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Business Combinations Phase II

Date recorded:

Intangible Assets

The Board continued its deliberations on Phase II of the joint IASB-FASB project on business combinations. At the September meeting the Board focused on accounting for intangible assets acquired in a business combination.

The staff asked the Board to clarify several matters before the upcoming joint meeting with the FASB in October.

Should intangible assets be recognised separately from goodwill?

The Board agreed that intangible assets should be recognised separately from goodwill when there is a reliable and relevant measurement attribute available.

Should a market value or an entity-specific value be used to measure intangible assets?

Both IFRS 3 and FAS 141 require intangible assets to be measured at fair value. During discussions by the FASB on project, the staff has become aware that FASB members question the relevance and reliability of fair value as a measurement attribute for non-financial items when significant unobservable (non-market) input data is used. In addition, FASB members have questioned the cost/benefit of separating and measuring intangible assets when observable market values do not exist. The IASB was asked whether they want the staff to explore an entity-specific measurement attribute.

The Board confirmed that intangible asset acquired in a business combination should be recognised at a market-based estimate of fair value and that further exploration of a entity-specific value was not necessary.

The Board also had a short discussion on whether entities could measure intangible assets acquired in a business combination at zero if the acquiring entity has no intention to use the asset. Board members seemed to agree that an intangible should not be measured at zero just because an entity did not intend to use it. The value must still be determined based on whether the intangible has a market value, for example by preventing others to produce something of value.

Can intangible assets be measured separately from goodwill?

Most of the discussion focused on situations in which an entity should separate the intangible from goodwill. Some Board members expressed a view that while it is possible to separate an intangible in many cases, doing so should depend on cost/benefit considerations. For example, it may not be cost-beneficial to separate intangibles with an indefinite life from goodwill because the subsequent accounting would not be different.

At the end of this section the staff raised some specific questions for the Board:

"Do the Boards agree that a fair value measurement of an identifiable intangible asset is sufficiently reliable if it is based on inputs in Level 1 (quoted market price), Level 2 (other observable market data), or Level 3 (non-observable data) of the fair value hierarchy?"

The Board agreed.

"If not, how do the Boards want to define sufficient reliability for recognising identifiable intangible assets separately from goodwill?"

In light of the answer to the previous question, this was not discussed.

The Board did not conclude on the remaining part of the questions set out in the agenda paper.

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