Chapter 1 - Business Combinations: Statutory Merger and

Statutory Consolidation
Saturday, 14 August 2021 11:29 am

rules that govern how a company is

run and one of the first items to be
Included in this Chapter: established by the BOD at the time a
✓ Reasons for the popularity of business combination company is started
✓ Methods and techniques in dealing with them

Nature of a Business Combination

How?
Entity's own shares that have
been issued and then re-
acquired but not canceled
Board of directors A business combination may be:
▫ Friendly • Submitted to the stockholders for approval
→ The BOD of the potential combining companies negotiates mutually agreeable terms of a • Normally, 2/3 or 3/4 positive vote is required by corporate by-laws
proposed combination to bind all stockholders to the combination
Why lower? Isn't the ▫ Unfriendly (hostile takeovers)
acquisition supposed to be at → The BOD of a company targeted for acquisition resists the combination
premium price? ▫ Resistance
→ Involves various moves by the target company A formal tender offer enables the acquiring firm to deal directly with
→ Defensive tactics or moves to resist the proposed business combination: individual shareholders
• Poison Pill - An amendment of the Articles of incorporation or by-laws to
make it more difficult to obtain stockholder approval for a takeover
• At a price substantially lower in excess of the • Greenmail - Acquisition of common stock presently owned by the prospective → a public solicitation to all shareholders requesting
prospective acquirer's cost acquiring (acquirer) company that they tender their stock for sale at a specific
• The purchased shares are then held as • White Knight or White Squire - A search for a candidate to be the acquirer in price during a certain time
treasury or retired a friendly takeover → Relatively quick and easily executed
• Largely ineffective - it may result to an • Pac-man Defense - attempting on unfriendly takeover of the would be A shield bearer → Preferred mean of acquiring public companies
expensive excise tax; the excess of the price acquiring company or armor bearer
paid over the market price is expensed • Selling the "Crown Jewels" or "Scorched Earth" - The sale of valuable assets or a knight
to others to make the firm less attractive to the "would be acquirer"
Burned by flames or • Shark Repellent - acquisition of substantial amounts of outstanding common
heat stock for the treasury or for the retirement, or the incurring of substantial Any one of a number of measures taken
long term debt in exchange for outstanding common stock by a company to fend off an unwanted
• Leveraged buyouts - management desires to own the business, arrange to or hostile takeover attempt
buy out the stockholders using the company's assets to finance the deal
The bonds issued often take
• Mudslinging Defense - an attempt to discredit one's competitor, opponent,
the form of high-interest,
etc., by malicious or scandalous attacks
high-risk "junk" bonds When the acquiring company offers stock instead of cash, the perspective
• Defensive Acquisition Tactic - When a major reason for an attempted acquiring (acquirer) company's management may try to convince the
takeover is the prospective acquiring (acquirer) company's favorable cash shareholders that the stock would be a bad investment
position, the prospective acquiring (acquirer) company may try to rid itself of
this excess cash by attempting to takeover of its own

✓ Reasons for Business Combinations There are several ways of business expansion. The ff are the reasons
why business combination may be preferred as compared to other
means:
1. Cost Advantage - less expensive to obtain needed amenities through combination than through
development
2. Lower Risk - the acquisition of the reputable product lines and markets is usually less risky than a risk management strategy that
developing new products and market; low threat when the purpose is diversification mixes a wide variety of
3. Avoidance of Takeovers - small companies tend to be more susceptible to corporate takeovers investments within a portfolio.
How? 4. Acquisition of Intangible Assets - bring together both intangible and tangible resources
5. Other Reasons - for business tax advantages, for personal income, estate-tax advantages, or for
personal reasons

Types of Business Combinations

Three schemes:
1. Based on the structure of the combination
2. Based on the method used to accomplished the combination
3. Based on the accounting method used

Possible Structures: (Factors that might

• Overriding objective - increase profitability determine the structure of business combination)
• Firms can become more efficient by horizontally, or vertically
Structure of Business Combination
• Legal & Tax strategies
integrating operations, through conglomerate operations • Market and regulatory considerations:
• Horizontal Integration - involves companies within the same industry that have previously ▫ One becomes a subsidiary of
been competitors another
a large corporation formed by the Normally, a company ▫ Two are legally merged into one
merging of separate and diverse
• Vertical Integration - take place between two companies involved in the same industry but at and its suppliers or ▫ One transfers its net assets to
different levels
firms customers another
involve (something) as a • Conglomerate Combination - involving companies in unrelated industries having little, If any, ▫ Owner transfer their equity interest
necessary or inevitable production or market similarities for the purpose of entering into new markets or industries to the other owner
part or consequence • Circular Combination - entails some diversification, but does not have a drastic change in ▫ Two or more transfer their net
likely to have a strong or far- assets, owners transfer their equity
operation as a conglomerate reaching effect; radical and interests, to a newly-formed entity
extreme (roll-up, put-together transaction)
▫ Group of former owners of one
obtains control of a combined entity
Methods/Types of Combinations/ Legal forms of Effecting Business
Combinations

From legal, accounting, organizational perspective, the specific procedures to be used in accounting
for business combination is effected through:
Assets less liabilities
• Acquirer debits an account "Investment in
Subsidiary"
• The stock of the acquired company is recorded as an
inter-corporate investment
• Does not necessarily have to involve the acquisition
of all of a company's outstanding voting (common)
shares
• The selling firm may continue to survive as a legal entity
or liquidate entirely
• Acquirer typically targets key assets, buy asset but not
assume liabilities
• Acquirer may not buy the entire entity
Assets, securities, debt Acquirer accounts for the combination
I. Acquisition of Net Assets
instruments received Record each asset acquired, each
→ Books of the acquired company are closed out, its assets and liabilities are transferred to
from acquirer liability assumed, and the consideration
the books of the acquirer
→ Features of asset and liabilities acquisition: Acquired company given in exchange
• Acquirer acquires the net assets of the other enterprise for cash or other property, distributes to its
debt instruments, and equity instruments, or combination stockholders
• Acquirer must acquire 100% of the net assets of the acquired company Liquidates
• It only involves when the acquirer survives
II. Acquisition of Common Stock
→ Books of the acquirer and the acquired company remain intact and consolidated financial
statements are prepared periodically
• When other factors are present that lead to the acquirer gaining control
→ Feature of a stock acquisition:
• Non-controlling Interest
• Acquirer acquires voting (common) stock from another enterprise for cash or other
→ Total of the shares of the acquired company not held by the
property, debt instruments, and equity instruments, or combination
controlling shareholder
• Acquirer must obtain control by purchasing 50% or more of the voting stock or
possibly less
• Acquired company need not be dissolved
Both the acquirer and the acquired company remain as separate legal entity
III. Asset Acquisition
→ Acquisition by one firm of assets (and possibly liabilities) of another firm, but not its
shares

Acquisition of Net Assets Classification:

• The board of directors of the companies involved
normally negotiates the terms of a plan of merger,
consolidation
• be approved by the stockholders of each company
involved
• Laws or corporation by laws dictate the percentage
of positive votes required by approval of the plan
• Statutory Merger
→ Acquirer survives though it may be continued as a separate division of the acquirer
→ Acquired company ceases to exist as a separate legal entity
→ X company + Y company = X company or Y company
• Statutory Consolidation
→ New corporation is formed to acquire two or more other corporations May be operated as separate division of new corporation
→ Acquired corporation cease to exist as separate legal entities
→ X company + Y company = Z company
→ Stockholders of the acquired companies (X,Y) become stockholders in the new entity (Z)

Merger Consolidation
→ All but one of the combining companies go → All the combining companies are dissolved
out of existence → New corporation is formed to take over their
net assets
→ First key aspect
→ Control can usually be obtained by:
→ In accounting, refers to the accounting process ○ Buying the assets themselves
or procedures of combining parent and ○ Buying enough shares in the corporation

Book Notes Page 1


PFRS 3
→ Accounting standard relevant for
accounting for business combinations
→ Appendix A - different terms
→ Appendix B - application guidance
The focus on outputs is on returns from goods and
services provided investment income and other
income
Not scope of Business Combination
• If it results in the formation of all types of joint
arrangements
• Scope exception only applies to the financial statements
of the joint venture or the joint operation itself
• If it involves entities or businesses under common
control
• If the acquisition of an asset or group of assets does not
constitute a business
○ Asset acquisition
○ Identifies and recognizes the individual identifiable
assets acquired and liabilities assumed
○ Allocates the cost of the group of assets and liabilities
to the individual assets and liabilities on the basis of
their relative fair value at the date of purchase
○ Does not give rise to goodwill
Includes:
• Legal fees
• Finder's brokerage fees
• Advisory, accounting, valuation,
and other professional or
consulting fees
• General, administrative costs such as
✓ Managerial (including the costs of
maintaining an internal acquisitions
department - management salaries,
depreciation, rent, and costs incurred to
Book Notes Page 2
→ All but one of the combining companies go → All the combining companies are dissolved
out of existence → New corporation is formed to take over their
net assets
→ First key aspect
→ Control can usually be obtained by:
→ In accounting, refers to the accounting process ○ Buying the assets themselves
or procedures of combining parent and ○ Buying enough shares in the corporation
subsidiary financial statements
→ Economic events that might result to obtaining
control:
○ Transferring cash or other assets, net assets
Accounting Concept of Business Combination ○ Incurring liabilities
○ Issuing equity instruments
Business Combination ○ Combination of the above
→ A transaction or other event in which an acquirer obtains control of one or more businesses ○ Transaction not involving consideration,
→ "true mergers", "mergers of equals" (combination by contract alone)
→ Must involve the acquisition of a business, three elements:
▫ Inputs - economic resource merely need to have the ability to contribute to the creation
of outputs
▫ Process - system, standard, protocol, convention, or rule that when applied to an input or → Second key aspect
inputs, creates outputs → Integrated set of activities and assets that is capable of being conducted and
▫ Output - the result of inputs and processes, that provide goods or services to customers, managed for the purpose of providing goods or services to customers,
generate income generating investment income (such as dividends or interest) or generating
other income from ordinary activities - PFRS 3
→ Purpose to define - to distinguish acquisition of group of assets and the
Scope of Business Combination acquisition of an entity that is capable of producing output
1. Combinations involving mutual entities
2. Combinations achieved by contract alone (dual listing stapling)
→ Two entities enter into a contractual arrangement which may cover An entity other than an investor-owned entity, that A mutual insurance
• operation under a single management provides dividends, lower costs or other economic company, a credit union, a
• equalization of voting power and earnings attributable to both entities' equity benefits directly to its owners, members or participants cooperative entity
investors
→ May involve a 'stapling' or formation of a dual listed corporation
→ Accounting - requires one of the combining entities to be identified as the acquirer, and
one to be identified as the acquiree/acquired company
Acquisition Method
→ Applied on the acquisition date which is the date the acquirer obtains control of the acquiree
→ Approaches a business combination from the perspective of the acquirer
→ All assets and liabilities are identified and reported at their fair values
→ Required method of accounting for a business combination
1. Identify the acquirer
• Acquirer - the entity that obtains control of the acquiree
• One of the combining entities should be identified as the acquirer
• In the event that the overriding principle of 'control' in PFRS 3 does not conclusively
determine the identity of the acquirer, PFRS 3 provides additional guidance
2. Determining the acquisition date Other important dates:
• Acquisition date ✓ The date contract is signed
✓ The date the consideration is paid
→ Date on which the acquirer obtains control of the acquiree ✓ A date nominated in the contract
→ Does not depend on the date the acquirer receives physical possession of the assets ✓ The date on which assets acquired are delivered to the acquirer
acquired or actually pays out the consideration to the acquiree ✓ The date on which an offer becomes unconditional
→ In time when the net assets of the acquired company become the net assets of the
acquirer
• Business combination occurs at the date of the assets or net assets are under the control
of the acquirer
• The use of control in determining the acquisition date ensures that the substance of the
transaction determines the accounting rather than the form of the transaction
• Areas where the selection of the date affects the accounting for business combination:
□ Identifiable assets acquired and liabilities assumed by the acquirer are measured at
the fair value on the acquisition date
□ Consideration paid by the acquirer is determined as the sum of the fair values of
assets given, equity issued and/ or liabilities undertaken in an exchange for the net
assets or shares of another entity
□ Acquirer may acquire only some of the shares of the acquiree, the non-controlling
interest is measured at fair value on acquisition date
□ Acquirer may have previously held an equity interest in the acquiree prior to
obtaining control of the acquiree, the value of this investment is measured at fair
value on acquisition date
• The effect of determining the acquisition date is that the financial position of the
combined entity on acquisition date should report the assets and liabilities of the
acquiree on that date
• Any profits reports as a result of the acquiree's operation within the business
combination should reflect profits earned after the acquisition date
3. Calculate the fair value of the consideration transferred
• Consideration transferred
→ Measured at fair value at acquisition date
→ Calculated as the sum of acquisition date fair values of:
□ The assets transferred by the acquirer
□ The liabilities incurred by the acquirer to former owners of the acquiree
□ The equity interest issued by the acquirer
• Consideration transferred includes:
✓ Cash or other monetary assets
▪ Fair value = the amount of cash or cash equivalent dispersed
▪ Problem that may arise - when the settlement is deferred to a time after the
acquisition date
▫ Deferred payment fair value = the amount the entity would have to
borrow to settle the debt immediately (present value of the obligation)
▫ Discount rate used = entity's incremental borrowing rate • The acquirer is in effect selling the non-
✓ Non-monetary assets monetary asset to the acquiree
→ Assets such as property, plant, and equipment, investments, licenses and • Thus, it is earning an income equal to the fair
patents value of the asset
▪ Fair value = if active second-hand market exists, obtained by reference to • Gain or loss = fair value less carrying amount
those
✓ Equity instruments
▪ Fair value = for listed entities, reference is made to the quoted prices of the
shares at acquisition date
✓ Liabilities Undertaken Future losses or other costs expected to be incurred as a result
▪ Fair value = present values of expected future cash outflows of the combination are not liabilities of the acquirer and not
✓ Contingent Consideration included on the calculation
→ An obligation of the acquirer to transfer additional assets or equity interests
to the former owners of an acquiree as part of the exchange for control of the
acquiree if the specified future events occur or conditions are met
→ May also give the acquirer the right to the return of previously transferred
consideration if specified conditions are met
→ An add-on to the base acquisition price that is based on events occurring or
conditions being met some time after the purchase takes place
✓ Share-based payment awards
→ Exchanged for awards held by the acquiree's employees
▪ Measurement = market based measure
▪ The acquirer is obliged to replace the acquiree's awards if the acquiree or the
employees have the ability to enforce replacement, either all or a portion of
the market-based measure of the acquirer's replacement awards is included
in measuring consideration transferred in the business combination
• Acquisition-Related Costs
→ Further item to be considered in determining the cost of the business combination
→ Excluded from the measurement of the consideration paid
→ Not part of the fair value of the acquiree and are not assets
→ They are as follows: Reasons:
□ Costs directly attributable to the combination • Acquisition-related costs are not part of the fair value exchange
□ Indirect, ongoing costs, general costs including the cost to maintain an between the buyer and seller
internal acquisition department • They are separate transactions for which the buyer pays the fair
→ Accounting for these outlays is a result of the decision to record the identifiable value for the services received
assets acquired and liabilities assumed at fair value • These amounts do not generally represent assets of the acquirer of
→ If associated with a business combination = accounted for as expenses in the acquisition date because the benefits obtained are consumed as the
periods in which they are incurred and the services are received services are received

• General, administrative costs such as
Including:
A relationship between Examples of separate transaction that are not
acquirer and the acquiree included in applying the acquisition method:
that existed before the
business combination,
may include a contractual
or non-contractual
relationship
Contractual:
• Vendor-customer
• Franchisor-
franchisee
• Licensor-licensee Whether arrangements for contingent
Non-contractual payments to employees or former owners of
• Plaintiff-defendant an acquiree should be considered as
contingent consideration that is included in
the measurement of the consideration
transferred or are separate transactions
depends on the nature of the arrangement
✓ Managerial (including the costs of
maintaining an internal acquisitions
department - management salaries,
depreciation, rent, and costs incurred to
duplicate facilities
✓ Overhead that are allocated to the merger
but would have existed in its absence
✓ Other costs of which cannot be directly
attributed to the particular acquisition
• Shutting-down departments
• Re-assigning or eliminating jobs
• changing suppliers or production practices
in connection with business combinations
Acquisition-related costs
1. Directly attributable costs
2. Indirect acquisition costs
3. Cost of issuing securities
4. Cost of arranging and
4. Recognize and measure the identifiable assets and liabilities of the
• Acquirer shall assess whether any portion of
the transaction price (payments or other
arrangements) and any asset acquired or
liabilities assumed or incurred are not a
part or a component of the exchange for the
acquiree
• Not part = shall be accounted for separately
from the business combination
• A transaction that settles pre-existing
relationships between the acquirer and the
acquire
• A transaction that compensates employees
or former employees of the acquiree for
future services
• A transaction that reimburses the acquiree
or its former owners for paying the
acquirer's acquisition related costs
Book Notes Page 3
→ They are as follows: Reasons:
□ Costs directly attributable to the combination • Acquisition-related costs are not part of the fair value exchange
□ Indirect, ongoing costs, general costs including the cost to maintain an between the buyer and seller
internal acquisition department • They are separate transactions for which the buyer pays the fair
→ Accounting for these outlays is a result of the decision to record the identifiable value for the services received
assets acquired and liabilities assumed at fair value • These amounts do not generally represent assets of the acquirer of
→ If associated with a business combination = accounted for as expenses in the acquisition date because the benefits obtained are consumed as the
periods in which they are incurred and the services are received services are received
• Costs of Issuing Equity Instruments/Share Issuance Costs • In contrast to PAS 16
→ Excluded from the consideration and accounted for separately
→ These costs are accounted for in accordance with PAS 32
→ These outlays should be treated as a reduction in the share capital
→ Reduce the proceeds from equity issue - reducing the additional paid-in capital, net
of any related income tax benefit
→ Share premium/Additional paid-in capital from the related issuance not enough to
absorb such cost:
▪ excess should be debited to 'Share Issuance Costs'
▪ treated as a contra shareholders' equity account as a deduction in the ff
order of priority:
1. Share premium from previous share issuance
2. Retained Earnings with appropriate disclosure
→ Additional acquisition-related restructuring costs = unless represented by
acquisition-date liabilities, are expensed as incurred and do not affect acquisition
cost
→ Listing fee for initial public offering of shares = outright expense
• Cost of Issuing Debt Instruments
→ The costs of arranging and issuing debt instruments or financial liabilities are an
integral part of the liability issue transaction
→ Deemed as yield adjustments to the cost of borrowing
→ Included in the measurement of the liability as bond issue cost and amortized over
the life of the debt
• Summary:
Examples Treatment
Legal fees, finders and brokerage fees, Expenses
advisory, accounting valuation (valuers)
and other professional or consulting fees
to affect the combination
General and administrative costs Expenses
Transaction costs such as stamp duties on Debit to "Share
new shares, professional adviser's fees, premium" or
underwriting costs and brokerage fees "Additional paid-in
might be incurred capital"
Professional adviser's fees, underwriting Bond issue costs
issuing debt securities or costs and brokerage fees
financial liabilities
business
• Principles in assessing what is part of the Business Combination
▫ Only the consideration transferred and the assets acquired or liabilities assumed or
incurred that are part of the exchange for the acquiree shall be included in the business
combination accounting
▫ Guidelines to assess what part of the business combination for certain items requires the
acquirer to evaluate the substance of transactions entered into by the parties:
i. Transactions entered into or any amounts paid that are designed primarily for the
economic benefit of the acquiree (or its former owners) before the combination Don't apply to any costs incurred by the acquirer on its
– Though not paid directly, the amount paid will still form part of the purchase own behalf = accounted for outside the business
consideration for the business combination as the acquirer is acting on behalf combination
of the acquiree in making the payments
ii. Transactions entered into or any amounts paid into by or on behalf of the acquirer
or the combined entity are not part of the business combination, likely to be
accounted for separately
• Recognition and Measurement of Assets Acquired and Liabilities Assumed: Accounting PFRS 3
Records of the Acquirer → set out basic principles for the recognition
▫ The acquirer is required to: and measurement of identifiable assets
i. Recognize identifiable assets and liabilities separately from goodwill; and acquired, liabilities assumed and non-
ii. Measure such assets and liabilities at their fair values on the date of acquisition controlling interests
▫ Identifiable - key word
▫ As of acquisition date, acquirer should recognize separately from goodwill:
▪ Identifiable assets acquired
▪ Liabilities assumed
▪ Any non-controlling interests in the acquirer
▫ Two recognition criteria for assets and liabilities, the recognition occurs if:
▪ It is probable that any future economic benefit will flow to or from the entity
▪ The item has a cost or value that can be reliably measured
▫ Acquirer is required to recognized identifiable assets acquired and liabilities assumed
regardless of the degree of probability of an inflow or outflow of economic benefits
▫ The assets acquired and liabilities assumed are measured at fair value
• Conditions for Recognition Principle
→ Two conditions have to be met prior to the recognition of assets and liabilities acquired
(1) Assets and liabilities
▫ at the acquisition date, must meet the definition of assets and liabilities in
the Framework
▫ Expected future costs = can't be included in the calculation
▫ Outcomes of applying this recognition condition:
▪ Post-acquisition reorganization
→ Costs the acquirer expects but it is not oblige to incur in the
future to affect its plan to exit an activity of an acquiree
▪ Unrecognized assets and liabilities
→ The acquirer may recognize some assets and liabilities that the
acquiree had not previously recognized in its financial statements
▫ Exception:
→ One area affected by this condition - accounting for contingent
liabilities
(2) Item acquired or assumed The entities involved in the transactions
▫ Must be part of the business acquired rather than the result of a separate may link another transaction with the
transaction business combination, but in substance it
▫ An example of the application of substance over form is a separate transaction
• Measurement Principle for Assets and Liabilities
▫ Identifiable assets acquired and liabilities assumed = measured at their fair values on
acquisition date
▫ Fair value
→ The price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date
→ A market-based measurement, not an entity-specific measurement
→ The process of determining, necessarily involves judgement and estimation
→ Measurement under the fair value hierarchy:
▫ Level 1 inputs
→ Fully observable
→ Unadjusted quoted prices in an active market for identical assets and
liabilities
▫ Level 2 inputs
→ Directly or indirectly observable inputs other than Level 1 inputs
▫ Level 3 inputs
→ Unobservable inputs for the asset or liability
→ Not based on observable market data
• Valuation Techniques
→ To estimate the price at which an orderly transaction to sell an asset or to transfer the
liability would take place between market participants and the measurement date under
current market conditions
a. Market approach or market-based
→ Uses prices and other relevant information generated by market transactions
involving identical or comparable (similar) assets, liabilities, or a group of assets and
liabilities
→ "analogy or benchmark approach"
b. Income approach or income-based
→ Based on future economic benefit derived from owning the assets or converts
 → Based on future economic benefit derived from owning the assets or converts
future amounts (cash flows or income and expenses) to a single current
(discounted) amount, reflecting current market expectations about those future
amounts
c. Cost approach or cost-based
→ Reflects the amount that would be required currently to replace the service
capacity of an asset (current replacement cost)
→ Although the result may not reflect fair value

• Valuation of Identifiable assets and liabilities

▫ First step in recording an acquisition
→ To record existing assets and liabilities accounts (except goodwill)
→ General rule - to be recorded at their individually determined fair values
▫ Preferred method
→ Quoted market value - an active market for the item exists
→ Not an active market - used to estimated fair values:
□ independent appraisals
□ discounted cash flow analysis
□ Other types of analysis
→ Some exceptions to the use of fair value that apply to accounts:
□ Assets for resale
□ Deferred taxes
▫ The acquirer is not required to establish values immediately on the acquisition date

• Summary of procedures Acquirer not permitted to recognize a separate

(1) Identifiable Tangible Assets valuation allowance as of the acquisition date for
→ Asset other than intangible asset assets acquired in a business combination that
→ Recognized through probability and reliability test are measured at their acquisition date fair values
a. Current Assets
→ Recorded at estimated fair values
→ All accounts share the rule that only the net fair value is recorded, and
valuation accounts are not used
b. Assets held for sale If the assets had initially been measured
→ Assets that are going to be sold rather than to be used in operations at their fair value at the acquisition date,
→ Should be measure at fair value less costs to sell they are listed as current assets.
c. Property, plant and equipment
→ Estimate of fair value
→ Recorded at the net amount with no separate accumulated depreciation
account
→ No valuation allowance principle also applies
d. Investments in equity-accounted entities
→ Fair value of the associate should be determined on the basis of the value of
the shares of the associate
(2) Identifiable Intangible Assets
→ Recognize regardless of the degree of probability of an inflow of economic benefits
→ Identifiable if:
▪ Can be separated
→ Separability criterion
→ Capable of being separated or divided from the entity sold, transferred,
licensed, rented, or exchanged, either individually or together with a related
contract
▪ Meets the contractual-legal criterion
→ Arises from contractual or legal rights
→ Whether those rights are transferable or separable from the acquiree or from
other rights and obligations
→ When an intangible asset satisfies either of the criteria, sufficient information should exist
to measure reliably its fair value
Marketing- Customer- Artistic-related Contract-based Technologica
related related l-based
Trademarks, Order or Plays, operas and Licensing royalty Patented
trade names, production ballets and standstill technology
service marks, backlog agreements
collective marks,
certification
marks
Trade dress Customer Books, magazines, Advertising Computer
contracts and newspaper, and construction, software and
the related other literary works management, masks works
customer service or supply
relationships contracts
Newspaper Non- Musical works such Lease Unpatented
mastheads contractual as compositions, agreements technology
customer song lyrics and (whether the
relationships advertising jingles acquiree is the
lessee or lessor)
Internet domain Customer lists Pictures and Construction Databases
names photographs permits including
title plants
Non-competition Video and Franchise Trade secrets
agreements audiovisual agreements such as
material, including secret
motion pictures or formulas,
films, music videos processes or
and television recipe
programs
Operating and
broadcasting
rights
Use rights such
as drilling, water,
air, mineral,
timber-getting
and route
authorities
Servicing
contracts such as
mortgage
servicing
contracts
Employment
contracts

→ Other intangible assets being acquired with their proper valuation:

• Emission rights
→ Recognized on the acquisition date at fair value
• Reacquired rights
→ Recognizes separately from goodwill
→ An acquirer may reacquire a right that it had previously granted to the acquiree to
use one or more of the acquirer's recognized or unrecognized assets such as right to
use the acquirer's trade name under franchise agreement
→ Care should be considered to as recognition of intangible assets:
a. Existing Intangible Assets
Such as patent and copyright
→ Recorded at estimated fair value
→ The valuation will typically require the use of discounted cash flow analysis
b. Intangible assets not currently recorded by the acquiree

Book Notes Page 4