(a) annually, and
(b) whenever there is an indication that the intangible asset may be impaired.
Review of useful life assessment
109 The useful life of an intangible asset that is not being amortised shall be reviewed each period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
110 In accordance with IAS 36, reassessing the useful life of an intangible asset as finite rather than indefinite is an indicator that the asset may be impaired. As a result, the entity tests the asset for impairment by comparing its recoverable amount, determined in accordance with IAS 36, with its carrying amount, and recognising any excess of the carrying amount over the recoverable amount as an impairment loss.
Recoverability of the carrying amount—impairment losses
111 To determine whether an intangible asset is impaired, an entity applies IAS 36 Impairment of Assets. That Standard explains when and how an entity reviews the carrying amount of its assets, how it determines the recoverable amount of an asset and when it recognises or reverses an impairment loss.
Retirements and disposals
112 An intangible asset shall be derecognised:
(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal.
113 The gain or loss arising from the derecognMon of an intangible asset shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset. It shall be recognised in profit or loss when the asset is derecognised (unless IAS17 leases requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.
114 The disposal of an intangible asset may occur in a variety of ways (eg by sale, by entering into a finance lease, or by donation). In determining the date of disposal of such an asset, an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods. IAS 17 applies to disposal by a sale and leaseback.
115 If in accordance with the recognition principle in paragraph 21 an entity recognises in the carrying amount of an asset the cost of a replacement for part of an intangible asset, then it derecognises the carrying amount of the replaced part. If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or internally generated.
116 The consideration receivable on disposal of an intangible asset is recognised initially at its fair value. If payment for the intangible asset is deferred, the consideration received is recognised initially at the cash price equivalent. The difference between the nominal amount of the consideration and the cash price equivalent is recognised as interest revenue in accordance with IAS 18 reflecting the effective yield on the receivable.
117 Amortisation of an intangible asset with a finite useful life does not cease when the intangible asset is no longer used, unless the asset has been fully depreciated or is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5.
Disclosure
General
118 An entity shall disclose the following for each class of intangible assets, distinguishing between internally generated intangible assets and other intangible assets:
(a) whether the useful lives are indefinite or finite and, if finite, the useful lives or the amortisation rates used;
(b) the amortisation methods used for intangible assets with finite useful lives;
(c) the gross carrying amount and any accumulated amortisation (aggregated with accumulated impairment losses) at the beginning and end of the period;
(d) the line item(s) of the income statement in which any amortisation of intangible assets is included;
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions, indicating separately those from internal development, those acquired separately, and those acquired through business combinations;
(ii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS5 and other disposals;
(iii) increases or decreases during the period resulting from revaluations under paragraphs 75, 85 and 86 and from impairment losses recognised or reversed directly in equity in accordance with IAS 36 Impairment of Assets (if any);
(iv) impairment losses recognised in profit or loss during the period in accordance with IAS 36 (if any);
(v) impairment losses reversed in profit or loss during the period in accordance with IAS 36 (if any);
(vi) any amortisation recognised during the period;
(vii) net exchange differences arising on the translation of the financial statements into the presentation currency, and on the translation of a foreign operation into the presentation currency of the entity; and
(viii) other changes in the carrying amount during the period.
119 A class of intangible assets is a grouping of assets of a similar nature and use in an entity's operations. Examples of separate classes may include:
(a) brand names;
(b) mastheads and publishing titles;
(c) computer software;
(d) licences and franchises;
(e) copyrights, patents and other industrial property rights, service and operating rights;
(f) recipes, formulae, models, designs and prototypes; and
(g) intangible assets under development.
The classes mentioned above are disaggregated (aggregated) into smaller (larger) classes if this results in more relevant information for the users of the financial statements.
120 An entity discloses information on impaired intangible assets in accordance with IAS 36 in addition to the information required by paragraph 118(e)(iii)-(v).
121 IAS 8 requires an entity to disclose the nature and amount of a change in an accounting estimate that has a material effect in the current period or is expected to have a material effect in subsequent periods. Such disclosure may arise from changes in:
(a) the assessment of an intangible asset's useful life;
(b) the amortisation method; or
(c) residual values.
122 An entity shall also disclose:
(a) for an intangible asset assessed as having an indefinite useful life, the carrying amount of that asset and the reasons supporting the assessment of an indefinite useful life. In giving these reasons, the entity shall describe the factors) that played a significant role in determining that the asset has an indefinite useful life.
(b) a description, the carrying amount and remaining amortisation period of any individual intangible asset that is material to the entity's financial statements.
(c) for intangible assets acquired by way of a government grant and initially recognised at fair value (see paragraph 44):
(i) the fair value initially recognised for these assets; (ii) their carrying amount; and
(iii) whether they are measured after recognition under the cost model or the revaluation model.
(d) the existence and carrying amounts of intangible assets whose title is restricted and the carrying amounts of intangible assets pledged as security for liabilities.
(e) the amount of contractual commitments for the acquisition of intangible assets.
123 When an entity describes the factor(s) that played a significant role in determining that the useful life of an intangible asset is indefinite, the entity considers the list of factors in paragraph 90.
Intangible assets measured after recognition using the revaluation model
124 If intangible assets are accounted for at revalued amounts, an entity shall disclose the following:
(a) by class of intangible assets:
(i) the effective date of the revaluation;
(ii) the carrying amount of revalued intangible assets; and
(iii) the carrying amount that would have been recognised had the revalued class of intangible assets been measured after recognition using the cost model in paragraph 74;
(b) the amount of the revaluation surplus that relates to intangible assets at the beginning and end of the period, indicating the changes during the period and any restrictions on the distribution of the balance to shareholders; and
(c) the methods and significant assumptions applied in estimating the assets' fair values.
125 It may be necessary to aggregate the classes of revalued assets into larger classes for disclosure purposes. However, classes are not aggregated if this would result in the combination of a class of intangible assets that includes amounts measured under both the cost and revaluation models.
Research and development expenditure
126 An entity shall disclose the aggregate amount of research and development expenditure recognised as an expense during the period.
127 Research and development expenditure comprises all expenditure that is directly attributable to research or development activities (see paragraphs 66 and 67 for guidance on the type of expenditure to be included for the purpose of the disclosure requirement in paragraph 126).
Other information
128 An entity is encouraged, but not required, to disclose the following information:
(a) a description of any fully amortised intangible asset that is still in use; and
(b) a brief description of significant intangible assets controlled by the entity but not recognised as assets because they did not meet the recognition criteria in this Standard or because they were acquired or generated before the version of IAS 38 Intangible Assets issued in 1998 was effective.
Transitional provisions and effective date
129 If an entity elects in accordance with paragraph 85 of IFRS 3 Business Combinations to apply IFRS 3 from any date before the effective dates set out in paragraphs 78-84 of IFRS 3, it also shall apply this Standard prospectively from that same date. Thus, the entity shall not adjust the carrying amount of intangible assets recognised at that date. However, the entity shall, at that date, apply this Standard to reassess the useful lives of its recognised intangible assets. If, as a result of that reassessment, the entity changes its assessment of the useful life of an asset, that change shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
130 Otherwise, an entity shall apply this Standard:
(a) to the accounting for intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004; and
(b) to the accounting for all other intangible assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004. Thus, the entity shall not adjust the carrying amount of intangible assets recognised at that date. However, the entity shall, at that date, apply this Standard to reassess the useful lives of such intangible assets. If, as a result of that reassessment, the entity changes its assessment of the useful life of an asset, that change shall be accounted for as a change in an accounting estimate in accordance with IAS 8.
130A An entity shall apply the amendments in paragraph 2 for annual periods beginning on or after 1 January 2006. If an entity applies IFRS 6 Exploration for and Evaluation of Mineral Resources for an earlier period, those amendments shall be applied for that earlier period.
Exchanges of similar assets
131 The requirement in paragraphs 129 and 130(b) to apply this Standard prospectively means that if an exchange of assets was measured before the effective date of this Standard on the basis of the carrying amount of the asset given up, the entity does not restate the carrying amount of the asset acquired to reflect its fair value at the acquisition date.
Early application
132 Entities to which paragraph 130 applies are encouraged to apply the requirements of this Standard before the effective dates specified in paragraph 130. However, if an entity applies this Standard before those effective dates, it also shall apply IFRS 3 and IAS 36 Impairment of Assets (as revised in 2004) at the same time.
Withdrawal of IAS 38 (issued 1998)
133 This Standard supersedes IAS 38 Intangible Assets (issued in 1998).
Approval of IAS 38 by the Board
International Accounting Standard 38 Intangible Assets was approved for issue by thirteen of the fourteen members of the International Accounting Standards Board. Professor Whittington dissented. His dissenting opinion is set out after the Basis for Conclusions on IAS 38.
Sir David Tweedie Chairman
Thomas E Jones Vice-Chairman
Магу Е Barth
Hans-Georg Brans
Anthony Т Соре
Robert P Garnett
Gilbert Gelard
James J Leisenring
Warren J McGregor
Patricia L O'Malley
Harry К Schmid
John Т Smith
Geoffrey Whittington
Tatsumi Yamada
contents | |
| paragraphs |
BASIS FOR CONCLUSIONS ON IAS 38 INTANGIBLE ASSETS | |
INTRODUCTION | BC1-BC3 |
DEFINITION OF AN INTANGIBLE ASSET | BC4-BC5 |
IDENTIFIABILITY | BC6-BC14 |
Background to the Board's deliberations | BC7-BC8 |
Clarifying identifiability | BC9-BC10 |
Non-contractual customer relationships | BC11-BC14 |
CRITERIA FOR INITIAL RECOGNITION | BC15-BCZ46 |
Acquisition as part of a business combination | BC16-BC25 |
Probability recognition criterion | BC17-BC18 |
Reliability of measurement recognition criterion | BC19-BC25 |
Separate acquisition | BC26-BC28 |
Internally generated intangible assets | BCZ29-BCZ46 |
Background on the requirements for internally generated intangible assets | BCZ30-BCZ32 |
Combination of IAS 9 with the Standard on intangible assets | BCZ33-BCZ35 |
Consequences of combining IAS 9 with IAS 38 | BCZ36-BCZ37 |
Recognition of expenditure on all internally generated intangible assets as an expense | BCZ38 |
Recognition of internally generated intangible assets | BCZ39 |
lASC's view in approving IAS 38 | BCZ40-BCZ41 |
Differences in recognition criteria for internally generated intangible assets and purchased intangible assets | BCZ42 |
Initial recognition at cost | BCZ43-BCZ44 |
Application of the recognition criteria for internally generated intangible assets | BCZ45-BCZ46 |
SUBSEQUENT ACCOUNTING FOR INTANGIBLE ASSETS | BC47-BC77 |
Accounting for intangible assets with finite useful lives acquired in business combinations | BC50-BC59 |
Impairment testing intangible assets with finite useful lives | BC54-BC56 |
Residual value of an intangible asset with a finite useful life | BC57-BC59 |
Useful lives of intangible assets | BC60-BC72 |
Useful life constrained by contractual or other legal rights | BC66-BC72 |
Accounting for intangible assets with indefinite useful lives | BC73-BC77 |
Non-amortisation | BC74-BC75 |
Revaluations | BC76-BC77 |
RESEARCH AND DEVELOPMENT PROJECTS ACQUIRED IN BUSINESS COMBINATIONS | BC78-BC89 |
Initial recognition separately from goodwill | BC80-BC82 |
Subsequent accounting for IPR&D projects acquired in a business combination and recognised as intangible assets | BC83-BC84 |
Subsequent expenditure on IPR&D projects acquired in a business combination and recognised as intangible assets | BC85-BC89 |
TRANSITIONAL PROVISIONS | BC90-BC102 |
Early application | BC101-BC102 |
SUMMARY OF MAIN CHANGES FROM THE EXPOSURE DRAFT | BC103 |
HISTORY OF THE DEVELOPMENT OF A STANDARD ON INTANGIBLE ASSETS | BCZ104-BCZ110 |
Basis for Conclusions on IAS 38 Intangible Assets
The International Accounting Standards Board revised IAS 38 as part of its project on business combinations. It was not the Board's intention to reconsider as part of that project all of the requirements in IAS 38.
The previous version oflAS 38 was accompanied by a Basis for Conclusions summarising the former International Accounting Standards Committee's considerations in reaching some of its conclusions in that Standard. For convenience the Board has incorporated into its own Basis for Conclusions material from the previous Basis for Conclusions that discusses (a) matters the Board did not reconsider and (b) the history of the development of a standard on intangible assets. That material is contained in paragraphs denoted by numbers with the prefix BCZ. Paragraphs describing the Board's considerations in reaching its own conclusions are numbered with the prefix EC.
Introduction
BCl This Basis for Conclusions summarises the International Accounting Standards Board's considerations in reaching the conclusions in IAS 38 Intangible Assets. Individual Board members gave greater weight to some factors than to others.
BC2 The International Accounting Standards Committee (IASC) issued the previous version of IAS 38 in 1998. It has been revised by the Board as part of its project on business combinations. That project has two phases. The first has resulted in the Board issuing simultaneously IFRS 3 Business Combinations and revised versions of IAS 38 and IAS 36 Impairment of Assets. Therefore, the Board's intention in revising IAS 38 as part of the first phase of the project was not to reconsider all of the requirements in IAS 38. The changes to IAS 38 are primarily concerned with:
(a) the notion of 'identiflability’ as it relates to intangible assets;
(b) the useful life and amortisation of intangible assets; and
(c) the accounting for in-process research and development projects acquired in business combinations.
BC3 With the exception of research and development projects acquired in business combinations, the Board did not reconsider the requirements in the previous version of IAS 38 on the recognition of internally generated intangible assets. The previous version of IAS 38 was accompanied by a Basis for Conclusions summarising lASC's considerations in reaching some of its conclusions in that Standard. For convenience, the Board has incorporated into this Basis for Conclusions material from the previous Basis for Conclusions that discusses the recognition of internally generated intangible assets (see paragraphs BCZ29-BCZ46) and the history of the development of a standard on intangible assets (see paragraphs BCZ104-BCZ110). The views expressed in paragraphs BCZ29-BCZ46 and BCZ104-BCZ110 are those of IASC.
Definition of an intangible asset (paragraph 8)
BC4 An intangible asset was defined in the previous version of IAS 38 as 'an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative services'. The definition in the revised Standard eliminates the requirement for the asset to be held for use in the production or supply of goods or services, for rental to others, or for administrative services.
BC5 The Board observed that the essential characteristics of intangible assets are that they:
(a) are resources controlled by the entity from which future economic benefits are expected to flow to the entity;
(b) lack physical substance; and
(c) are identifiable.
The Board concluded that the purpose for which an entity holds an item with these characteristics is not relevant to its classification as an intangible asset, and that all such items should be within the scope of the Standard.
Identifiability (paragraph 12)
BC6 Under the Standard, as under the previous version of IAS 38, a non-monetary asset without physical substance must be identifiable to meet the definition of an intangible asset. The previous version of IAS 38 did not define 'identifiability', but stated that an intangible asset could be distinguished from goodwill if the asset was separable, but that separability was not a necessary condition for identifiability. The revised Standard requires an asset to be treated as meeting the identifiability criterion in the definition of an intangible asset when it is separable, or when it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
Background to the Board's deliberations
BC7 The Board was prompted to consider the issue of 'identifiability' as part of the first phase of its Business Combinations project as a result of changes during 2001 to the requirements in Canadian and United States standards on the separate recognition of intangible assets acquired in business combinations. The Board observed that intangible assets comprise an increasing proportion of the assets of many entities, and that intangible assets acquired in a business combination are often included in the amount recognised as goodwill, despite the requirements in IAS 22 Business Combinations and IAS 38 for them to be recognised separately from goodwill. The Board agreed with the conclusion reached by the Canadian and US standard-setters that the usefulness of financial statements would be enhanced if intangible assets acquired in a business combination were distinguished from goodwill. Therefore, the Board concluded that the IFRS arising from the first phase of the Business Combinations project should provide a definitive basis for identifying and recognising intangible assets acquired in a business combination separately from goodwill.
BC8 In revising IAS 38 and developing IFRS 3, the Board affirmed the view in the previous version of IAS 38 that identifiability is the characteristic that conceptually distinguishes other intangible assets from goodwill. The Board concluded that to provide a definitive basis for identifying and recognising intangible assets separately from goodwill, the concept of identifiability needed to be articulated more clearly.
Clarifying identifiability (paragraph 12)
BC9 Consistently with the guidance in the previous version of IAS 38, the Board concluded that an intangible asset can be distinguished from goodwill if it is separable, ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged. Therefore, in the context of intangible assets, separability signifies identifiability, and intangible assets with that characteristic that are acquired in a business combination should be recognised as assets separately from goodwill.
ВС10 However, again consistently with the guidance in the previous version of IAS 38, the Board concluded that separability is not the only indication of identifiability. The Board observed that, in contrast to goodwill, the values of many intangible assets arise from rights conveyed legally by contract or statute. In the case of acquired goodwill, its value arises from the collection of assembled assets that make up an acquired entity or the value created by assembling a collection of assets through a business combination, such as the synergies that are expected to result from combining entities or businesses. The Board also observed that, although many intangible assets are both separable and arise from contractual-legal rights, some contractual-legal rights establish property interests that are not readily separable from the entity as a whole. For example, under the laws of some jurisdictions some licences granted to an entity are not transferable except by sale of the entity as a whole. The Board concluded that the fact that an intangible asset arises from contractual or other legal rights is a characteristic that distinguishes it from goodwill. Therefore, intangible assets with that characteristic that are acquired in a business combination should be recognised as assets separately from goodwill.
Non-contractual customer relationships (paragraph 16)
BC11 The previous version of IAS 38 and the Exposure Draft of Proposed Amendments to IAS 38 stated that 'An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and also can restrict the access of others to those benefits.' The documents then expanded on this by stating that 'in the absence of legal rights to protect, or other ways to control, the relationships with customers or the loyalty of the customers to the entity, the entity usually has insufficient control over the economic benefits from customer relationships and loyalty to consider that such items meet the definition of intangible assets.'
BC12 However, the Draft Illustrative Examples accompanying ED 3 Business Combinations stated that 'If a customer relationship acquired in a business combination does not arise from a contract, the relationship is recognised as an intangible asset separately from goodwill 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.' Whilst respondents to the Exposure Draft generally agreed with the Board's conclusions on the definition of identifiability, some were uncertain about the relationship between the separability criterion for establishing whether a non-contractual customer relationship is identifiable, and the control concept for establishing whether the relationship meets the definition of an asset. Additionally, some respondents suggested that non-contractual customer relationships would, under the proposal in the Exposure Draft, be separately recognised if acquired in a business combination, but not if acquired in a separate transaction.
BC13 The Board observed that exchange transactions for the same or similar non-contractual customer relationships provide evidence not only that the item is separable, but also that the entity is able to control the expected future economic benefits flowing from that relationship. Similarly, if an entity separately acquires a non-contractual customer relationship, the existence of an exchange transaction for that relationship provides evidence both that the item is separable, and that the entity is able to control the expected future economic benefits flowing from the relationship. Therefore, the relationship would meet the intangible asset definition and be recognised as such. However, in the absence of exchange transactions for the same or similar non-contractual customer relationships, such relationships acquired in a business combination would not normally meet the definition of an 'intangible asset'—they would not be separable, nor would the entity be able to demonstrate that it controls the expected future economic benefits flowing from that relationship.
BC14 Therefore, the Board decided to clarify in paragraph 16 of IAS 38 that in the absence of legal rights to protect customer relationships, exchange transactions for the same or similar non-contractual customer relationships (other than as part of a business combination) provide evidence that the entity is nonetheless able to control the future economic benefits flowing from the customer relationships. Because such exchange transactions also provide evidence that the customer relationships are separable, those customer relationships meet the definition of an intangible asset.
Criteria for initial recognition
BC15 In accordance with the Standard, as with the previous version of IAS 38, an intangible asset is recognised if, and only if:
(a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.
In revising IAS 38 the Board considered the application of these recognition criteria to intangible assets acquired in business combinations. The Board's deliberations on this issue are set out in paragraphs BC16-BC25.
Acquisition as part of a business combination (paragraphs 33-38)
BC16 The Exposure Draft of Proposed Amendments to IAS 38 proposed that the recognition criteria in paragraph BC15 would, with the exception of an assembled workforce, always be satisfied for an intangible asset acquired in a business combination. Therefore, those criteria were not included in ED 3 Business Combinations. ED 3 proposed requiring an acquirer to recognise separately at the acquisition date all of the acquiree's intangible assets as defined in IAS 38, other than an assembled workforce. After considering respondents' comments, the Board decided:
(a) to proceed with the proposal that the probability recognition criterion is always considered to be satisfied for intangible assets acquired in a business combination; and
(b) not to proceed with the proposal that, with the exception of an assembled workforce, sufficient information should always exist to measure reliably the fair value of an intangible asset acquired in a business combination.
Probability recognition criterion
BC17 In revising IAS 38, the Board observed that the fair value of an intangible asset reflects market expectations about the probability that the future economic benefits associated with the intangible asset will flow to the acquirer. In other words, the effect of probability is reflected in the fair value measurement of an intangible asset. Therefore, the probability recognition criterion is always considered to be satisfied for intangible assets acquired in business combinations.
BC18 The Board observed that this highlights a general inconsistency between the recognition criteria for assets and liabilities in the Framework (which states that an item meeting the definition of an element should be recognised only if it is probable that any future economic benefits associated with the item will flow to or from the entity, and the item can be measured reliably) and the fair value measurements required in, for example, a business combination. However, the Board concluded that the role of probability as a criterion for recognition in the Framework should be considered more generally as part of a forthcoming Concepts project.
Reliability of measurement recognition criterion
BC19 In developing the Exposure Draft, the Board concluded that, except for an assembled workforce, sufficient information should exist to measure reliably the fair value of an asset that has an underlying contractual or legal basis or is capable of being separated from the entity. Respondents generally disagreed with this conclusion, arguing that:
(a) it might not always be possible to measure reliably the fair value of an asset that has an underlying contractual or legal basis or is capable of being separated from the entity.
(b) a similar presumption does not exist in IFRSs for identifiable tangible assets acquired in a business combination. Indeed, the Board decided when developing IFRS 3 Business Combinations to carry forward from IAS 22 Business
Combinations the general principle that an acquirer should recognise separately from goodwill the acquiree's identifiable tangible assets, but only provided they can be measured reliably.
BC20 Additionally, as part of its consultative process, the Board conducted field visits and round-table discussions during the comment period for the Exposure Draft.* Field visit and round-table participants were asked a series of questions aimed at improving the Board's understanding of whether there might exist non-monetary assets without physical substance that are separable or arise from legal or other contractual rights, but for which there may not be sufficient information to measure fair value reliably.
*The field visits were conducted from early December 2002 to early April 2003, and involved IASB members and staff in meetings with 41 companies in Australia, France, Germany, Japan, South Africa, Switzerland and the United Kingdom. IASB members and staff also took part in a series of round-table discussions with auditors, preparers, accounting standard-setters and regulators in Canada and the United States on implementation issues encountered by North American companies during first-time application of US Statements of Financial Accounting Standards 141 Business Combinations and 142 Goodwill and Other Intangible Assets, and the equivalent Canadian Handbook Sections, which were issued in June 2001.
BC21 The field visit and round-table participants provided numerous examples of intangible assets they had acquired in recent business combinations whose fair values might not be reliably measurable. For example, one participant acquired water acquisition rights as part of a business combination. The rights are extremely valuable to many manufacturers operating in the same jurisdiction as the participant—the manufacturers cannot acquire water and, in many cases, cannot operate their plants without them. Local authorities grant the rights at little or no cost, but in limited numbers, for fixed periods (normally ten years), and renewal is certain at little or no cost. The rights cannot be sold other than as part of the sale of a business as a whole, therefore there exists no secondary market in the rights. If a manufacturer hands the rights back to the local authority, it is prohibited from reapplying. The participant argued that it could not value these rights separately from its business (and therefore from goodwill), because the business would cease to exist without the rights.
BC22 After considering respondents' comments and the experiences of field visit and round-table participants, the Board concluded that, in some instances, there might not be sufficient information to measure reliably the fair value of an intangible asset separately from goodwill, notwithstanding that the asset is identifiable. The Board observed that, except as outlined in paragraph BC25, the intangible assets whose fair values respondents and field visit and round-table participants could not measure reliably arose either:
(a) from legal or other contractual rights and are not separable (ie could be transferred only as part of the sale of a business as a whole); or
(b) from legal or other contractual rights and are separable (ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability), but there is no history or evidence of exchange transactions for the same or similar assets, and otherwise estimating fair value would be dependent on immeasurable variables.
ВС23 Nevertheless, the Board remained of the view that the usefulness of financial statements would be enhanced if intangible assets acquired in a business combination were distinguished from goodwill, particularly given the Board's decision to regard goodwill as an indefinite-lived asset that is not amortised. The Board also remained concerned that failing the recognition criterion of reliability of measurement might be inappropriately used by entities as a basis for not recognising intangible assets separately from goodwill. For example, IAS 22 and the previous version of IAS 38 required an acquirer to recognise an intangible asset of the acquiree separately from goodwill at the acquisition date if it was probable that any associated future economic benefits would flow to the acquirer and the asset's fair value could be measured reliably. The Board observed when developing the Exposure Draft that although intangible assets constitute an increasing proportion of the assets of many entities, those acquired in business combinations were often included in the amount recognised as goodwill, despite the requirements in IAS 22 and the previous version of IAS 38 that they be recognised separately from goodwill.