Pwc ifrs 3
- 1. Acquisitions Accounting and transparency under IFRS 3 May 2004
- 2. Other publications on IFRS PricewaterhouseCoopers has published the following publications on International Financial Reporting Standards and corporate practices; they are available from your nearest PricewaterhouseCoopers office. Applying IFRS – Finding the right solution (available on Comperio IFRS1) Adopting IFRS – A step-by-step illustration of the transition to IFRS International Accounting Standards – A Pocket Guide Financial instruments under IFRS Illustrative Corporate Consolidated Financial Statements 2004 Illustrative Bank Financial Statements Illustrative Funds Financial Statements2 Illustrative Investment Property Financial Statements2 International Financial Reporting Standards – Disclosure Checklist Similarities and Differences – A comparison of IFRS and US GAAP Understanding IAS 29 – Financial Reporting in Hyperinflationary Economies IFRS News – Shedding light on the IASB’s activities Making the Change to International Financial Reporting Standards Europe and IFRS 2005 – Your questions answered 2005 – Ready or not. IFRS Survey of over 650 CFOs World Watch – Governance and Corporate Reporting Audit Committees – Good Practices for Meeting Market Expectations Building the European Capital Market – Common Principles for a Capital Market Reporting Progress – Good Practices for Meeting Market Expectations These publications and the latest news on IFRS can be found at www.pwc.com/ifrs 1 Comperio IFRS can be purchased from the website – www.pwc.com/ifrs 2 Only available as a pdf on our website PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services for public and private clients. More than 120,000 people in 139 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders. © 2004 PricewaterhouseCoopers. All rights reserved. 2004.04.01.01.130
- 3. Contents Page Overview 5 Impact of the new standards 8 How will IFRS 3 affect acquisitions? 15 Living with IFRS 3 16 Appendix – Major differences between IFRS 3 and FAS 141/142 19 Acquisitions – Accounting and transparency under IFRS 3 3
- 5. Overview IFRS 3 makes the accounting The changes primarily involve the for business combinations a financial reporting for acquisitions, but boardroom issue. The increased this is not a change that can be left transparency will give the market solely to the accounting department. greater insight into what has Senior management must understand actually been acquired. They will the implications of IFRS 3 and related use this to evaluate management’s standards for corporate acquisition explanations of the rationale behind strategy and reported results of past a transaction. and future acquisitions. Changes to accounting standards This publication gives you an overview may transform the way companies of the changes and the potential impact plan and execute their acquisition on acquisition strategy and subsequent strategies. Markets will be able to transparency. The changes affect all judge the financial success or failure stages of the acquisition process – from of acquisitions more quickly and planning to post-deal results. accurately. Rigorous impairment testing, transparent cost allocation and extra disclosures will also require a significant investment in time and resources for each acquisition. If you would like to receive more information on IFRS 3 please contact for: Valuation Aspects Accounting Aspects Wim Holterman Leandro van Dam + 31 20 568 52 90 + 31 20 568 65 49 wim.holterman@nl.pwc.com leandro.van.dam@nl.pwc.com Jan Jaap Snel Jan Backhuijs + 31 20 568 52 00 + 31 20 568 48 00 jan.jaap.snel@nl.pwc.com jan.backhuijs@nl.pwc.com Acquisitions – Accounting and transparency under IFRS 3 5
- 6. Key issues for management Results will be harder to predict the amount allocated to goodwill. IFRS 3 creates a risk of more surprises, as it Results will be more unpredictable requires some expenses and losses in due to more frequent, comprehensive value to be charged immediately. and rigorous impairment testing of acquired assets. Greater analysis of No merger accounting the target entity’s business will be required in advance of a transaction, Merger accounting/pooling of interests to identify potential intangible assets will no longer be allowed; an acquirer and to determine the risk of impairment must be identified based on the charges. substance of a transaction. This will represent a major change for many Value will be harder to demonstrate moving from national GAAP. The financial statements will look very Deal structures may change different following an acquisition. New assets and liabilities will appear, others The end of merger accounting removes will be measured on a different basis, constraints on the structure of deal and some existing items may disappear. considerations. More cash deals are The recognition and measurement likely. requirements will make it harder to demonstrate earnings uplift from the More work will be required acquisition, as more of the acquisition’s costs will have to be expensed as they The acquisition process should become are incurred. more rigorous, from planning to execution. More rigorous evaluation of Greater transparency targets and structuring of deals will be required, in order to withstand greater Significant new disclosures are required market scrutiny. Expert valuation on the cost of the acquisition, the assistance may be needed to establish values of the main classes of assets values for items such as new intangible and liabilities and the justification for assets and contingent liabilities. IFRS 3 – not simply an accounting change 6 Acquisitions – Accounting and transparency under IFRS 3
- 7. Some questions for the board Directors and management should consider whether they are comfortable with the answers to the following questions: How robust is our M&A process? • Are the right people involved? • Is the right information obtained? • How do we price deals? Will there be significant goodwill write-offs in respect of past deals? • If so, how should we communicate this to the market? • If there is no write-off, can we satisfy the analysts that our impairment review process is robust? Who in our organisation takes responsibility for the valuation of intangible assets? • Do they have the skills to satisfy the requirements of the new standards? • Do we understand what they do so that we can explain this to analysts and others who ask questions? If not, management needs to take steps to ensure the company has access to the resources and skills it will require to successfully plan and execute acquisition strategies under IFRS 3. Acquisitions – Accounting and transparency under IFRS 3 7
- 8. Impact of the new standards At a glance • All business combinations are acquisitions – no more merger accounting • An acquirer must be identified for every combination • More intangible assets will be identified and recognised on acquisition – some will be intangible assets with indefinite lives • Goodwill is not amortised but subject to an annual impairment test • Negative goodwill is recognised immediately in income • Restructuring costs are charged to income • Contingent liabilities are recognised at fair value • Detailed disclosures about transactions and impairment testing are required • First-time adopters must apply new rules from day one of their IFRS track record and can choose to restate past deals Purchase accounting must be The identity of the acquirer is applied to all acquisitions critical and may not always be clear Merger accounting has traditionally Purchase accounting requires an meant that post-transaction earnings acquirer and a target (acquiree) to are at least equal to the sum of be identified for every business the earnings of the two combining combination. Where a new company is businesses less cost savings. Assets created to acquire two or more pre- were not recorded at fair value and, existing companies, one of the pre- as no goodwill arose, no amortisation existing companies must be designated charge was incurred. This was a clear as the acquirer. incentive for companies to structure deals as mergers or pooling of interests. The determination of the accounting acquirer is based on the facts and All business combinations under IFRS 3 circumstances of the deal and will are acquisitions. have a significant impact on the post- acquisition balance sheet. All of the acquired business’ identifiable assets and liabilities, including intangible assets, must be identified and valued. The purchase price is then allocated across the fair value of these assets and liabilities with any residual allocated to goodwill. 8 Acquisitions – Accounting and transparency under IFRS 3
- 9. Identification and valuation of intangible assets. An asset is intangibles identifiable when it either arises from contractual or other legal rights, or is Purchase price allocation has not separable. An asset is separable if it changed radically but has been made could be sold, on its own or with other more rigorous by the new standards. All assets. This will capture many more the identifiable intangible assets of the intangible assets than have typically acquired business must be recorded at been recognised. their fair values. IFRS 3 includes a list of assets (see Many intangible assets that would the examples below) that are expected previously have been subsumed within to be recognised separately from goodwill must be separately identified goodwill. The valuation of such assets and valued. Explicit guidance is is a complex process and may require provided for the recognition of such specialist skills. Examples of intangible assets to be separately recognised Marketing related Trademarks, brands, trade names, trade dress, internet domain names, newspaper mastheads, non-compete agreements Customer related Customer lists, order or production backlog, customer contracts and related relationships, non-contractual customer relationships Artistic related Plays, operas, ballets, books, magazines, newspapers, musical works, pictures, photographs, videos, films, television programmes Contract based Licensing, royalty and standstill agreements, contracts for advertising, construction, management, service or supply, lease agreements, construction permits, franchise agreements, operating and broadcasting rights, use rights such as drilling, water, air, mineral, timber cutting and route authorities, servicing contracts, employment contracts Technology based Patented technology, computer software, unpatented technology, databases, trade secrets Acquisitions – Accounting and transparency under IFRS 3 9
- 10. Poorly-performing acquisitions will be revealed sooner rather than later
- 11. Indefinite-lived intangible assets is likely to result in impairments on poor-performing acquisitions sooner Intangible assets may have an indefinite rather than later. Goodwill impairment life if there is no foreseeable limit on charges may not be reversed. the period over which the asset will generate cash flows. An intangible Structure of CGUs must be asset with an indefinite useful life is carefully thought through not amortised but is subject to annual impairment testing. All identifiable assets and liabilities acquired, including any goodwill, The criteria for indefinite lives are very are allocated to cash generating strict, and relatively few assets are units (CGUs) within the combined expected to meet them. Many will be organisation. Goodwill impairment is considered long-lived assets instead. assessed within the CGUs. An indefinite-lived intangible asset The CGU is relatively low level in may seem attractive, as there will be the company’s hierarchy, typically no amortisation charges. However, well below the level of an operating the risk of impairment should be segment. This increases the risk of an considered. A single intangible asset impairment charge against goodwill, must be reviewed for impairment as poorly-performing units can no annually irrespective of whether there longer be supported by those that is any “trigger event” suggesting that are performing well. As a result, the impairment may have occurred. structure of CGUs must be carefully thought through. Goodwill impairment charges Will earnings increase as Goodwill is deemed to have an amortisation ends? indefinite useful life and is no longer amortised. Instead, it will be subject to The end of goodwill amortisation annual impairment tests and ad will enhance earnings of companies hoc testing whenever impairment is with significant goodwill balances. indicated. This applies to goodwill The transition rules do not require from new transactions and to goodwill restatement of past transactions so from previous transactions. Additional there may be an immediate positive resources or external specialists may impact on earnings. However, more be required to assist with the intangible assets identified in new impairment reviews. transactions may result in more amortisation in the future, not less. Goodwill impairment testing has always Combined with the impact of new been required when a trigger event treatments for restructuring costs and occurs. Annual impairment testing, negative goodwill, earnings may well combined with the inability to smooth move downward. transition with restructuring provisions, Acquisitions – Accounting and transparency under IFRS 3 11
- 12. Companies that made acquisitions at Companies typically include substantial the top of the recent bull market may restructuring provisions in the allocated be particularly at risk of an impairment cost of an acquisition. This shelters charge. some of the cost impact of absorbing the acquired entity. Frequently, the Negative goodwill disappears most visible income statement effect has been positive when provisions turn The IASB has banished even the term out to be overstated, and the excess is “negative goodwill”. The new official released to the income statement. term is “excess of acquirer’s interest in the net fair value of acquiree’s Contingent liabilities may increase identifiable assets, liabilities and goodwill Results will contingent liabilities over cost”, (referred to as negative goodwill in Contingent liabilities of the acquired be more this publication). Negative goodwill entity will be more visible, as they must unpredictable implies a bargain purchase, and IFRS be recognised in the balance sheet at 3 is sceptical that bargains exist. fair value. Recognition of contingent The standard requires any negative liabilities will increase the value goodwill left after a reassessment of the attributed to goodwill, thus increasing purchase accounting to be recognised the risk of impairment. The existence of immediately in income. Previously, contingent liabilities has always been negative goodwill was carried on the implicitly reflected in a lower price, balance sheet and amortised over the reflecting the risk that such liabilities life of the assets acquired. would crystallise. Subsequent to initial recognition at fair value, contingent The earnings cushioning-effect has liabilities are not revalued to fair value been stripped out, increasing the risk each period but are subject to the of a later impairment if the acquisition requirements of IAS 37 and IAS 18. turns out not to be a bargain after all. More mandatory disclosures Restructuring costs excluded The new standards require significantly Restructuring provisions are excluded expanded disclosures. The intent is from acquisition accounting unless for users to be able to understand the the target was already committed to financial consequences of transactions. the plan prior to the acquisition. All restructuring costs will be a charge in Details of the actual costs of an the income statement post-acquisition, acquisition (including professional fees making it harder to demonstrate that paid to investment banks, lawyers and any acquisition is immediately earnings- accountants) are required, together with enhancing. details of the values ascribed to assets and liabilities and an explanation of the 12 Acquisitions – Accounting and transparency under IFRS 3
- 13. amount allocated to goodwill. Acquirers from the beginning of the next must also disclose the previous IFRS accounting year. A company with book value of acquired assets and significant goodwill in its balance liabilities to allow for comparison with sheet, particularly from higher priced fair values. transactions in the late 1990s, should assess now the potential impact of The annual disclosures required about the impairment review. Any probable the goodwill impairment review are impairment charge should be quantified detailed and onerous. Disclosures must and communicated to the market in an be made at the segment or CGU level. orderly fashion to minimise negative Details of the assumptions underlying share price movements as a result of impairment reviews and an analysis unexpected bad news. of the sensitivity of the impairment review conclusion to those assumptions IFRS 3 allows for the choice of must be provided. Specific additional retrospective application. Provided disclosures are required, driven by that the necessary information is how recoverable amounts have been available, companies can choose to estimated. adopt retrospectively and restate prior periods. Disclosures are intended to allow users to assess the reasonableness First-time adopters of management’s decisions and assessments. Analysts, shareholders First-time adopters of IFRS must apply and other users of the financial IFRS 3 to transactions after the date of statements will have more information transition but have a choice whether to about the nature and consequences of management decisions on acquisitions restate prior acquisitions in accordance with IFRS 3. Companies will want to Value will than they have ever had before. investigate this option carefully, as the be harder to demonstrate Directors need to be prepared for better amount of effort involved may outweigh informed questions than in the past. the benefits arising from exercising this option. The option is available for all Is earlier adoption an attractive acquisitions from the date of the earliest alternative? selected for restatement; selective restatement is not permitted. IFRS 3 is mandatory for all new transactions from 31 March 2004. However, first-time adopters must apply Companies will cease the amortisation the same accounting standards for all of goodwill in respect of previous periods covered by the first financial transactions but are not required statements. Thus a 31 December to restate assets and liabilities. The 2005 first-time adopter will apply the balance of goodwill arising on those new standards from 1 January 2004 transactions is tested for impairment (transition date). Acquisitions – Accounting and transparency under IFRS 3 13
- 15. How will IFRS 3 affect acquisitions? The intent of the new standards is to highlight what has been acquired and how it performs. Transactions are more transparent with more detailed assignment of purchase price and far more detailed disclosures. Analysts and shareholders will have more ammunition to ask awkward questions. Good management of the communication process is needed to explain precisely what is being acquired at what price and why. The table below highlights some of the key issues that management should consider at each stage of the transaction process. Structure Evaluation Communications Impacts Planning • Identify which party is • Consider the composition • Early identification of the • Determine the likely the acquirer; this may not of the opening balance key issues is vital and complexity of the be obvious in a complex sheet and impact of new requires an understanding purchase accounting. transaction. rules on key ratios. of the accounting and • Plan early communication disclosure requirements. to stakeholders of the likely financial impact of the transaction. • Identify additional resources needed to comply with recognition, valuation and disclosure requirements. Assessing • Consider how the target • Identify and value all • Stakeholder • Poor definition of CGUs fits into the organisation. intangible assets and communications must might result in an • Which parts of the contingent liabilities of the clarify impact of IFRS 3 impairment charge. business might be at risk target. on particular deal, e.g. • Use opportunities to from impairment? • Carry out detailed profit impact of intangible minimise the risks of analysis of all potential asset amortisation. future impairment only assets and liabilities available at the time of (including those above) to the transaction. determine impact on the • Carry out more detailed group balance sheet and due diligence to comply income statement post- with recognition and acquisition. disclosure requirements. • Assess risk of impairment charges. Closing • Plan an appropriate • Consider purchase • Formulate • The estimated value of all structure for accounting implications communications contingent consideration consideration. of variable share prices in strategy for informing is included in the cost non-cash deals. the market in the light of of the acquisition and increased transparency of allocated over the assets disclosure. and liabilities acquired. • Prepare senior management for more searching questions that may be raised by analysts and others. • Prepare market for any anticipated earnings dilution. Post-deal • Consider impact of • Prepare market for • Impairment charges impairment reviews of anticipated impairment create earnings volatility. goodwill and indefinite- charges. • Efforts involved lived intangible assets. in restating prior • First-time adopters transactions may consider whether to outweigh the benefits or restate this or other information may not be prior transactions in available. accordance with IFRS 3. Acquisitions – Accounting and transparency under IFRS 3 15
- 16. Living with IFRS 3 New skills required • The acquisition process will need management, the Audit Committee to become more rigorous, from and the auditors. Directors will want planning to execution. Stricter sound methodologies and analysis evaluation of targets and structuring to support answers to analysts’ and of deals will be required to regulators’ questions. withstand greater market scrutiny. Expert valuation assistance may be Assess now whether the necessary needed to establish robust values skills exist in-house and, if they do for items such as new intangible not, take steps to recruit or train assets and contingent liabilities. appropriate staff. Alternatively, form relationships with external specialists • Many companies informally carry to provide the services required. The out valuations, assessments and best answer may be a combination of impairment reviews in-house. a strong in-house team supported by However, companies may lack the external specialists as needed. skills to satisfy the requirements of Transition rules Companies cease the amortisation of goodwill for previous transactions and test existing goodwill for impairment from the beginning of their next accounting period. Companies should assess whether they are vulnerable to impairments and communicate relevant information to the market. Early adoption of the new standards is encouraged by the IASB. If management chooses to adopt the provisions of IFRS 3 early, it must simultaneously adopt the provisions of revised standards IAS 36 and IAS 38. IFRS 3 can only be retrospectively applied if all the necessary data on earlier acquisitions, including valuations, is available. First-time adopters have an option to restate acquisitions prior to the transition date in accordance with IFRS 3. Companies should consider this option carefully as the effort may outweigh the benefits. The option is available for all acquisitions from a certain date; cherry-picking is not permitted. First-time adopters will be required to apply IFRS 3 for all periods presented. Management should be sure to collect all the relevant data to allow for compliance. 16 Acquisitions – Accounting and transparency under IFRS 3
- 17. What will the financial statements look like? • The financial statements following an acquisition will look different. Many new assets will appear, others will be measured on a different basis, and some existing items may need to be removed. Financial statements are likely to include more intangible assets and to show greater volatility in earnings. • The example below shows how different a company’s financial statements might look under IFRS 3. • Differences will remain between the financial statements prepared in accordance with IFRS 3 and those prepared in accordance with US GAAP. SEC registrants will continue to have reconciling items, even on new transactions. The Appendix to this publication (p19) shows a snapshot view of the differences that exist between accounting for acquisitions under IFRS and US GAAP at the date of publication of IFRS 3. Both regimes continue to review their standards in this area and new proposals are expected from both standard setters this year. Company A acquires Company B for 600 Balance sheet impact Recorded under old GAAP Recorded under IFRS 3 Price paid 600 Price paid 600 Fair value of tangible assets 250 Fair value of tangible assets 250 Restructuring provision -50 Fair value of intangible assets Goodwill 400 – Trademark/brand 50 – Customer relationships 250 Contingent liabilities -75 Goodwill 125 Purchase price allocated 600 600 Income statement impact EBITDA 70 EBITDA 70 Amortisation of goodwill2 0 Amortisation of goodwill1 -20 Amortisation of Intangibles3 -53 Goodwill impairment4 (?) EBIT 50 EBIT 17 Interest -30 Interest -30 PBT 20 PBT -13 EBITDA = earnings before interest, tax and depreciation/amortisation, EBIT = earnings before tax and interest (1) Assumes goodwill amortisation over 20 years under old GAAP (2) Goodwill is not amortised under IFRS 3 (3) Assumes 20 year useful life for trademark and 5 year useful life for customer relationships (4) New annual impairment test may result in an impairment Acquisitions – Accounting and transparency under IFRS 3 17
- 19. Appendix Major differences between IFRS 3 and FAS 141/142 as at 31 March 2004 ISSUE IFRS 3 US GAAP (FAS 141/142 and related guidance) Application of the purchase method Measurement date Cost of a business combination measured at the date Measured at the date on which the transaction is of consideration of acquisition (i.e. the date on which control passes). consummated (closed). Contingent Contingent consideration included in the cost of the Generally excluded from the initial purchase price. consideration combination at the acquisition date if it is probable Adjusted after the contingency is resolved and the and can be measured reliably. additional consideration becomes payable (special considerations exist when there is negative goodwill). Restructuring Recognised when the acquiree has, at the acquisition Restructuring provisions are recognised if provisions date, an existing liability for restructuring in management, at the date of the acquisition, begins accordance with IAS 37. to assess and formulate the plan to exit an activity or terminate or relocate employees of the acquired entity (plan must be finalised within a one-year window). Contingent liabilities Recognise separately the acquiree’s contingent If fair value can be determined during the allocation liabilities at the acquisition date as part of allocating period, the contingent liabilities are included in the the cost, provided their fair values can be measured allocation of purchase price. If the fair value cannot be reliably. determined, the contingent liability should be included if it is probable and reasonably estimable (following the guidance in FAS 5). Minority interests Any minority interest in the acquiree is stated at the Fair values are assigned only to the parent company’s minority’s proportion of the net fair values of the share of the net assets acquired. The minority interest acquiree’s identifiable assets acquired and liabilities is valued at its historical book value. assumed. Negative goodwill First reassess the identification and measurement Reassess whether all acquired assets and assumed of the acquiree’s identifiable assets, liabilities and liabilities have been identified and properly valued. contingent liabilities and the measurement of the cost If negative goodwill remains, acquired assets (with of the combination. Then recognise immediately in certain exceptions) are proportionately reduced. If all profit or loss any excess remaining. eligible assets are reduced to zero and an amount of negative goodwill still remains, the remaining unallocated negative goodwill must be recognised immediately as an extraordinary gain. Acquisitions – Accounting and transparency under IFRS 3 19
- 20. Major differences between IFRS 3 and FAS 141/142 as at 31 March 2004 (continued) ISSUE IFRS 3 US GAAP (FAS 141/142 and related guidance) Goodwill Impairment Level of impairment Goodwill is assigned to one or more cash-generating Goodwill is assigned to an entity’s reporting unit testing (allocation units (CGUs). Each represents the smallest CGU to (i.e. an operating segment, as defined in FAS of goodwill to cash- which goodwill can be allocated on a reasonable and 131) or one level below an operating segment generating units) consistent basis (i.e. the CGU should represent the (i.e. a component). A component of an operating lowest level at which management monitors the return segment should be deemed a reporting unit if: (1) on investment in assets that include goodwill). The that component constitutes a business for which CGU is not larger than a segment based on either discrete financial information is available, and (2) the entity’s primary reporting or secondary reporting segment management regularly reviews the operating format (IAS 14, Segment Reporting). results of that component. When two or more components of an operating segment have similar economic characteristics, those components should be aggregated and deemed a single reporting unit. An operating segment should be deemed to be the reporting unit if: (1) all of its components are similar, (2) none of its components is a reporting unit, or (3) it is comprised of only a single component. Impairment test for The impairment test is performed under a one-step Goodwill impairment is calculated using a two-step goodwill approach. approach. The recoverable amount of the cash-generating unit Under Step 1, the entity compares the fair value (FV) (i.e. the higher of an asset’s net selling price and its of the reporting unit with the unit’s carrying amount value in use) is compared to its carrying amount. The (CV), including goodwill. When the FV is greater than impairment loss is recognised as the difference. If the the CV, the reporting unit’s goodwill is not considered impairment loss exceeds the book value of goodwill, as impaired, and Step 2 is not required. When the CV complex allocation rules must be followed. is greater than the FV, the reporting unit’s goodwill may be impaired, and Step 2 must be completed to measure the amount of a goodwill impairment loss, if any exists. Under Step 2, the entity compares the implied fair value of the reporting unit’s goodwill with the carrying amount of reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognised for the excess. The implied fair value of a reporting unit’s goodwill is calculated in the same manner as the amount of goodwill that is recognised in a business combination would be determined under FAS 141. This process involves allocating the reporting unit’s fair value (as determined in Step 1) to all of the reporting unit’s assets and liabilities (both recognised and unrecognised). 20 Acquisitions – Accounting and transparency under IFRS 3
- 21. Major differences between IFRS 3 and FAS 141/142 as at 31 March 2004 (continued) ISSUE IFRS 3 US GAAP (FAS 141/142 and related guidance) Intangibles IPR&D (initial IPR&D is recognised as an intangible asset. If is not IPR&D is charged to expense unless it has an recognition and separately recognised as an intangible asset, it is alternative future use. measurement) subsumed in goodwill. Subsequent expenditure on IPR&D is expensed as Subsequent expenditure on IPR&D can be capitalised incurred. if certain criteria are met (development phase). Measuring The impairment loss should be calculated as the The impairment test compares the fair value of the impairment of difference between the recoverable amount (i.e. the intangible asset with the asset’s carrying amount. indefinite-lived higher of the net selling price of the value in use) and If the fair value of the intangible asset is less than intangibles the carrying amount. the carrying amount, an impairment loss should be recognised in an amount equal to the difference. Indefinite-lived intangibles could be tested as part of the CGU. Indefinite-lived intangibles must be tested separately from goodwill (i.e. separate from the reporting unit to which goodwill has been allocated). Reversals of Reversals of impairment losses are allowed under Reversals of impairment losses are prohibited. impairment losses specific circumstances. for indefinite-lived and finite-lived intangibles Acquisitions – Accounting and transparency under IFRS 3 21
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