (i.e. CU134 or 6.7% of CU2,000).
The following example illustrates the application of the guidance on business combinations achieved in stages in paragraphs 58-60 of AASB 3. In particular, it deals with successive share purchases that result in an investee previously accounted for at fair value being included as a subsidiary in the consolidated financial statements.
Immediately following the example is a discussion of the outcome of applying the guidance in paragraphs 58-60 of AASB 3 to the example assuming the investee had previously been accounted for at cost or by applying the equity method, rather than at fair value.
Investor acquires a 20% ownership interest in Investee (a service company) on 1 January 20X1 for CU3,500,000 cash. At that date, the fair value of Investee’s identifiable assets is CU10,000,000, and the carrying amount of those assets is CU8,000,000. Investee has no liabilities or contingent liabilities at that date. The following shows Investee’s statement of financial position at 1 January 20X1 together with the fair values of the identifiable assets:
During the year ended 31 December 20X1, Investee reports a profit of CU6,000,000 but does not pay any dividends. In addition, the fair value of Investee’s land increases by CU3,000,000 to CU11,000,000. However, the amount recognised by Investee in respect of the land remains unchanged at CU6,000,000. The following shows Investee’s statement of financial position at 31 December 20X1 together with the fair values of the identifiable assets:
On 1 January 20X2, Investor acquires a further 60% ownership interest in Investee for CU22,000,000 cash, thereby obtaining control. Before obtaining control, Investor does not have significant influence over Investee, and accounts for its initial 20% investment at fair value with changes in value included in profit or loss. Investee’s ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share.[2]
Throughout the period 1 January 20X1 to 1 January 20X2, Investor’s issued equity was CU30,000,000. Investor’s only asset apart from its investment in Investee is cash.
Investor’s initial 20% investment in Investee is measured at CU3,500,000. However, Investee’s 1,000,000 ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share. Therefore, the carrying amount of Investor’s initial 20% investment is remeasured in Investor’s financial statements to CU6,000,000 at 31 December 20X1, with the CU2,500,000 increase recognised in profit or loss for the period. Therefore, Investor’s statement of financial position at 31 December 20X1, before the acquisition of the additional 60% ownership interest, is as follows:
Paragraph 25 of AASB 3 states that when a business combination involves more than one exchange transaction, the cost of the combination is the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). This means that for this example, the cost to Investor of the business combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000), irrespective of the fact that the carrying amount of the initial 20% interest has changed.
In addition, and in accordance with paragraph 58 of AASB 3, each transaction must be treated separately to determine the goodwill on that transaction, using cost and fair value information at the date of each exchange transaction. Therefore, Investor recognises the following amounts for goodwill in its consolidated financial statements:
The following shows Investor’s consolidation worksheet (all amounts in CU) immediately after the acquisition of the additional 60% ownership interest in Investee, together with consolidation adjustments and associated explanations:
To recognise goodwill on the initial 20% investment in Investee and record the elimination of that investment against associated equity balances
To recognise goodwill on the subsequent 60% investment in Investee and record elimination of that investment against associated equity balances
(a) investee’s identifiable net assets being stated at their full fair values at the date Investor obtains control of Investee. This means that the 20% minority interest in Investee also is stated at the minority’s 20% share of the fair values of Investee’s identifiable net assets;
(b) goodwill being recognised from the acquisition date at an amount based on treating each exchange transaction separately and using cost and fair value information at the date of each exchange transaction;
(d) an asset revaluation reserve of CU600,000. This amount reflects that part of the increase in the fair value of Investee’s identifiable net assets after the acquisition of the initial 20% interest that is attributable to that initial 20% interest [20% × CU3,000,000];
(e) a retained earnings balance of CU1,200,000. This amount reflects the changes in Investee’s retained earnings after Investor acquired its initial 20% interest that is attributable to that 20% interest [20% × CU6,000,000].
Therefore, the effect of applying the requirements in AASB 3 to business combinations involving successive share purchases for which the investment was previously accounted for at fair value with changes in value included in profit or loss is to cause:
changes in the fair value of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
As discussed above, paragraph 25 of AASB 3 requires the cost of a business combination involving more than one exchange transaction to be measured as the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). Therefore, irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, the cost to Investor of the combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000).
In addition, and again irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, each transaction must be treated separately for the purpose of determining the amount of goodwill on that transaction, using cost and fair value information at the date of each exchange transaction.
any changes in the carrying amount of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
Consequently, the consolidated financial statements immediately after Investor acquires the additional 60% ownership interest and obtains control of Investee would be the same irrespective of the method used to account for the initial 20% investment in Investee before obtaining control.
The following example illustrates the application of the guidance in paragraph 62 of AASB 3 on completing the initial accounting for a business combination when the acquirer has, at the end of the first period after the combination, accounted for the combination using provisional values. This example does not address the accounting for any income tax effects arising from the adjustments.
AASB 3 requires the acquirer to account for a business combination using provisional values if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination is effected. The acquirer is required to recognise any adjustments to those provisional values as a result of completing the initial accounting:
(i) the carrying amount of an identifiable asset, liability or contingent liability that is recognised or adjusted as a result of completing the initial accounting is calculated as if its fair value at the acquisition date had been recognised from that date;
(ii) goodwill or any gain recognised in accordance with paragraph 56 is adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognised or adjusted;
(iii) comparative information presented for the periods before the initial accounting for the combination is complete is presented as if the initial accounting had been completed from the acquisition date. This includes any additional depreciation, amortisation or other profit or loss effects recognised as a result of completing the initial accounting.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X4. The entity sought an independent appraisal for an item of property, plant and equipment acquired in the combination. However, the appraisal was not finalised by the time the entity completed its 20X4 annual financial statements. The entity recognised in its 20X4 annual financial statements a provisional fair value for the asset of CU30,000, and a provisional value for acquired goodwill of CU100,000. The item of property, plant and equipment had a remaining useful life at the acquisition date of five years.
Four months after the acquisition date, the entity received the independent appraisal, which estimated the asset’s fair value at the acquisition date at CU40,000.
As outlined in paragraph 62 of AASB 3, the acquirer is required to recognise any adjustments to provisional values as a result of completing the initial accounting from the acquisition date.
Therefore, in the 20X5 financial statements, an adjustment is made to the opening carrying amount of the item of property, plant and equipment. That adjustment is measured as the fair value adjustment at the acquisition date of CU10,000, less the additional depreciation that would have been recognised had the asset’s fair value at the acquisition date been recognised from that date (CU500 for three months’ depreciation to 31 December 20X4). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU10,000, and the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
In accordance with paragraph 69 of AASB 3, the entity discloses in its 20X4 financial statements that the initial accounting for the business combination has been determined only provisionally, and explains why this is the case. In accordance with paragraph 73(b) of AASB 3, the entity discloses in its 20X5 financial statements the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, the entity discloses that:
the fair value of the item of property, plant and equipment at the acquisition date has been increased by CU10,000 with a corresponding decrease in goodwill; and
the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
The following examples illustrate the application of the guidance in paragraphs 63 and 64 of AASB 3 on the accounting for error corrections related to the initial accounting for a business combination. These examples do not address the accounting for any income tax effects arising from the adjustments.
With three exceptions,[4] AASB 3 requires adjustments to be made to the initial accounting for a business combination after that initial accounting is complete only to correct an error in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. After that accounting is completed, adjustments cannot be recognised for the effect of changes in accounting estimates. In accordance with AASB 108, the effect of a change in an accounting estimate is recognised prospectively. AASB 108 provides guidance on distinguishing corrections of errors from changes in accounting estimates.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X1. As part of the initial accounting for that combination, the entity recognised goodwill of CU100,000. The carrying amount of goodwill at 31 December 20X1 was CU100,000.
During 20X2, the entity becomes aware of an error relating to the amount initially allocated to property, plant and equipment assets acquired in the business combination. In particular, CU20,000 of the CU100,000 initially allocated to goodwill should be allocated to property, plant and equipment assets that had a remaining useful life at the acquisition date of five years.
As outlined in paragraph 64 of AASB 3, AASB 108 requires the correction of an error to be accounted for retrospectively, and for the financial statements to be presented as if the error had never occurred by correcting the error in the comparative information for the prior period(s) in which it occurred.
Therefore, in the 20X2 financial statements, an adjustment is made to the opening carrying amount of property, plant and equipment assets. That adjustment is measured as the fair value adjustment at the acquisition date of CU20,000 less the amount that would have been recognised as depreciation of the fair value adjustment (CU1,000 for three months’ depreciation to 31 December 20X1). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU20,000, and the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been increased by CU20,000 with a corresponding decrease in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
This example assumes the same facts as in Example 8, except that the amount initially allocated to property, plant and equipment assets is decreased by CU20,000 to correct the error, rather than increased by CU20,000. This example also assumes that the entity determines that the recoverable amount of the additional goodwill is only CU17,000 at 31 December 20X1.
In the 20X2 financial statements, the opening carrying amount of property, plant and equipment assets is reduced by CU19,000, being the fair value adjustment at the acquisition date of CU20,000 less CU1,000 in depreciation expense recognised for the three-month period to 31 December 20X1. The carrying amount of goodwill is increased by CU17,000, being the increase in value at the acquisition date of CU20,000 less a CU3,000 impairment loss to reflect that the carrying amount of the adjustment exceeds its recoverable amount. The 20X1 comparative information is restated to reflect this adjustment and to exclude the CU1,000 depreciation and include the CU3,000 impairment loss.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been decreased by CU20,000 with a corresponding increase in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to exclude CU1,000 depreciation recognised during the year ended 31 December 20X1 and include a CU3,000 impairment loss for goodwill relating to the year ended 31 December 20X1.
Parent obtained control of Subsidiary in a business combination on 31 December 20X4. Subsidiary manufactures goods in two distinct lines of business – sporting goods and electronics. Customer purchases from Subsidiary both sporting goods and electronics. Subsidiary has a contract with Customer to be its exclusive provider of sporting goods. However, there is no contract for the supply of electronics to Customer. Both Subsidiary and Parent believe that there is only one overall customer relationship between Subsidiary and Customer.
The contract to be Customer’s exclusive supplier of sporting goods (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and is therefore recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Subsidiary establishes its relationship with Customer through a contract, the customer relationship with Customer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill, provided its fair value can be measured reliably. Because there is only one customer relationship with Customer, the fair value of that relationship incorporates assumptions regarding Subsidiary's relationship with Customer related to both sporting goods and electronics.
However, if both Parent and Subsidiary believed there were separate customer relationships with Customer – one for sporting goods and another for electronics – the customer relationship with respect to electronics would be assessed by Parent to determine whether it meets the separability criterion for identification as an intangible asset.
Example 3 Example 3
The following guidance provides examples of items acquired in a business combination that meet the definition of an intangible asset and are therefore recognised under AASB 3 separately from goodwill, provided that their fair values can be measured reliably. To meet the definition of an intangible asset a non-monetary asset without physical substance must be identifiable, that is, it must arise from contractual or other legal rights or be separable.
The examples provided below are not intended to be an exhaustive list of items acquired in a business combination that meet the definition of an intangible asset. A non-monetary asset without physical substance acquired in a business combination might meet the identifiability criterion for identification as an intangible asset but not be included in this guidance.
Assets designated with the symbol are those that meet the definition of an intangible asset because they arise from contractual or other legal rights. Assets designated with the symbol do not arise from contractual or other legal rights, but meet the definition of an intangible asset because they are separable. Assets designated with the symbol might also be separable; however, separability is not a necessary condition for an asset to meet the contractual-legal criterion.
Trademarks are words, names, symbols or other devices used in trade to indicate the source of a product and to distinguish it from the products of others. A service mark identifies and distinguishes the source of a service rather than a product. Collective marks are used to identify the goods or services of members of a group. Certification marks are used to certify the geographical origin or other characteristics of a good or service.
Trademarks, trade names, service marks, collective marks and certification marks may be protected legally through registration with governmental agencies, continuous use in commerce, or by other means. Provided it is protected legally through registration or other means, a trademark or other mark acquired in a business combination is an intangible asset that meets the contractual-legal criterion. Otherwise, a trademark or other mark acquired in a business combination can meet the definition of an intangible asset provided the separability criterion is met, which would normally be the case.
The terms ‘brand’ and ‘brand name’ are often used as synonyms for trademarks and other marks. However, the former are general marketing terms that are typically used to refer to a group of complementary assets such as a trademark (or service mark) and its related trade name, formulas, recipes and technological expertise.
An Internet domain name is a unique alphanumeric name that is used to identify a particular numeric Internet address. Registration of a domain name creates an association between that name and a designated computer on the Internet for the period of the registration. Those registrations are renewable. A registered domain name acquired in a business combination is an intangible asset that meets the contractual-legal criterion.
A customer list consists of information about customers, such as their name and contact information. A customer list may also be in the form of a database that includes other information about the customers such as their order history and demographic information. A customer list does not generally arise from contractual or other legal rights. However, customer lists are valuable and are frequently leased or exchanged. Therefore, a customer list acquired in a business combination normally meets the separability criterion for identification as an intangible asset. However, a customer list acquired in a business combination would not meet that criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing or otherwise exchanging information about its customers.
An order or production backlog arises from contracts such as purchase or sales orders. An order or production backlog acquired in a business combination meets the contractual-legal criterion for identification as an intangible asset, even if the purchase or sales orders are cancellable.
If an entity establishes relationships with its customers through contracts, those customer relationships arise from contractual rights. Therefore, customer contracts and the related customer relationships acquired in a business combination meet the contractual-legal criterion for identification as intangible assets. This will be the case even if confidentiality or other contractual terms prohibit the sale or transfer of a contract separately from the acquired entity or business.
Customer relationships also meet the contractual-legal criterion for identification as intangible assets when an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date.
As noted in B2, an order or a production backlog arises from contracts such as purchase or sales orders, and is therefore also considered a contractual right. Consequently, if an entity has customer relationships with its customers through these types of contracts, the customer relationships also arise from contractual rights, and therefore meet the contractual-legal criterion for identification as intangible assets.
If a customer relationship acquired in a business combination does not arise from a contract, the relationship is an intangible asset if it meets the separability criterion. Exchange transactions for the same asset or a similar asset provide evidence of separability of a non-contractual customer relationship and might also provide information about exchange prices that should be considered when estimating fair value.
Artistic-related assets acquired in a business combination meet the criteria for identification as intangible assets if they arise from contractual or legal rights such as those provided by copyright. Copyrights can be transferred either in whole through assignments or in part through licensing agreements. An entity is not precluded from recognising a copyright intangible asset and any related assignments or licence agreements as a single asset, provided they have similar useful lives.
Contracts to service financial assets are one particular type of contract-based intangible asset. While servicing is inherent in all financial assets, it becomes a distinct asset (or liability):
(a) when contractually separated from the underlying financial asset by sale or securitisation of the assets with servicing retained; or
If mortgage loans, credit card receivables or other financial assets are acquired in a business combination with servicing retained, the inherent servicing rights are not a separate intangible asset because the fair value of those servicing rights is included in the measurement of the fair value of the acquired financial asset.
9 Employment contracts that are beneficial contracts from the perspective of the employer because the pricing of those contracts is below their current market value
If computer software and program formats acquired in a business combination are protected legally, such as by patent or copyright, they meet the contractual-legal criterion for identification as intangible assets.
Mask works are software permanently stored on a read-only memory chip as a series of stencils or integrated circuitry. Mask works may have legal protection. Mask works with legal protection that are acquired in a business combination also meet the contractual-legal criterion for identification as intangible assets.
Databases are collections of information, often stored in electronic form (such as on computer disks or files). A database that includes original works of authorship may be entitled to copyright protection. If a database acquired in a business combination is protected by copyright, it meets the contractual-legal criterion for identification as an intangible asset. However, a database typically includes information created as a consequence of an entity’s normal operations, such as customer lists, or specialised information such as scientific data or credit information. Databases that are not protected by copyright can be, and often are, exchanged, licensed or leased to others in their entirety or in part. Therefore, even if the future economic benefits from a database do not arise from legal rights, a database acquired in a business combination meets the separability criterion for identification as an intangible asset.
If the future economic benefits from a trade secret acquired in a business combination are legally protected, that asset meets the contractual-legal criterion for identification as an intangible asset. Otherwise, trade secrets acquired in a business combination meet the definition of an intangible asset only if the separability criterion is met, which is often likely to be the case.
The following examples illustrate the recognition in accordance with AASB 3 of customer relationship intangible assets acquired in a business combination.
Parent obtained control of Supplier in a business combination on 31 December 20X4. Supplier has a five-year agreement to supply goods to Buyer. Both Supplier and Parent believe that Buyer will renew the supply agreement at the end of the current contract. The supply agreement is not separable.
The supply agreement (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and therefore is recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Supplier establishes its relationship with Buyer through a contract, the customer relationship with Buyer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably. In determining the fair value of the customer relationship, Parent considers assumptions such as the expected renewal of the supply agreement.
Parent obtained control of Subsidiary in a business combination on 31 December 20X4. Subsidiary manufactures goods in two distinct lines of business – sporting goods and electronics. Customer purchases from Subsidiary both sporting goods and electronics. Subsidiary has a contract with Customer to be its exclusive provider of sporting goods. However, there is no contract for the supply of electronics to Customer. Both Subsidiary and Parent believe that there is only one overall customer relationship between Subsidiary and Customer.
The contract to be Customer’s exclusive supplier of sporting goods (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and is therefore recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Subsidiary establishes its relationship with Customer through a contract, the customer relationship with Customer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill, provided its fair value can be measured reliably. Because there is only one customer relationship with Customer, the fair value of that relationship incorporates assumptions regarding Subsidiary's relationship with Customer related to both sporting goods and electronics.
However, if both Parent and Subsidiary believed there were separate customer relationships with Customer – one for sporting goods and another for electronics – the customer relationship with respect to electronics would be assessed by Parent to determine whether it meets the separability criterion for identification as an intangible asset.
Entity A obtained control of Entity B in a business combination on 31 December 20X4. Entity B does business with its customers solely through purchase and sales orders. At 31 December 20X4, Entity B has a backlog of customer purchase orders from 60% of its customers, all of whom are recurring customers. The other 40% of Entity B's customers are also recurring customers. However, as of 31 December 20X4, Entity B does not have any open purchase orders or other contracts with those customers.
The purchase orders from 60% of Entity B's customers (whether cancellable or not) meet the contractual-legal criterion for identification as intangible assets, and are therefore recognised separately from goodwill, provided their fair values can be measured reliably. Additionally, because Entity B has established its relationship with 60% of its customers through contracts, those customer relationships meet the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably.
Because Entity B has a practice of establishing contracts with the remaining 40% of its customers, its relationship with those customers also arises through contractual rights, and therefore meets the contractual-legal criterion for identification as an intangible asset. Entity A recognises this customer relationship separately from goodwill, provided its fair value can be measured reliably, even though Entity B does not have contracts with those customers at 31 December 20X4.
Parent obtained control of Insurer in a business combination on 31 December 20X4. Insurer has a portfolio of one-year motor insurance contracts that are cancellable by policyholders. A reasonably predictable number of policyholders renew their insurance contracts each year.
Because Insurer establishes its relationships with policyholders through insurance contracts, the customer relationship with policyholders meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is recognised separately from goodwill, provided its fair value can be measured reliably. In determining the fair value of the customer relationship intangible asset, Parent considers estimates of renewals and cross-selling. AASB 136 Impairment of Assets and AASB 138 Intangible Assets apply to the customer relationship intangible asset.
In determining the fair value of the liability relating to the portfolio of insurance contracts, Parent considers estimates of cancellations by policyholders. AASB 4 Insurance Contracts permits, but does not require, an expanded presentation that splits the fair value of acquired insurance contracts into two components:
(a) a liability measured in accordance with the insurer’s accounting policies for insurance contracts that it issues; and
(b) an intangible asset, representing the fair value of the contractual rights and obligations acquired, to the extent that the liability does not reflect that fair value. This intangible asset is excluded from the scope of AASB 136 and AASB 138. After the business combination, Parent is required to measure that intangible asset on a basis consistent with the measurement of the related insurance liability.
The following example illustrates the application of the guidance on reverse acquisition accounting provided as an application supplement in paragraphs B1‑B15 of Appendix B of AASB 3.
This example illustrates the accounting for a reverse acquisition in which Entity A, the entity issuing equity instruments and therefore the legal parent, is acquired in a reverse acquisition by Entity B, the legal subsidiary, on 30 September 20X1. The accounting for any income tax effects is ignored in this example:
(a) On 30 September 20X1, A issues 2½ shares in exchange for each ordinary share of B. All of B’s shareholders exchange their shares in B. Therefore, A issues 150 ordinary shares in exchange for all 60 ordinary shares of B.
(b) The fair value of each ordinary share of B at 30 September 20X1 is CU40. The quoted market price of A’s ordinary shares at that date is CU12.
(c) The fair values of A’s identifiable assets and liabilities at 30 September 20X1 are the same as their carrying amounts, with the exception of non-current assets. The fair value of A’s non-current assets at 30 September 20X1 is CU1,500.
As a result of the issue of 150 ordinary shares by A, B’s shareholders own 60% of the issued shares of the combined entity (i.e. 150 shares out of 250 issued shares). The remaining 40% are owned by A’s shareholders. If the business combination had taken place in the form of B issuing additional ordinary shares to A’s shareholders in exchange for their ordinary shares in A, B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. B’s shareholders would then own 60 out of the 100 issued shares of B and therefore 60% of the combined entity.
Goodwill is measured as the excess of the cost of the business combination over the net fair value of A’s identifiable assets and liabilities. Therefore, goodwill is measured as follows:
CU
CU
Cost of the business combination
1,600
Net fair value of A’s identifiable assets and liabilities:Current assetsNon-current assetsCurrent liabilitiesNon-current liabilities
5001,500(300)(400)
1,300
Goodwill
300
Assume that B’s profit for the annual period ending 31 December 20X0 was CU600, and that the consolidated profit for the annual period ending 31 December 20X1 is CU800. Assume also that there was no change in the number of ordinary shares issued by B during the annual period ending 31 December 20X0 and during the period from 1 January 20X1 to the date of the reverse acquisition (30 September 20X1).
Number of shares deemed to be outstanding for the period from 1 January 20X1 to the acquisition date (i.e. the number of ordinary shares issued by A in the reverse acquisition)
150
Number of shares outstanding from the acquisition date to 31 December 20X1
250
Weighted average number of ordinary shares outstanding [(150 x 9/12) + (250 x 3/12)]
175
Earnings per share [800/175]
CU4.57
Restated earnings per share for the annual period ending 31 December 20X0 is 4.00 (i.e. the profit of B of 600 divided by the number of ordinary shares issued by A in the reverse acquisition).
In the above example, assume that only 56 of B’s ordinary shares are tendered for exchange rather than all 60. Because A issues 2½ shares in exchange for each ordinary share of B, A issues only 140 (rather than 150) shares. As a result, B’s shareholders own 58.3% of the issued shares of the combined entity (i.e. 140 shares out of 240 issued shares).
The cost of the business combination is calculated by assuming that the combination had taken place in the form of B issuing additional ordinary shares to the shareholders of A in exchange for their ordinary shares in A. In calculating the number of shares that would have to be issued by B, the minority interest is ignored. The majority shareholders own 56 shares of B. For this to represent a 58.3% ownership interest, B would have had to issue an additional 40 shares. The majority shareholders would then own 56 out of the 96 issued shares of B and therefore 58.3% of the combined entity.
As a result, the cost of the business combination is CU1,600 (i.e. 40 shares each with a fair value of CU40). This is the same amount as when all 60 of B’s ordinary shares are tendered for exchange. The cost of the combination does not change simply because some of B’s shareholders do not participate in the exchange.
The minority interest is represented by the 4 shares of the total 60 shares of B that are not exchanged for shares of A. Therefore, the minority interest is 6.7%. The minority interest reflects the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the net assets of the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a minority interest of 6.7% of the pre-combination carrying amounts of B’s net assets (i.e. CU134 or 6.7% of CU2,000).
The following example illustrates the application of the guidance on business combinations achieved in stages in paragraphs 58-60 of AASB 3. In particular, it deals with successive share purchases that result in an investee previously accounted for at fair value being included as a subsidiary in the consolidated financial statements.
Immediately following the example is a discussion of the outcome of applying the guidance in paragraphs 58-60 of AASB 3 to the example assuming the investee had previously been accounted for at cost or by applying the equity method, rather than at fair value.
Investor acquires a 20% ownership interest in Investee (a service company) on 1 January 20X1 for CU3,500,000 cash. At that date, the fair value of Investee’s identifiable assets is CU10,000,000, and the carrying amount of those assets is CU8,000,000. Investee has no liabilities or contingent liabilities at that date. The following shows Investee’s statement of financial position at 1 January 20X1 together with the fair values of the identifiable assets:
During the year ended 31 December 20X1, Investee reports a profit of CU6,000,000 but does not pay any dividends. In addition, the fair value of Investee’s land increases by CU3,000,000 to CU11,000,000. However, the amount recognised by Investee in respect of the land remains unchanged at CU6,000,000. The following shows Investee’s statement of financial position at 31 December 20X1 together with the fair values of the identifiable assets:
On 1 January 20X2, Investor acquires a further 60% ownership interest in Investee for CU22,000,000 cash, thereby obtaining control. Before obtaining control, Investor does not have significant influence over Investee, and accounts for its initial 20% investment at fair value with changes in value included in profit or loss. Investee’s ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share.[2]
Throughout the period 1 January 20X1 to 1 January 20X2, Investor’s issued equity was CU30,000,000. Investor’s only asset apart from its investment in Investee is cash.
Investor’s initial 20% investment in Investee is measured at CU3,500,000. However, Investee’s 1,000,000 ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share. Therefore, the carrying amount of Investor’s initial 20% investment is remeasured in Investor’s financial statements to CU6,000,000 at 31 December 20X1, with the CU2,500,000 increase recognised in profit or loss for the period. Therefore, Investor’s statement of financial position at 31 December 20X1, before the acquisition of the additional 60% ownership interest, is as follows:
Paragraph 25 of AASB 3 states that when a business combination involves more than one exchange transaction, the cost of the combination is the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). This means that for this example, the cost to Investor of the business combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000), irrespective of the fact that the carrying amount of the initial 20% interest has changed.
In addition, and in accordance with paragraph 58 of AASB 3, each transaction must be treated separately to determine the goodwill on that transaction, using cost and fair value information at the date of each exchange transaction. Therefore, Investor recognises the following amounts for goodwill in its consolidated financial statements:
The following shows Investor’s consolidation worksheet (all amounts in CU) immediately after the acquisition of the additional 60% ownership interest in Investee, together with consolidation adjustments and associated explanations:
To recognise goodwill on the initial 20% investment in Investee and record the elimination of that investment against associated equity balances
To recognise goodwill on the subsequent 60% investment in Investee and record elimination of that investment against associated equity balances
(a) investee’s identifiable net assets being stated at their full fair values at the date Investor obtains control of Investee. This means that the 20% minority interest in Investee also is stated at the minority’s 20% share of the fair values of Investee’s identifiable net assets;
(b) goodwill being recognised from the acquisition date at an amount based on treating each exchange transaction separately and using cost and fair value information at the date of each exchange transaction;
(d) an asset revaluation reserve of CU600,000. This amount reflects that part of the increase in the fair value of Investee’s identifiable net assets after the acquisition of the initial 20% interest that is attributable to that initial 20% interest [20% × CU3,000,000];
(e) a retained earnings balance of CU1,200,000. This amount reflects the changes in Investee’s retained earnings after Investor acquired its initial 20% interest that is attributable to that 20% interest [20% × CU6,000,000].
Therefore, the effect of applying the requirements in AASB 3 to business combinations involving successive share purchases for which the investment was previously accounted for at fair value with changes in value included in profit or loss is to cause:
changes in the fair value of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
As discussed above, paragraph 25 of AASB 3 requires the cost of a business combination involving more than one exchange transaction to be measured as the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). Therefore, irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, the cost to Investor of the combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000).
In addition, and again irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, each transaction must be treated separately for the purpose of determining the amount of goodwill on that transaction, using cost and fair value information at the date of each exchange transaction.
any changes in the carrying amount of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
Consequently, the consolidated financial statements immediately after Investor acquires the additional 60% ownership interest and obtains control of Investee would be the same irrespective of the method used to account for the initial 20% investment in Investee before obtaining control.
The following example illustrates the application of the guidance in paragraph 62 of AASB 3 on completing the initial accounting for a business combination when the acquirer has, at the end of the first period after the combination, accounted for the combination using provisional values. This example does not address the accounting for any income tax effects arising from the adjustments.
AASB 3 requires the acquirer to account for a business combination using provisional values if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination is effected. The acquirer is required to recognise any adjustments to those provisional values as a result of completing the initial accounting:
(i) the carrying amount of an identifiable asset, liability or contingent liability that is recognised or adjusted as a result of completing the initial accounting is calculated as if its fair value at the acquisition date had been recognised from that date;
(ii) goodwill or any gain recognised in accordance with paragraph 56 is adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognised or adjusted;
(iii) comparative information presented for the periods before the initial accounting for the combination is complete is presented as if the initial accounting had been completed from the acquisition date. This includes any additional depreciation, amortisation or other profit or loss effects recognised as a result of completing the initial accounting.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X4. The entity sought an independent appraisal for an item of property, plant and equipment acquired in the combination. However, the appraisal was not finalised by the time the entity completed its 20X4 annual financial statements. The entity recognised in its 20X4 annual financial statements a provisional fair value for the asset of CU30,000, and a provisional value for acquired goodwill of CU100,000. The item of property, plant and equipment had a remaining useful life at the acquisition date of five years.
Four months after the acquisition date, the entity received the independent appraisal, which estimated the asset’s fair value at the acquisition date at CU40,000.
As outlined in paragraph 62 of AASB 3, the acquirer is required to recognise any adjustments to provisional values as a result of completing the initial accounting from the acquisition date.
Therefore, in the 20X5 financial statements, an adjustment is made to the opening carrying amount of the item of property, plant and equipment. That adjustment is measured as the fair value adjustment at the acquisition date of CU10,000, less the additional depreciation that would have been recognised had the asset’s fair value at the acquisition date been recognised from that date (CU500 for three months’ depreciation to 31 December 20X4). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU10,000, and the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
In accordance with paragraph 69 of AASB 3, the entity discloses in its 20X4 financial statements that the initial accounting for the business combination has been determined only provisionally, and explains why this is the case. In accordance with paragraph 73(b) of AASB 3, the entity discloses in its 20X5 financial statements the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, the entity discloses that:
the fair value of the item of property, plant and equipment at the acquisition date has been increased by CU10,000 with a corresponding decrease in goodwill; and
the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
The following examples illustrate the application of the guidance in paragraphs 63 and 64 of AASB 3 on the accounting for error corrections related to the initial accounting for a business combination. These examples do not address the accounting for any income tax effects arising from the adjustments.
With three exceptions,[4] AASB 3 requires adjustments to be made to the initial accounting for a business combination after that initial accounting is complete only to correct an error in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. After that accounting is completed, adjustments cannot be recognised for the effect of changes in accounting estimates. In accordance with AASB 108, the effect of a change in an accounting estimate is recognised prospectively. AASB 108 provides guidance on distinguishing corrections of errors from changes in accounting estimates.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X1. As part of the initial accounting for that combination, the entity recognised goodwill of CU100,000. The carrying amount of goodwill at 31 December 20X1 was CU100,000.
During 20X2, the entity becomes aware of an error relating to the amount initially allocated to property, plant and equipment assets acquired in the business combination. In particular, CU20,000 of the CU100,000 initially allocated to goodwill should be allocated to property, plant and equipment assets that had a remaining useful life at the acquisition date of five years.
As outlined in paragraph 64 of AASB 3, AASB 108 requires the correction of an error to be accounted for retrospectively, and for the financial statements to be presented as if the error had never occurred by correcting the error in the comparative information for the prior period(s) in which it occurred.
Therefore, in the 20X2 financial statements, an adjustment is made to the opening carrying amount of property, plant and equipment assets. That adjustment is measured as the fair value adjustment at the acquisition date of CU20,000 less the amount that would have been recognised as depreciation of the fair value adjustment (CU1,000 for three months’ depreciation to 31 December 20X1). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU20,000, and the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been increased by CU20,000 with a corresponding decrease in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
This example assumes the same facts as in Example 8, except that the amount initially allocated to property, plant and equipment assets is decreased by CU20,000 to correct the error, rather than increased by CU20,000. This example also assumes that the entity determines that the recoverable amount of the additional goodwill is only CU17,000 at 31 December 20X1.
In the 20X2 financial statements, the opening carrying amount of property, plant and equipment assets is reduced by CU19,000, being the fair value adjustment at the acquisition date of CU20,000 less CU1,000 in depreciation expense recognised for the three-month period to 31 December 20X1. The carrying amount of goodwill is increased by CU17,000, being the increase in value at the acquisition date of CU20,000 less a CU3,000 impairment loss to reflect that the carrying amount of the adjustment exceeds its recoverable amount. The 20X1 comparative information is restated to reflect this adjustment and to exclude the CU1,000 depreciation and include the CU3,000 impairment loss.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been decreased by CU20,000 with a corresponding increase in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to exclude CU1,000 depreciation recognised during the year ended 31 December 20X1 and include a CU3,000 impairment loss for goodwill relating to the year ended 31 December 20X1.
Entity A obtained control of Entity B in a business combination on 31 December 20X4. Entity B does business with its customers solely through purchase and sales orders. At 31 December 20X4, Entity B has a backlog of customer purchase orders from 60% of its customers, all of whom are recurring customers. The other 40% of Entity B's customers are also recurring customers. However, as of 31 December 20X4, Entity B does not have any open purchase orders or other contracts with those customers.
The purchase orders from 60% of Entity B's customers (whether cancellable or not) meet the contractual-legal criterion for identification as intangible assets, and are therefore recognised separately from goodwill, provided their fair values can be measured reliably. Additionally, because Entity B has established its relationship with 60% of its customers through contracts, those customer relationships meet the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably.
Because Entity B has a practice of establishing contracts with the remaining 40% of its customers, its relationship with those customers also arises through contractual rights, and therefore meets the contractual-legal criterion for identification as an intangible asset. Entity A recognises this customer relationship separately from goodwill, provided its fair value can be measured reliably, even though Entity B does not have contracts with those customers at 31 December 20X4.
Example 4 Example 4
The following guidance provides examples of items acquired in a business combination that meet the definition of an intangible asset and are therefore recognised under AASB 3 separately from goodwill, provided that their fair values can be measured reliably. To meet the definition of an intangible asset a non-monetary asset without physical substance must be identifiable, that is, it must arise from contractual or other legal rights or be separable.
The examples provided below are not intended to be an exhaustive list of items acquired in a business combination that meet the definition of an intangible asset. A non-monetary asset without physical substance acquired in a business combination might meet the identifiability criterion for identification as an intangible asset but not be included in this guidance.
Assets designated with the symbol are those that meet the definition of an intangible asset because they arise from contractual or other legal rights. Assets designated with the symbol do not arise from contractual or other legal rights, but meet the definition of an intangible asset because they are separable. Assets designated with the symbol might also be separable; however, separability is not a necessary condition for an asset to meet the contractual-legal criterion.
Trademarks are words, names, symbols or other devices used in trade to indicate the source of a product and to distinguish it from the products of others. A service mark identifies and distinguishes the source of a service rather than a product. Collective marks are used to identify the goods or services of members of a group. Certification marks are used to certify the geographical origin or other characteristics of a good or service.
Trademarks, trade names, service marks, collective marks and certification marks may be protected legally through registration with governmental agencies, continuous use in commerce, or by other means. Provided it is protected legally through registration or other means, a trademark or other mark acquired in a business combination is an intangible asset that meets the contractual-legal criterion. Otherwise, a trademark or other mark acquired in a business combination can meet the definition of an intangible asset provided the separability criterion is met, which would normally be the case.
The terms ‘brand’ and ‘brand name’ are often used as synonyms for trademarks and other marks. However, the former are general marketing terms that are typically used to refer to a group of complementary assets such as a trademark (or service mark) and its related trade name, formulas, recipes and technological expertise.
An Internet domain name is a unique alphanumeric name that is used to identify a particular numeric Internet address. Registration of a domain name creates an association between that name and a designated computer on the Internet for the period of the registration. Those registrations are renewable. A registered domain name acquired in a business combination is an intangible asset that meets the contractual-legal criterion.
A customer list consists of information about customers, such as their name and contact information. A customer list may also be in the form of a database that includes other information about the customers such as their order history and demographic information. A customer list does not generally arise from contractual or other legal rights. However, customer lists are valuable and are frequently leased or exchanged. Therefore, a customer list acquired in a business combination normally meets the separability criterion for identification as an intangible asset. However, a customer list acquired in a business combination would not meet that criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing or otherwise exchanging information about its customers.
An order or production backlog arises from contracts such as purchase or sales orders. An order or production backlog acquired in a business combination meets the contractual-legal criterion for identification as an intangible asset, even if the purchase or sales orders are cancellable.
If an entity establishes relationships with its customers through contracts, those customer relationships arise from contractual rights. Therefore, customer contracts and the related customer relationships acquired in a business combination meet the contractual-legal criterion for identification as intangible assets. This will be the case even if confidentiality or other contractual terms prohibit the sale or transfer of a contract separately from the acquired entity or business.
Customer relationships also meet the contractual-legal criterion for identification as intangible assets when an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date.
As noted in B2, an order or a production backlog arises from contracts such as purchase or sales orders, and is therefore also considered a contractual right. Consequently, if an entity has customer relationships with its customers through these types of contracts, the customer relationships also arise from contractual rights, and therefore meet the contractual-legal criterion for identification as intangible assets.
If a customer relationship acquired in a business combination does not arise from a contract, the relationship is an intangible asset if it meets the separability criterion. Exchange transactions for the same asset or a similar asset provide evidence of separability of a non-contractual customer relationship and might also provide information about exchange prices that should be considered when estimating fair value.
Artistic-related assets acquired in a business combination meet the criteria for identification as intangible assets if they arise from contractual or legal rights such as those provided by copyright. Copyrights can be transferred either in whole through assignments or in part through licensing agreements. An entity is not precluded from recognising a copyright intangible asset and any related assignments or licence agreements as a single asset, provided they have similar useful lives.
Contracts to service financial assets are one particular type of contract-based intangible asset. While servicing is inherent in all financial assets, it becomes a distinct asset (or liability):
(a) when contractually separated from the underlying financial asset by sale or securitisation of the assets with servicing retained; or
If mortgage loans, credit card receivables or other financial assets are acquired in a business combination with servicing retained, the inherent servicing rights are not a separate intangible asset because the fair value of those servicing rights is included in the measurement of the fair value of the acquired financial asset.
9 Employment contracts that are beneficial contracts from the perspective of the employer because the pricing of those contracts is below their current market value
If computer software and program formats acquired in a business combination are protected legally, such as by patent or copyright, they meet the contractual-legal criterion for identification as intangible assets.
Mask works are software permanently stored on a read-only memory chip as a series of stencils or integrated circuitry. Mask works may have legal protection. Mask works with legal protection that are acquired in a business combination also meet the contractual-legal criterion for identification as intangible assets.
Databases are collections of information, often stored in electronic form (such as on computer disks or files). A database that includes original works of authorship may be entitled to copyright protection. If a database acquired in a business combination is protected by copyright, it meets the contractual-legal criterion for identification as an intangible asset. However, a database typically includes information created as a consequence of an entity’s normal operations, such as customer lists, or specialised information such as scientific data or credit information. Databases that are not protected by copyright can be, and often are, exchanged, licensed or leased to others in their entirety or in part. Therefore, even if the future economic benefits from a database do not arise from legal rights, a database acquired in a business combination meets the separability criterion for identification as an intangible asset.
If the future economic benefits from a trade secret acquired in a business combination are legally protected, that asset meets the contractual-legal criterion for identification as an intangible asset. Otherwise, trade secrets acquired in a business combination meet the definition of an intangible asset only if the separability criterion is met, which is often likely to be the case.
The following examples illustrate the recognition in accordance with AASB 3 of customer relationship intangible assets acquired in a business combination.
Parent obtained control of Supplier in a business combination on 31 December 20X4. Supplier has a five-year agreement to supply goods to Buyer. Both Supplier and Parent believe that Buyer will renew the supply agreement at the end of the current contract. The supply agreement is not separable.
The supply agreement (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and therefore is recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Supplier establishes its relationship with Buyer through a contract, the customer relationship with Buyer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably. In determining the fair value of the customer relationship, Parent considers assumptions such as the expected renewal of the supply agreement.
Parent obtained control of Subsidiary in a business combination on 31 December 20X4. Subsidiary manufactures goods in two distinct lines of business – sporting goods and electronics. Customer purchases from Subsidiary both sporting goods and electronics. Subsidiary has a contract with Customer to be its exclusive provider of sporting goods. However, there is no contract for the supply of electronics to Customer. Both Subsidiary and Parent believe that there is only one overall customer relationship between Subsidiary and Customer.
The contract to be Customer’s exclusive supplier of sporting goods (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and is therefore recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Subsidiary establishes its relationship with Customer through a contract, the customer relationship with Customer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill, provided its fair value can be measured reliably. Because there is only one customer relationship with Customer, the fair value of that relationship incorporates assumptions regarding Subsidiary's relationship with Customer related to both sporting goods and electronics.
However, if both Parent and Subsidiary believed there were separate customer relationships with Customer – one for sporting goods and another for electronics – the customer relationship with respect to electronics would be assessed by Parent to determine whether it meets the separability criterion for identification as an intangible asset.
Entity A obtained control of Entity B in a business combination on 31 December 20X4. Entity B does business with its customers solely through purchase and sales orders. At 31 December 20X4, Entity B has a backlog of customer purchase orders from 60% of its customers, all of whom are recurring customers. The other 40% of Entity B's customers are also recurring customers. However, as of 31 December 20X4, Entity B does not have any open purchase orders or other contracts with those customers.
The purchase orders from 60% of Entity B's customers (whether cancellable or not) meet the contractual-legal criterion for identification as intangible assets, and are therefore recognised separately from goodwill, provided their fair values can be measured reliably. Additionally, because Entity B has established its relationship with 60% of its customers through contracts, those customer relationships meet the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably.
Because Entity B has a practice of establishing contracts with the remaining 40% of its customers, its relationship with those customers also arises through contractual rights, and therefore meets the contractual-legal criterion for identification as an intangible asset. Entity A recognises this customer relationship separately from goodwill, provided its fair value can be measured reliably, even though Entity B does not have contracts with those customers at 31 December 20X4.
Parent obtained control of Insurer in a business combination on 31 December 20X4. Insurer has a portfolio of one-year motor insurance contracts that are cancellable by policyholders. A reasonably predictable number of policyholders renew their insurance contracts each year.
Because Insurer establishes its relationships with policyholders through insurance contracts, the customer relationship with policyholders meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is recognised separately from goodwill, provided its fair value can be measured reliably. In determining the fair value of the customer relationship intangible asset, Parent considers estimates of renewals and cross-selling. AASB 136 Impairment of Assets and AASB 138 Intangible Assets apply to the customer relationship intangible asset.
In determining the fair value of the liability relating to the portfolio of insurance contracts, Parent considers estimates of cancellations by policyholders. AASB 4 Insurance Contracts permits, but does not require, an expanded presentation that splits the fair value of acquired insurance contracts into two components:
(a) a liability measured in accordance with the insurer’s accounting policies for insurance contracts that it issues; and
(b) an intangible asset, representing the fair value of the contractual rights and obligations acquired, to the extent that the liability does not reflect that fair value. This intangible asset is excluded from the scope of AASB 136 and AASB 138. After the business combination, Parent is required to measure that intangible asset on a basis consistent with the measurement of the related insurance liability.
The following example illustrates the application of the guidance on reverse acquisition accounting provided as an application supplement in paragraphs B1‑B15 of Appendix B of AASB 3.
This example illustrates the accounting for a reverse acquisition in which Entity A, the entity issuing equity instruments and therefore the legal parent, is acquired in a reverse acquisition by Entity B, the legal subsidiary, on 30 September 20X1. The accounting for any income tax effects is ignored in this example:
(a) On 30 September 20X1, A issues 2½ shares in exchange for each ordinary share of B. All of B’s shareholders exchange their shares in B. Therefore, A issues 150 ordinary shares in exchange for all 60 ordinary shares of B.
(b) The fair value of each ordinary share of B at 30 September 20X1 is CU40. The quoted market price of A’s ordinary shares at that date is CU12.
(c) The fair values of A’s identifiable assets and liabilities at 30 September 20X1 are the same as their carrying amounts, with the exception of non-current assets. The fair value of A’s non-current assets at 30 September 20X1 is CU1,500.
As a result of the issue of 150 ordinary shares by A, B’s shareholders own 60% of the issued shares of the combined entity (i.e. 150 shares out of 250 issued shares). The remaining 40% are owned by A’s shareholders. If the business combination had taken place in the form of B issuing additional ordinary shares to A’s shareholders in exchange for their ordinary shares in A, B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. B’s shareholders would then own 60 out of the 100 issued shares of B and therefore 60% of the combined entity.
Goodwill is measured as the excess of the cost of the business combination over the net fair value of A’s identifiable assets and liabilities. Therefore, goodwill is measured as follows:
CU
CU
Cost of the business combination
1,600
Net fair value of A’s identifiable assets and liabilities:Current assetsNon-current assetsCurrent liabilitiesNon-current liabilities
5001,500(300)(400)
1,300
Goodwill
300
Assume that B’s profit for the annual period ending 31 December 20X0 was CU600, and that the consolidated profit for the annual period ending 31 December 20X1 is CU800. Assume also that there was no change in the number of ordinary shares issued by B during the annual period ending 31 December 20X0 and during the period from 1 January 20X1 to the date of the reverse acquisition (30 September 20X1).
Number of shares deemed to be outstanding for the period from 1 January 20X1 to the acquisition date (i.e. the number of ordinary shares issued by A in the reverse acquisition)
150
Number of shares outstanding from the acquisition date to 31 December 20X1
250
Weighted average number of ordinary shares outstanding [(150 x 9/12) + (250 x 3/12)]
175
Earnings per share [800/175]
CU4.57
Restated earnings per share for the annual period ending 31 December 20X0 is 4.00 (i.e. the profit of B of 600 divided by the number of ordinary shares issued by A in the reverse acquisition).
In the above example, assume that only 56 of B’s ordinary shares are tendered for exchange rather than all 60. Because A issues 2½ shares in exchange for each ordinary share of B, A issues only 140 (rather than 150) shares. As a result, B’s shareholders own 58.3% of the issued shares of the combined entity (i.e. 140 shares out of 240 issued shares).
The cost of the business combination is calculated by assuming that the combination had taken place in the form of B issuing additional ordinary shares to the shareholders of A in exchange for their ordinary shares in A. In calculating the number of shares that would have to be issued by B, the minority interest is ignored. The majority shareholders own 56 shares of B. For this to represent a 58.3% ownership interest, B would have had to issue an additional 40 shares. The majority shareholders would then own 56 out of the 96 issued shares of B and therefore 58.3% of the combined entity.
As a result, the cost of the business combination is CU1,600 (i.e. 40 shares each with a fair value of CU40). This is the same amount as when all 60 of B’s ordinary shares are tendered for exchange. The cost of the combination does not change simply because some of B’s shareholders do not participate in the exchange.
The minority interest is represented by the 4 shares of the total 60 shares of B that are not exchanged for shares of A. Therefore, the minority interest is 6.7%. The minority interest reflects the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the net assets of the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a minority interest of 6.7% of the pre-combination carrying amounts of B’s net assets (i.e. CU134 or 6.7% of CU2,000).
The following example illustrates the application of the guidance on business combinations achieved in stages in paragraphs 58-60 of AASB 3. In particular, it deals with successive share purchases that result in an investee previously accounted for at fair value being included as a subsidiary in the consolidated financial statements.
Immediately following the example is a discussion of the outcome of applying the guidance in paragraphs 58-60 of AASB 3 to the example assuming the investee had previously been accounted for at cost or by applying the equity method, rather than at fair value.
Investor acquires a 20% ownership interest in Investee (a service company) on 1 January 20X1 for CU3,500,000 cash. At that date, the fair value of Investee’s identifiable assets is CU10,000,000, and the carrying amount of those assets is CU8,000,000. Investee has no liabilities or contingent liabilities at that date. The following shows Investee’s statement of financial position at 1 January 20X1 together with the fair values of the identifiable assets:
During the year ended 31 December 20X1, Investee reports a profit of CU6,000,000 but does not pay any dividends. In addition, the fair value of Investee’s land increases by CU3,000,000 to CU11,000,000. However, the amount recognised by Investee in respect of the land remains unchanged at CU6,000,000. The following shows Investee’s statement of financial position at 31 December 20X1 together with the fair values of the identifiable assets:
On 1 January 20X2, Investor acquires a further 60% ownership interest in Investee for CU22,000,000 cash, thereby obtaining control. Before obtaining control, Investor does not have significant influence over Investee, and accounts for its initial 20% investment at fair value with changes in value included in profit or loss. Investee’s ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share.[2]
Throughout the period 1 January 20X1 to 1 January 20X2, Investor’s issued equity was CU30,000,000. Investor’s only asset apart from its investment in Investee is cash.
Investor’s initial 20% investment in Investee is measured at CU3,500,000. However, Investee’s 1,000,000 ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share. Therefore, the carrying amount of Investor’s initial 20% investment is remeasured in Investor’s financial statements to CU6,000,000 at 31 December 20X1, with the CU2,500,000 increase recognised in profit or loss for the period. Therefore, Investor’s statement of financial position at 31 December 20X1, before the acquisition of the additional 60% ownership interest, is as follows:
Paragraph 25 of AASB 3 states that when a business combination involves more than one exchange transaction, the cost of the combination is the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). This means that for this example, the cost to Investor of the business combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000), irrespective of the fact that the carrying amount of the initial 20% interest has changed.
In addition, and in accordance with paragraph 58 of AASB 3, each transaction must be treated separately to determine the goodwill on that transaction, using cost and fair value information at the date of each exchange transaction. Therefore, Investor recognises the following amounts for goodwill in its consolidated financial statements:
The following shows Investor’s consolidation worksheet (all amounts in CU) immediately after the acquisition of the additional 60% ownership interest in Investee, together with consolidation adjustments and associated explanations:
To recognise goodwill on the initial 20% investment in Investee and record the elimination of that investment against associated equity balances
To recognise goodwill on the subsequent 60% investment in Investee and record elimination of that investment against associated equity balances
(a) investee’s identifiable net assets being stated at their full fair values at the date Investor obtains control of Investee. This means that the 20% minority interest in Investee also is stated at the minority’s 20% share of the fair values of Investee’s identifiable net assets;
(b) goodwill being recognised from the acquisition date at an amount based on treating each exchange transaction separately and using cost and fair value information at the date of each exchange transaction;
(d) an asset revaluation reserve of CU600,000. This amount reflects that part of the increase in the fair value of Investee’s identifiable net assets after the acquisition of the initial 20% interest that is attributable to that initial 20% interest [20% × CU3,000,000];
(e) a retained earnings balance of CU1,200,000. This amount reflects the changes in Investee’s retained earnings after Investor acquired its initial 20% interest that is attributable to that 20% interest [20% × CU6,000,000].
Therefore, the effect of applying the requirements in AASB 3 to business combinations involving successive share purchases for which the investment was previously accounted for at fair value with changes in value included in profit or loss is to cause:
changes in the fair value of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
As discussed above, paragraph 25 of AASB 3 requires the cost of a business combination involving more than one exchange transaction to be measured as the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). Therefore, irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, the cost to Investor of the combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000).
In addition, and again irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, each transaction must be treated separately for the purpose of determining the amount of goodwill on that transaction, using cost and fair value information at the date of each exchange transaction.
any changes in the carrying amount of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
Consequently, the consolidated financial statements immediately after Investor acquires the additional 60% ownership interest and obtains control of Investee would be the same irrespective of the method used to account for the initial 20% investment in Investee before obtaining control.
The following example illustrates the application of the guidance in paragraph 62 of AASB 3 on completing the initial accounting for a business combination when the acquirer has, at the end of the first period after the combination, accounted for the combination using provisional values. This example does not address the accounting for any income tax effects arising from the adjustments.
AASB 3 requires the acquirer to account for a business combination using provisional values if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination is effected. The acquirer is required to recognise any adjustments to those provisional values as a result of completing the initial accounting:
(i) the carrying amount of an identifiable asset, liability or contingent liability that is recognised or adjusted as a result of completing the initial accounting is calculated as if its fair value at the acquisition date had been recognised from that date;
(ii) goodwill or any gain recognised in accordance with paragraph 56 is adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognised or adjusted;
(iii) comparative information presented for the periods before the initial accounting for the combination is complete is presented as if the initial accounting had been completed from the acquisition date. This includes any additional depreciation, amortisation or other profit or loss effects recognised as a result of completing the initial accounting.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X4. The entity sought an independent appraisal for an item of property, plant and equipment acquired in the combination. However, the appraisal was not finalised by the time the entity completed its 20X4 annual financial statements. The entity recognised in its 20X4 annual financial statements a provisional fair value for the asset of CU30,000, and a provisional value for acquired goodwill of CU100,000. The item of property, plant and equipment had a remaining useful life at the acquisition date of five years.
Four months after the acquisition date, the entity received the independent appraisal, which estimated the asset’s fair value at the acquisition date at CU40,000.
As outlined in paragraph 62 of AASB 3, the acquirer is required to recognise any adjustments to provisional values as a result of completing the initial accounting from the acquisition date.
Therefore, in the 20X5 financial statements, an adjustment is made to the opening carrying amount of the item of property, plant and equipment. That adjustment is measured as the fair value adjustment at the acquisition date of CU10,000, less the additional depreciation that would have been recognised had the asset’s fair value at the acquisition date been recognised from that date (CU500 for three months’ depreciation to 31 December 20X4). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU10,000, and the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
In accordance with paragraph 69 of AASB 3, the entity discloses in its 20X4 financial statements that the initial accounting for the business combination has been determined only provisionally, and explains why this is the case. In accordance with paragraph 73(b) of AASB 3, the entity discloses in its 20X5 financial statements the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, the entity discloses that:
the fair value of the item of property, plant and equipment at the acquisition date has been increased by CU10,000 with a corresponding decrease in goodwill; and
the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
The following examples illustrate the application of the guidance in paragraphs 63 and 64 of AASB 3 on the accounting for error corrections related to the initial accounting for a business combination. These examples do not address the accounting for any income tax effects arising from the adjustments.
With three exceptions,[4] AASB 3 requires adjustments to be made to the initial accounting for a business combination after that initial accounting is complete only to correct an error in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. After that accounting is completed, adjustments cannot be recognised for the effect of changes in accounting estimates. In accordance with AASB 108, the effect of a change in an accounting estimate is recognised prospectively. AASB 108 provides guidance on distinguishing corrections of errors from changes in accounting estimates.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X1. As part of the initial accounting for that combination, the entity recognised goodwill of CU100,000. The carrying amount of goodwill at 31 December 20X1 was CU100,000.
During 20X2, the entity becomes aware of an error relating to the amount initially allocated to property, plant and equipment assets acquired in the business combination. In particular, CU20,000 of the CU100,000 initially allocated to goodwill should be allocated to property, plant and equipment assets that had a remaining useful life at the acquisition date of five years.
As outlined in paragraph 64 of AASB 3, AASB 108 requires the correction of an error to be accounted for retrospectively, and for the financial statements to be presented as if the error had never occurred by correcting the error in the comparative information for the prior period(s) in which it occurred.
Therefore, in the 20X2 financial statements, an adjustment is made to the opening carrying amount of property, plant and equipment assets. That adjustment is measured as the fair value adjustment at the acquisition date of CU20,000 less the amount that would have been recognised as depreciation of the fair value adjustment (CU1,000 for three months’ depreciation to 31 December 20X1). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU20,000, and the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been increased by CU20,000 with a corresponding decrease in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
This example assumes the same facts as in Example 8, except that the amount initially allocated to property, plant and equipment assets is decreased by CU20,000 to correct the error, rather than increased by CU20,000. This example also assumes that the entity determines that the recoverable amount of the additional goodwill is only CU17,000 at 31 December 20X1.
In the 20X2 financial statements, the opening carrying amount of property, plant and equipment assets is reduced by CU19,000, being the fair value adjustment at the acquisition date of CU20,000 less CU1,000 in depreciation expense recognised for the three-month period to 31 December 20X1. The carrying amount of goodwill is increased by CU17,000, being the increase in value at the acquisition date of CU20,000 less a CU3,000 impairment loss to reflect that the carrying amount of the adjustment exceeds its recoverable amount. The 20X1 comparative information is restated to reflect this adjustment and to exclude the CU1,000 depreciation and include the CU3,000 impairment loss.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been decreased by CU20,000 with a corresponding increase in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to exclude CU1,000 depreciation recognised during the year ended 31 December 20X1 and include a CU3,000 impairment loss for goodwill relating to the year ended 31 December 20X1.
Parent obtained control of Insurer in a business combination on 31 December 20X4. Insurer has a portfolio of one-year motor insurance contracts that are cancellable by policyholders. A reasonably predictable number of policyholders renew their insurance contracts each year.
Because Insurer establishes its relationships with policyholders through insurance contracts, the customer relationship with policyholders meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is recognised separately from goodwill, provided its fair value can be measured reliably. In determining the fair value of the customer relationship intangible asset, Parent considers estimates of renewals and cross-selling. AASB 136 Impairment of Assets and AASB 138 Intangible Assets apply to the customer relationship intangible asset.
In determining the fair value of the liability relating to the portfolio of insurance contracts, Parent considers estimates of cancellations by policyholders. AASB 4 Insurance Contracts permits, but does not require, an expanded presentation that splits the fair value of acquired insurance contracts into two components:
(a) a liability measured in accordance with the insurer’s accounting policies for insurance contracts that it issues; and
(b) an intangible asset, representing the fair value of the contractual rights and obligations acquired, to the extent that the liability does not reflect that fair value. This intangible asset is excluded from the scope of AASB 136 and AASB 138. After the business combination, Parent is required to measure that intangible asset on a basis consistent with the measurement of the related insurance liability.
Reverse acquisitions Reverse acquisitions
The following example illustrates the application of the guidance on reverse acquisition accounting provided as an application supplement in paragraphs B1‑B15 of Appendix B of AASB 3.
Example 5 Example 5
This example illustrates the accounting for a reverse acquisition in which Entity A, the entity issuing equity instruments and therefore the legal parent, is acquired in a reverse acquisition by Entity B, the legal subsidiary, on 30 September 20X1. The accounting for any income tax effects is ignored in this example:
Statements of financial position of A an Statements of financial position of A and B immediately before the business combination
Other information Other information
(a) On 30 September 20X1, A issues 2½ shares in exchange for each ordinary share of B. All of B’s shareholders exchange their shares in B. Therefore, A issues 150 ordinary shares in exchange for all 60 ordinary shares of B.
(b) The fair value of each ordinary share of B at 30 September 20X1 is CU40. The quoted market price of A’s ordinary shares at that date is CU12.
(c) The fair values of A’s identifiable assets and liabilities at 30 September 20X1 are the same as their carrying amounts, with the exception of non-current assets. The fair value of A’s non-current assets at 30 September 20X1 is CU1,500.
Calculating the cost of the business com Calculating the cost of the business combination
As a result of the issue of 150 ordinary shares by A, B’s shareholders own 60% of the issued shares of the combined entity (i.e. 150 shares out of 250 issued shares). The remaining 40% are owned by A’s shareholders. If the business combination had taken place in the form of B issuing additional ordinary shares to A’s shareholders in exchange for their ordinary shares in A, B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. B’s shareholders would then own 60 out of the 100 issued shares of B and therefore 60% of the combined entity.
Measuring goodwill Measuring goodwill
Goodwill is measured as the excess of the cost of the business combination over the net fair value of A’s identifiable assets and liabilities. Therefore, goodwill is measured as follows:
CU
CU
Cost of the business combination
1,600
Net fair value of A’s identifiable assets and liabilities:Current assetsNon-current assetsCurrent liabilitiesNon-current liabilities
5001,500(300)(400)
1,300
Goodwill
300
Consolidated statement of financial posi Consolidated statement of financial position at 30 September 20X1
Earnings per share Earnings per share
Assume that B’s profit for the annual period ending 31 December 20X0 was CU600, and that the consolidated profit for the annual period ending 31 December 20X1 is CU800. Assume also that there was no change in the number of ordinary shares issued by B during the annual period ending 31 December 20X0 and during the period from 1 January 20X1 to the date of the reverse acquisition (30 September 20X1).
Number of shares deemed to be outstanding for the period from 1 January 20X1 to the acquisition date (i.e. the number of ordinary shares issued by A in the reverse acquisition)
150
Number of shares outstanding from the acquisition date to 31 December 20X1
250
Weighted average number of ordinary shares outstanding [(150 x 9/12) + (250 x 3/12)]
175
Earnings per share [800/175]
CU4.57
Restated earnings per share for the annual period ending 31 December 20X0 is 4.00 (i.e. the profit of B of 600 divided by the number of ordinary shares issued by A in the reverse acquisition).
Minority interest Minority interest
In the above example, assume that only 56 of B’s ordinary shares are tendered for exchange rather than all 60. Because A issues 2½ shares in exchange for each ordinary share of B, A issues only 140 (rather than 150) shares. As a result, B’s shareholders own 58.3% of the issued shares of the combined entity (i.e. 140 shares out of 240 issued shares).
The cost of the business combination is calculated by assuming that the combination had taken place in the form of B issuing additional ordinary shares to the shareholders of A in exchange for their ordinary shares in A. In calculating the number of shares that would have to be issued by B, the minority interest is ignored. The majority shareholders own 56 shares of B. For this to represent a 58.3% ownership interest, B would have had to issue an additional 40 shares. The majority shareholders would then own 56 out of the 96 issued shares of B and therefore 58.3% of the combined entity.
As a result, the cost of the business combination is CU1,600 (i.e. 40 shares each with a fair value of CU40). This is the same amount as when all 60 of B’s ordinary shares are tendered for exchange. The cost of the combination does not change simply because some of B’s shareholders do not participate in the exchange.
The minority interest is represented by the 4 shares of the total 60 shares of B that are not exchanged for shares of A. Therefore, the minority interest is 6.7%. The minority interest reflects the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the net assets of the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a minority interest of 6.7% of the pre-combination carrying amounts of B’s net assets (i.e. CU134 or 6.7% of CU2,000).
Business combination achieved in stages Business combination achieved in stages
The following example illustrates the application of the guidance on business combinations achieved in stages in paragraphs 58-60 of AASB 3. In particular, it deals with successive share purchases that result in an investee previously accounted for at fair value being included as a subsidiary in the consolidated financial statements.
Immediately following the example is a discussion of the outcome of applying the guidance in paragraphs 58-60 of AASB 3 to the example assuming the investee had previously been accounted for at cost or by applying the equity method, rather than at fair value.
Example 6 Example 6
Investor acquires a 20% ownership interest in Investee (a service company) on 1 January 20X1 for CU3,500,000 cash. At that date, the fair value of Investee’s identifiable assets is CU10,000,000, and the carrying amount of those assets is CU8,000,000. Investee has no liabilities or contingent liabilities at that date. The following shows Investee’s statement of financial position at 1 January 20X1 together with the fair values of the identifiable assets:
During the year ended 31 December 20X1, Investee reports a profit of CU6,000,000 but does not pay any dividends. In addition, the fair value of Investee’s land increases by CU3,000,000 to CU11,000,000. However, the amount recognised by Investee in respect of the land remains unchanged at CU6,000,000. The following shows Investee’s statement of financial position at 31 December 20X1 together with the fair values of the identifiable assets:
On 1 January 20X2, Investor acquires a further 60% ownership interest in Investee for CU22,000,000 cash, thereby obtaining control. Before obtaining control, Investor does not have significant influence over Investee, and accounts for its initial 20% investment at fair value with changes in value included in profit or loss. Investee’s ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share.[2]
Throughout the period 1 January 20X1 to 1 January 20X2, Investor’s issued equity was CU30,000,000. Investor’s only asset apart from its investment in Investee is cash.
Accounting for the initial investment be Accounting for the initial investment before obtaining control
Investor’s initial 20% investment in Investee is measured at CU3,500,000. However, Investee’s 1,000,000 ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share. Therefore, the carrying amount of Investor’s initial 20% investment is remeasured in Investor’s financial statements to CU6,000,000 at 31 December 20X1, with the CU2,500,000 increase recognised in profit or loss for the period. Therefore, Investor’s statement of financial position at 31 December 20X1, before the acquisition of the additional 60% ownership interest, is as follows:
Accounting for the business combination Accounting for the business combination
Paragraph 25 of AASB 3 states that when a business combination involves more than one exchange transaction, the cost of the combination is the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). This means that for this example, the cost to Investor of the business combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000), irrespective of the fact that the carrying amount of the initial 20% interest has changed.
In addition, and in accordance with paragraph 58 of AASB 3, each transaction must be treated separately to determine the goodwill on that transaction, using cost and fair value information at the date of each exchange transaction. Therefore, Investor recognises the following amounts for goodwill in its consolidated financial statements:
The following shows Investor’s consolidation worksheet (all amounts in CU) immediately after the acquisition of the additional 60% ownership interest in Investee, together with consolidation adjustments and associated explanations:
To recognise goodwill on the initial 20% investment in Investee and record the elimination of that investment against associated equity balances
To recognise goodwill on the subsequent 60% investment in Investee and record elimination of that investment against associated equity balances
Notes Notes
(a) investee’s identifiable net assets being stated at their full fair values at the date Investor obtains control of Investee. This means that the 20% minority interest in Investee also is stated at the minority’s 20% share of the fair values of Investee’s identifiable net assets;
(b) goodwill being recognised from the acquisition date at an amount based on treating each exchange transaction separately and using cost and fair value information at the date of each exchange transaction;
(d) an asset revaluation reserve of CU600,000. This amount reflects that part of the increase in the fair value of Investee’s identifiable net assets after the acquisition of the initial 20% interest that is attributable to that initial 20% interest [20% × CU3,000,000];
(e) a retained earnings balance of CU1,200,000. This amount reflects the changes in Investee’s retained earnings after Investor acquired its initial 20% interest that is attributable to that 20% interest [20% × CU6,000,000].
Therefore, the effect of applying the requirements in AASB 3 to business combinations involving successive share purchases for which the investment was previously accounted for at fair value with changes in value included in profit or loss is to cause:
changes in the fair value of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
Applying AASB 3 if the investee had prev Applying AASB 3 if the investee had previously been accounted for at cost or using the equity method
As discussed above, paragraph 25 of AASB 3 requires the cost of a business combination involving more than one exchange transaction to be measured as the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). Therefore, irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, the cost to Investor of the combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000).
In addition, and again irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, each transaction must be treated separately for the purpose of determining the amount of goodwill on that transaction, using cost and fair value information at the date of each exchange transaction.
any changes in the carrying amount of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
Consequently, the consolidated financial statements immediately after Investor acquires the additional 60% ownership interest and obtains control of Investee would be the same irrespective of the method used to account for the initial 20% investment in Investee before obtaining control.
Changes in the values assigned to the ac Changes in the values assigned to the acquiree’s identifiable assets
The following guidance provides examples of items acquired in a business combination that meet the definition of an intangible asset and are therefore recognised under AASB 3 separately from goodwill, provided that their fair values can be measured reliably. To meet the definition of an intangible asset a non-monetary asset without physical substance must be identifiable, that is, it must arise from contractual or other legal rights or be separable.
The examples provided below are not intended to be an exhaustive list of items acquired in a business combination that meet the definition of an intangible asset. A non-monetary asset without physical substance acquired in a business combination might meet the identifiability criterion for identification as an intangible asset but not be included in this guidance.
Assets designated with the symbol are those that meet the definition of an intangible asset because they arise from contractual or other legal rights. Assets designated with the symbol do not arise from contractual or other legal rights, but meet the definition of an intangible asset because they are separable. Assets designated with the symbol might also be separable; however, separability is not a necessary condition for an asset to meet the contractual-legal criterion.
Trademarks are words, names, symbols or other devices used in trade to indicate the source of a product and to distinguish it from the products of others. A service mark identifies and distinguishes the source of a service rather than a product. Collective marks are used to identify the goods or services of members of a group. Certification marks are used to certify the geographical origin or other characteristics of a good or service.
Trademarks, trade names, service marks, collective marks and certification marks may be protected legally through registration with governmental agencies, continuous use in commerce, or by other means. Provided it is protected legally through registration or other means, a trademark or other mark acquired in a business combination is an intangible asset that meets the contractual-legal criterion. Otherwise, a trademark or other mark acquired in a business combination can meet the definition of an intangible asset provided the separability criterion is met, which would normally be the case.
The terms ‘brand’ and ‘brand name’ are often used as synonyms for trademarks and other marks. However, the former are general marketing terms that are typically used to refer to a group of complementary assets such as a trademark (or service mark) and its related trade name, formulas, recipes and technological expertise.
An Internet domain name is a unique alphanumeric name that is used to identify a particular numeric Internet address. Registration of a domain name creates an association between that name and a designated computer on the Internet for the period of the registration. Those registrations are renewable. A registered domain name acquired in a business combination is an intangible asset that meets the contractual-legal criterion.
A customer list consists of information about customers, such as their name and contact information. A customer list may also be in the form of a database that includes other information about the customers such as their order history and demographic information. A customer list does not generally arise from contractual or other legal rights. However, customer lists are valuable and are frequently leased or exchanged. Therefore, a customer list acquired in a business combination normally meets the separability criterion for identification as an intangible asset. However, a customer list acquired in a business combination would not meet that criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing or otherwise exchanging information about its customers.
An order or production backlog arises from contracts such as purchase or sales orders. An order or production backlog acquired in a business combination meets the contractual-legal criterion for identification as an intangible asset, even if the purchase or sales orders are cancellable.
If an entity establishes relationships with its customers through contracts, those customer relationships arise from contractual rights. Therefore, customer contracts and the related customer relationships acquired in a business combination meet the contractual-legal criterion for identification as intangible assets. This will be the case even if confidentiality or other contractual terms prohibit the sale or transfer of a contract separately from the acquired entity or business.
Customer relationships also meet the contractual-legal criterion for identification as intangible assets when an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date.
As noted in B2, an order or a production backlog arises from contracts such as purchase or sales orders, and is therefore also considered a contractual right. Consequently, if an entity has customer relationships with its customers through these types of contracts, the customer relationships also arise from contractual rights, and therefore meet the contractual-legal criterion for identification as intangible assets.
If a customer relationship acquired in a business combination does not arise from a contract, the relationship is an intangible asset if it meets the separability criterion. Exchange transactions for the same asset or a similar asset provide evidence of separability of a non-contractual customer relationship and might also provide information about exchange prices that should be considered when estimating fair value.
Artistic-related assets acquired in a business combination meet the criteria for identification as intangible assets if they arise from contractual or legal rights such as those provided by copyright. Copyrights can be transferred either in whole through assignments or in part through licensing agreements. An entity is not precluded from recognising a copyright intangible asset and any related assignments or licence agreements as a single asset, provided they have similar useful lives.
Contracts to service financial assets are one particular type of contract-based intangible asset. While servicing is inherent in all financial assets, it becomes a distinct asset (or liability):
(a) when contractually separated from the underlying financial asset by sale or securitisation of the assets with servicing retained; or
If mortgage loans, credit card receivables or other financial assets are acquired in a business combination with servicing retained, the inherent servicing rights are not a separate intangible asset because the fair value of those servicing rights is included in the measurement of the fair value of the acquired financial asset.
9 Employment contracts that are beneficial contracts from the perspective of the employer because the pricing of those contracts is below their current market value
If computer software and program formats acquired in a business combination are protected legally, such as by patent or copyright, they meet the contractual-legal criterion for identification as intangible assets.
Mask works are software permanently stored on a read-only memory chip as a series of stencils or integrated circuitry. Mask works may have legal protection. Mask works with legal protection that are acquired in a business combination also meet the contractual-legal criterion for identification as intangible assets.
Databases are collections of information, often stored in electronic form (such as on computer disks or files). A database that includes original works of authorship may be entitled to copyright protection. If a database acquired in a business combination is protected by copyright, it meets the contractual-legal criterion for identification as an intangible asset. However, a database typically includes information created as a consequence of an entity’s normal operations, such as customer lists, or specialised information such as scientific data or credit information. Databases that are not protected by copyright can be, and often are, exchanged, licensed or leased to others in their entirety or in part. Therefore, even if the future economic benefits from a database do not arise from legal rights, a database acquired in a business combination meets the separability criterion for identification as an intangible asset.
If the future economic benefits from a trade secret acquired in a business combination are legally protected, that asset meets the contractual-legal criterion for identification as an intangible asset. Otherwise, trade secrets acquired in a business combination meet the definition of an intangible asset only if the separability criterion is met, which is often likely to be the case.
The following examples illustrate the recognition in accordance with AASB 3 of customer relationship intangible assets acquired in a business combination.
Parent obtained control of Supplier in a business combination on 31 December 20X4. Supplier has a five-year agreement to supply goods to Buyer. Both Supplier and Parent believe that Buyer will renew the supply agreement at the end of the current contract. The supply agreement is not separable.
The supply agreement (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and therefore is recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Supplier establishes its relationship with Buyer through a contract, the customer relationship with Buyer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably. In determining the fair value of the customer relationship, Parent considers assumptions such as the expected renewal of the supply agreement.
Parent obtained control of Subsidiary in a business combination on 31 December 20X4. Subsidiary manufactures goods in two distinct lines of business – sporting goods and electronics. Customer purchases from Subsidiary both sporting goods and electronics. Subsidiary has a contract with Customer to be its exclusive provider of sporting goods. However, there is no contract for the supply of electronics to Customer. Both Subsidiary and Parent believe that there is only one overall customer relationship between Subsidiary and Customer.
The contract to be Customer’s exclusive supplier of sporting goods (whether cancellable or not) meets the contractual-legal criterion for identification as an intangible asset, and is therefore recognised separately from goodwill, provided its fair value can be measured reliably. Additionally, because Subsidiary establishes its relationship with Customer through a contract, the customer relationship with Customer meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill, provided its fair value can be measured reliably. Because there is only one customer relationship with Customer, the fair value of that relationship incorporates assumptions regarding Subsidiary's relationship with Customer related to both sporting goods and electronics.
However, if both Parent and Subsidiary believed there were separate customer relationships with Customer – one for sporting goods and another for electronics – the customer relationship with respect to electronics would be assessed by Parent to determine whether it meets the separability criterion for identification as an intangible asset.
Entity A obtained control of Entity B in a business combination on 31 December 20X4. Entity B does business with its customers solely through purchase and sales orders. At 31 December 20X4, Entity B has a backlog of customer purchase orders from 60% of its customers, all of whom are recurring customers. The other 40% of Entity B's customers are also recurring customers. However, as of 31 December 20X4, Entity B does not have any open purchase orders or other contracts with those customers.
The purchase orders from 60% of Entity B's customers (whether cancellable or not) meet the contractual-legal criterion for identification as intangible assets, and are therefore recognised separately from goodwill, provided their fair values can be measured reliably. Additionally, because Entity B has established its relationship with 60% of its customers through contracts, those customer relationships meet the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is also recognised separately from goodwill provided its fair value can be measured reliably.
Because Entity B has a practice of establishing contracts with the remaining 40% of its customers, its relationship with those customers also arises through contractual rights, and therefore meets the contractual-legal criterion for identification as an intangible asset. Entity A recognises this customer relationship separately from goodwill, provided its fair value can be measured reliably, even though Entity B does not have contracts with those customers at 31 December 20X4.
Parent obtained control of Insurer in a business combination on 31 December 20X4. Insurer has a portfolio of one-year motor insurance contracts that are cancellable by policyholders. A reasonably predictable number of policyholders renew their insurance contracts each year.
Because Insurer establishes its relationships with policyholders through insurance contracts, the customer relationship with policyholders meets the contractual-legal criterion for identification as an intangible asset. Therefore, the customer relationship intangible asset is recognised separately from goodwill, provided its fair value can be measured reliably. In determining the fair value of the customer relationship intangible asset, Parent considers estimates of renewals and cross-selling. AASB 136 Impairment of Assets and AASB 138 Intangible Assets apply to the customer relationship intangible asset.
In determining the fair value of the liability relating to the portfolio of insurance contracts, Parent considers estimates of cancellations by policyholders. AASB 4 Insurance Contracts permits, but does not require, an expanded presentation that splits the fair value of acquired insurance contracts into two components:
(a) a liability measured in accordance with the insurer’s accounting policies for insurance contracts that it issues; and
(b) an intangible asset, representing the fair value of the contractual rights and obligations acquired, to the extent that the liability does not reflect that fair value. This intangible asset is excluded from the scope of AASB 136 and AASB 138. After the business combination, Parent is required to measure that intangible asset on a basis consistent with the measurement of the related insurance liability.
The following example illustrates the application of the guidance on reverse acquisition accounting provided as an application supplement in paragraphs B1‑B15 of Appendix B of AASB 3.
This example illustrates the accounting for a reverse acquisition in which Entity A, the entity issuing equity instruments and therefore the legal parent, is acquired in a reverse acquisition by Entity B, the legal subsidiary, on 30 September 20X1. The accounting for any income tax effects is ignored in this example:
(a) On 30 September 20X1, A issues 2½ shares in exchange for each ordinary share of B. All of B’s shareholders exchange their shares in B. Therefore, A issues 150 ordinary shares in exchange for all 60 ordinary shares of B.
(b) The fair value of each ordinary share of B at 30 September 20X1 is CU40. The quoted market price of A’s ordinary shares at that date is CU12.
(c) The fair values of A’s identifiable assets and liabilities at 30 September 20X1 are the same as their carrying amounts, with the exception of non-current assets. The fair value of A’s non-current assets at 30 September 20X1 is CU1,500.
As a result of the issue of 150 ordinary shares by A, B’s shareholders own 60% of the issued shares of the combined entity (i.e. 150 shares out of 250 issued shares). The remaining 40% are owned by A’s shareholders. If the business combination had taken place in the form of B issuing additional ordinary shares to A’s shareholders in exchange for their ordinary shares in A, B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. B’s shareholders would then own 60 out of the 100 issued shares of B and therefore 60% of the combined entity.
Goodwill is measured as the excess of the cost of the business combination over the net fair value of A’s identifiable assets and liabilities. Therefore, goodwill is measured as follows:
CU
CU
Cost of the business combination
1,600
Net fair value of A’s identifiable assets and liabilities:Current assetsNon-current assetsCurrent liabilitiesNon-current liabilities
5001,500(300)(400)
1,300
Goodwill
300
Assume that B’s profit for the annual period ending 31 December 20X0 was CU600, and that the consolidated profit for the annual period ending 31 December 20X1 is CU800. Assume also that there was no change in the number of ordinary shares issued by B during the annual period ending 31 December 20X0 and during the period from 1 January 20X1 to the date of the reverse acquisition (30 September 20X1).
Number of shares deemed to be outstanding for the period from 1 January 20X1 to the acquisition date (i.e. the number of ordinary shares issued by A in the reverse acquisition)
150
Number of shares outstanding from the acquisition date to 31 December 20X1
250
Weighted average number of ordinary shares outstanding [(150 x 9/12) + (250 x 3/12)]
175
Earnings per share [800/175]
CU4.57
Restated earnings per share for the annual period ending 31 December 20X0 is 4.00 (i.e. the profit of B of 600 divided by the number of ordinary shares issued by A in the reverse acquisition).
In the above example, assume that only 56 of B’s ordinary shares are tendered for exchange rather than all 60. Because A issues 2½ shares in exchange for each ordinary share of B, A issues only 140 (rather than 150) shares. As a result, B’s shareholders own 58.3% of the issued shares of the combined entity (i.e. 140 shares out of 240 issued shares).
The cost of the business combination is calculated by assuming that the combination had taken place in the form of B issuing additional ordinary shares to the shareholders of A in exchange for their ordinary shares in A. In calculating the number of shares that would have to be issued by B, the minority interest is ignored. The majority shareholders own 56 shares of B. For this to represent a 58.3% ownership interest, B would have had to issue an additional 40 shares. The majority shareholders would then own 56 out of the 96 issued shares of B and therefore 58.3% of the combined entity.
As a result, the cost of the business combination is CU1,600 (i.e. 40 shares each with a fair value of CU40). This is the same amount as when all 60 of B’s ordinary shares are tendered for exchange. The cost of the combination does not change simply because some of B’s shareholders do not participate in the exchange.
The minority interest is represented by the 4 shares of the total 60 shares of B that are not exchanged for shares of A. Therefore, the minority interest is 6.7%. The minority interest reflects the minority shareholders’ proportionate interest in the pre-combination carrying amounts of the net assets of the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a minority interest of 6.7% of the pre-combination carrying amounts of B’s net assets (i.e. CU134 or 6.7% of CU2,000).
The following example illustrates the application of the guidance on business combinations achieved in stages in paragraphs 58-60 of AASB 3. In particular, it deals with successive share purchases that result in an investee previously accounted for at fair value being included as a subsidiary in the consolidated financial statements.
Immediately following the example is a discussion of the outcome of applying the guidance in paragraphs 58-60 of AASB 3 to the example assuming the investee had previously been accounted for at cost or by applying the equity method, rather than at fair value.
Investor acquires a 20% ownership interest in Investee (a service company) on 1 January 20X1 for CU3,500,000 cash. At that date, the fair value of Investee’s identifiable assets is CU10,000,000, and the carrying amount of those assets is CU8,000,000. Investee has no liabilities or contingent liabilities at that date. The following shows Investee’s statement of financial position at 1 January 20X1 together with the fair values of the identifiable assets:
During the year ended 31 December 20X1, Investee reports a profit of CU6,000,000 but does not pay any dividends. In addition, the fair value of Investee’s land increases by CU3,000,000 to CU11,000,000. However, the amount recognised by Investee in respect of the land remains unchanged at CU6,000,000. The following shows Investee’s statement of financial position at 31 December 20X1 together with the fair values of the identifiable assets:
On 1 January 20X2, Investor acquires a further 60% ownership interest in Investee for CU22,000,000 cash, thereby obtaining control. Before obtaining control, Investor does not have significant influence over Investee, and accounts for its initial 20% investment at fair value with changes in value included in profit or loss. Investee’s ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share.[2]
Throughout the period 1 January 20X1 to 1 January 20X2, Investor’s issued equity was CU30,000,000. Investor’s only asset apart from its investment in Investee is cash.
Investor’s initial 20% investment in Investee is measured at CU3,500,000. However, Investee’s 1,000,000 ordinary shares have a quoted market price at 31 December 20X1 of CU30 per share. Therefore, the carrying amount of Investor’s initial 20% investment is remeasured in Investor’s financial statements to CU6,000,000 at 31 December 20X1, with the CU2,500,000 increase recognised in profit or loss for the period. Therefore, Investor’s statement of financial position at 31 December 20X1, before the acquisition of the additional 60% ownership interest, is as follows:
Paragraph 25 of AASB 3 states that when a business combination involves more than one exchange transaction, the cost of the combination is the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). This means that for this example, the cost to Investor of the business combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000), irrespective of the fact that the carrying amount of the initial 20% interest has changed.
In addition, and in accordance with paragraph 58 of AASB 3, each transaction must be treated separately to determine the goodwill on that transaction, using cost and fair value information at the date of each exchange transaction. Therefore, Investor recognises the following amounts for goodwill in its consolidated financial statements:
The following shows Investor’s consolidation worksheet (all amounts in CU) immediately after the acquisition of the additional 60% ownership interest in Investee, together with consolidation adjustments and associated explanations:
To recognise goodwill on the initial 20% investment in Investee and record the elimination of that investment against associated equity balances
To recognise goodwill on the subsequent 60% investment in Investee and record elimination of that investment against associated equity balances
(a) investee’s identifiable net assets being stated at their full fair values at the date Investor obtains control of Investee. This means that the 20% minority interest in Investee also is stated at the minority’s 20% share of the fair values of Investee’s identifiable net assets;
(b) goodwill being recognised from the acquisition date at an amount based on treating each exchange transaction separately and using cost and fair value information at the date of each exchange transaction;
(d) an asset revaluation reserve of CU600,000. This amount reflects that part of the increase in the fair value of Investee’s identifiable net assets after the acquisition of the initial 20% interest that is attributable to that initial 20% interest [20% × CU3,000,000];
(e) a retained earnings balance of CU1,200,000. This amount reflects the changes in Investee’s retained earnings after Investor acquired its initial 20% interest that is attributable to that 20% interest [20% × CU6,000,000].
Therefore, the effect of applying the requirements in AASB 3 to business combinations involving successive share purchases for which the investment was previously accounted for at fair value with changes in value included in profit or loss is to cause:
changes in the fair value of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
As discussed above, paragraph 25 of AASB 3 requires the cost of a business combination involving more than one exchange transaction to be measured as the aggregate cost of the individual transactions, with the cost of each individual transaction determined at the date of each exchange transaction (i.e. the date that each individual investment is recognised in the acquirer’s financial statements). Therefore, irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, the cost to Investor of the combination is the aggregate of the cost of the initial 20% ownership interest (CU3,500,000) plus the cost of the subsequent 60% ownership interest (CU22,000,000).
In addition, and again irrespective of whether the initial 20% investment in Investee is accounted for at cost, by applying the equity method or at fair value, each transaction must be treated separately for the purpose of determining the amount of goodwill on that transaction, using cost and fair value information at the date of each exchange transaction.
any changes in the carrying amount of previously held ownership interests to be reversed (so that the carrying amounts of those ownership interests are restated to cost);
changes in the investee’s retained earnings and other equity balances after each exchange transaction to be included in the post-combination consolidated financial statements to the extent that they relate to the previously held ownership interests.
Consequently, the consolidated financial statements immediately after Investor acquires the additional 60% ownership interest and obtains control of Investee would be the same irrespective of the method used to account for the initial 20% investment in Investee before obtaining control.
The following example illustrates the application of the guidance in paragraph 62 of AASB 3 on completing the initial accounting for a business combination when the acquirer has, at the end of the first period after the combination, accounted for the combination using provisional values. This example does not address the accounting for any income tax effects arising from the adjustments.
AASB 3 requires the acquirer to account for a business combination using provisional values if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination is effected. The acquirer is required to recognise any adjustments to those provisional values as a result of completing the initial accounting:
(i) the carrying amount of an identifiable asset, liability or contingent liability that is recognised or adjusted as a result of completing the initial accounting is calculated as if its fair value at the acquisition date had been recognised from that date;
(ii) goodwill or any gain recognised in accordance with paragraph 56 is adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognised or adjusted;
(iii) comparative information presented for the periods before the initial accounting for the combination is complete is presented as if the initial accounting had been completed from the acquisition date. This includes any additional depreciation, amortisation or other profit or loss effects recognised as a result of completing the initial accounting.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X4. The entity sought an independent appraisal for an item of property, plant and equipment acquired in the combination. However, the appraisal was not finalised by the time the entity completed its 20X4 annual financial statements. The entity recognised in its 20X4 annual financial statements a provisional fair value for the asset of CU30,000, and a provisional value for acquired goodwill of CU100,000. The item of property, plant and equipment had a remaining useful life at the acquisition date of five years.
Four months after the acquisition date, the entity received the independent appraisal, which estimated the asset’s fair value at the acquisition date at CU40,000.
As outlined in paragraph 62 of AASB 3, the acquirer is required to recognise any adjustments to provisional values as a result of completing the initial accounting from the acquisition date.
Therefore, in the 20X5 financial statements, an adjustment is made to the opening carrying amount of the item of property, plant and equipment. That adjustment is measured as the fair value adjustment at the acquisition date of CU10,000, less the additional depreciation that would have been recognised had the asset’s fair value at the acquisition date been recognised from that date (CU500 for three months’ depreciation to 31 December 20X4). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU10,000, and the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
In accordance with paragraph 69 of AASB 3, the entity discloses in its 20X4 financial statements that the initial accounting for the business combination has been determined only provisionally, and explains why this is the case. In accordance with paragraph 73(b) of AASB 3, the entity discloses in its 20X5 financial statements the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, the entity discloses that:
the fair value of the item of property, plant and equipment at the acquisition date has been increased by CU10,000 with a corresponding decrease in goodwill; and
the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
The following examples illustrate the application of the guidance in paragraphs 63 and 64 of AASB 3 on the accounting for error corrections related to the initial accounting for a business combination. These examples do not address the accounting for any income tax effects arising from the adjustments.
With three exceptions,[4] AASB 3 requires adjustments to be made to the initial accounting for a business combination after that initial accounting is complete only to correct an error in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. After that accounting is completed, adjustments cannot be recognised for the effect of changes in accounting estimates. In accordance with AASB 108, the effect of a change in an accounting estimate is recognised prospectively. AASB 108 provides guidance on distinguishing corrections of errors from changes in accounting estimates.
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X1. As part of the initial accounting for that combination, the entity recognised goodwill of CU100,000. The carrying amount of goodwill at 31 December 20X1 was CU100,000.
During 20X2, the entity becomes aware of an error relating to the amount initially allocated to property, plant and equipment assets acquired in the business combination. In particular, CU20,000 of the CU100,000 initially allocated to goodwill should be allocated to property, plant and equipment assets that had a remaining useful life at the acquisition date of five years.
As outlined in paragraph 64 of AASB 3, AASB 108 requires the correction of an error to be accounted for retrospectively, and for the financial statements to be presented as if the error had never occurred by correcting the error in the comparative information for the prior period(s) in which it occurred.
Therefore, in the 20X2 financial statements, an adjustment is made to the opening carrying amount of property, plant and equipment assets. That adjustment is measured as the fair value adjustment at the acquisition date of CU20,000 less the amount that would have been recognised as depreciation of the fair value adjustment (CU1,000 for three months’ depreciation to 31 December 20X1). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU20,000, and the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been increased by CU20,000 with a corresponding decrease in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
This example assumes the same facts as in Example 8, except that the amount initially allocated to property, plant and equipment assets is decreased by CU20,000 to correct the error, rather than increased by CU20,000. This example also assumes that the entity determines that the recoverable amount of the additional goodwill is only CU17,000 at 31 December 20X1.
In the 20X2 financial statements, the opening carrying amount of property, plant and equipment assets is reduced by CU19,000, being the fair value adjustment at the acquisition date of CU20,000 less CU1,000 in depreciation expense recognised for the three-month period to 31 December 20X1. The carrying amount of goodwill is increased by CU17,000, being the increase in value at the acquisition date of CU20,000 less a CU3,000 impairment loss to reflect that the carrying amount of the adjustment exceeds its recoverable amount. The 20X1 comparative information is restated to reflect this adjustment and to exclude the CU1,000 depreciation and include the CU3,000 impairment loss.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been decreased by CU20,000 with a corresponding increase in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to exclude CU1,000 depreciation recognised during the year ended 31 December 20X1 and include a CU3,000 impairment loss for goodwill relating to the year ended 31 December 20X1.
Completing the initial accounting for a Completing the initial accounting for a business combination
The following example illustrates the application of the guidance in paragraph 62 of AASB 3 on completing the initial accounting for a business combination when the acquirer has, at the end of the first period after the combination, accounted for the combination using provisional values. This example does not address the accounting for any income tax effects arising from the adjustments.
AASB 3 requires the acquirer to account for a business combination using provisional values if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination is effected. The acquirer is required to recognise any adjustments to those provisional values as a result of completing the initial accounting:
(i) the carrying amount of an identifiable asset, liability or contingent liability that is recognised or adjusted as a result of completing the initial accounting is calculated as if its fair value at the acquisition date had been recognised from that date;
(ii) goodwill or any gain recognised in accordance with paragraph 56 is adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognised or adjusted;
(iii) comparative information presented for the periods before the initial accounting for the combination is complete is presented as if the initial accounting had been completed from the acquisition date. This includes any additional depreciation, amortisation or other profit or loss effects recognised as a result of completing the initial accounting.
Example 7 Example 7
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X4. The entity sought an independent appraisal for an item of property, plant and equipment acquired in the combination. However, the appraisal was not finalised by the time the entity completed its 20X4 annual financial statements. The entity recognised in its 20X4 annual financial statements a provisional fair value for the asset of CU30,000, and a provisional value for acquired goodwill of CU100,000. The item of property, plant and equipment had a remaining useful life at the acquisition date of five years.
Four months after the acquisition date, the entity received the independent appraisal, which estimated the asset’s fair value at the acquisition date at CU40,000.
As outlined in paragraph 62 of AASB 3, the acquirer is required to recognise any adjustments to provisional values as a result of completing the initial accounting from the acquisition date.
Therefore, in the 20X5 financial statements, an adjustment is made to the opening carrying amount of the item of property, plant and equipment. That adjustment is measured as the fair value adjustment at the acquisition date of CU10,000, less the additional depreciation that would have been recognised had the asset’s fair value at the acquisition date been recognised from that date (CU500 for three months’ depreciation to 31 December 20X4). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU10,000, and the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
In accordance with paragraph 69 of AASB 3, the entity discloses in its 20X4 financial statements that the initial accounting for the business combination has been determined only provisionally, and explains why this is the case. In accordance with paragraph 73(b) of AASB 3, the entity discloses in its 20X5 financial statements the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, the entity discloses that:
the fair value of the item of property, plant and equipment at the acquisition date has been increased by CU10,000 with a corresponding decrease in goodwill; and
the 20X4 comparative information is restated to reflect this adjustment and to include additional depreciation of CU500 relating to the year ended 31 December 20X4.
Error corrections Error corrections
The following examples illustrate the application of the guidance in paragraphs 63 and 64 of AASB 3 on the accounting for error corrections related to the initial accounting for a business combination. These examples do not address the accounting for any income tax effects arising from the adjustments.
With three exceptions,[4] AASB 3 requires adjustments to be made to the initial accounting for a business combination after that initial accounting is complete only to correct an error in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. After that accounting is completed, adjustments cannot be recognised for the effect of changes in accounting estimates. In accordance with AASB 108, the effect of a change in an accounting estimate is recognised prospectively. AASB 108 provides guidance on distinguishing corrections of errors from changes in accounting estimates.
Example 8 Example 8
An entity prepares financial statements for annual periods ending on 31 December and does not prepare interim financial reports. The entity was the acquirer in a business combination on 30 September 20X1. As part of the initial accounting for that combination, the entity recognised goodwill of CU100,000. The carrying amount of goodwill at 31 December 20X1 was CU100,000.
During 20X2, the entity becomes aware of an error relating to the amount initially allocated to property, plant and equipment assets acquired in the business combination. In particular, CU20,000 of the CU100,000 initially allocated to goodwill should be allocated to property, plant and equipment assets that had a remaining useful life at the acquisition date of five years.
As outlined in paragraph 64 of AASB 3, AASB 108 requires the correction of an error to be accounted for retrospectively, and for the financial statements to be presented as if the error had never occurred by correcting the error in the comparative information for the prior period(s) in which it occurred.
Therefore, in the 20X2 financial statements, an adjustment is made to the opening carrying amount of property, plant and equipment assets. That adjustment is measured as the fair value adjustment at the acquisition date of CU20,000 less the amount that would have been recognised as depreciation of the fair value adjustment (CU1,000 for three months’ depreciation to 31 December 20X1). The carrying amount of goodwill is also adjusted for the reduction in value at the acquisition date of CU20,000, and the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been increased by CU20,000 with a corresponding decrease in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to include additional depreciation of CU1,000 relating to the year ended 31 December 20X1.
Example 9 Example 9
This example assumes the same facts as in Example 8, except that the amount initially allocated to property, plant and equipment assets is decreased by CU20,000 to correct the error, rather than increased by CU20,000. This example also assumes that the entity determines that the recoverable amount of the additional goodwill is only CU17,000 at 31 December 20X1.
In the 20X2 financial statements, the opening carrying amount of property, plant and equipment assets is reduced by CU19,000, being the fair value adjustment at the acquisition date of CU20,000 less CU1,000 in depreciation expense recognised for the three-month period to 31 December 20X1. The carrying amount of goodwill is increased by CU17,000, being the increase in value at the acquisition date of CU20,000 less a CU3,000 impairment loss to reflect that the carrying amount of the adjustment exceeds its recoverable amount. The 20X1 comparative information is restated to reflect this adjustment and to exclude the CU1,000 depreciation and include the CU3,000 impairment loss.
In accordance with AASB 108, the entity discloses in its 20X2 financial statements the nature of the error and that, as a result of correcting that error, an adjustment was made to the carrying amount of property, plant and equipment. The entity also discloses that:
the fair value of property, plant and equipment assets at the acquisition date has been decreased by CU20,000 with a corresponding increase in goodwill; and
the 20X1 comparative information is restated to reflect this adjustment and to exclude CU1,000 depreciation recognised during the year ended 31 December 20X1 and include a CU3,000 impairment loss for goodwill relating to the year ended 31 December 20X1.