Fair valuing a recent acquisition and applying IFRS 3

If you have recently made an acquisition you could face challenges with preparing the financial statements.

Whilst IFRS 3 (Revised) has been in issue since 2008, it has complex requirements which are still creating problems. These include requirements to:

  • determine whether a transaction falls within the scope of the Standard or not and, if not, how they should be accounted for;
  • decide whether the acquisition is a business combination or not;
  • identify intangible assets that need to be recognised separately from goodwill;
  • measure intangible assets at fair value;
  • review the opening balance sheet to assess whether fair value measurements would result in material differences to the carrying value – for instance for property, plant and equipment, inventory, and deferred income;
  • measure contingent consideration at fair value; and
  • determine who the acquirer is and, in some circumstances, apply reverse acquisition accounting principles.

Valuing intangible assets will, in most cases, require specialist assistance. The valuation methodology will be dependent upon the nature and characteristics of the intangible asset itself and factors such as royalty rates, customer profiles, customer retention and concentration, useful economic lives, market conditions and risks, contributory asset charges, discounts rate and the tax amortisation benefit. Furthermore, the fair value exercise needs to cover the entire balance sheet (and not just intangible assets) and when measuring the fair value of different assets (tangible and intangible), the fact that the various operating assets will all contribute to the generation of future returns will need to be taken into account .

How can we help?

We have extensive experience in providing clients with independent, professional valuations, and accounting /valuation advice in relation to acquisitions. Our friendly dedicated team will work with you to understand the reasons and key commercial and economic drivers for your acquisition and how this may impact on the accounting treatment and valuation assessments, ensuring that all assumptions underlying any calculations are robust and supportable.

Examples of the services that we can deliver include:

  • assistance in determining whether the acquisition is a business combination or an asset acquisition;
  • identification of intangible assets acquired and thorough investigation of all potential intangible assets;
  • an independent estimate of the fair value of acquired assets – in particular intangible assets, inventory, deferred revenue, and property, plant and equipment;
  • an independent estimate of the fair value of contingent consideration;
  • accounting advice in relation to business combinations, common control transactions and group reconstructions; and
  • detailed reports to support accounting treatment and valuations for audit purposes.

If you are interested in receiving some specialist advice please contact Danielle Stewart or Bart Sommerville.