Where assets are acquired as part of a business combination, IFRS 3 Business Combinations is applied. In this section, a reference to a business combination indicates that the acquiring entity has acquired a group of assets rather than a single asset and one of the assets in that group is an intangible asset. The group of assets could be an operating division or a segment of another entity.
The key issue is then how to account for the acquisition of an intangible asset when it is acquired as part of a group of assets rather than as a single asset. Note, however, that IFRS 3 prescribes different accounting for the acquisition of a group of assets that constitutes a business and for a group that does not constitute a business. In applying the principles in IAS 38 relating to acquisition of assets as part of a business combination, it is first necessary to ensure that the group of assets being acquired is a business.
With respect to recognition criteria to apply when intangible assets are acquired in a business combination, IAS 38 states that no recognition criteria need be applied. Provided the assets meet the definition of an intangible asset, they must be recognized as separate assets. As with separately acquired intangible assets, paragraph 33 of IAS 38 provides that, where intangible assets are acquired as part of a business combination, the effect of probability is reflected in the measurement of the asset. Hence, the probability recognition criterion is automatically met.
Further, it is argued in paragraph 33 of IAS 38 that the requirement for reliability of measurement is always met as sufficient information always exists to measure reliably the fair value of the asset. This non-application of recognition criteria in accounting for intangibles acquired in a business combination is also seen in IFRS 3 where paragraphs 11 and 12 note that the recognition conditions for the identifiable assets must meet the definition of an asset in the Conceptual Framework, as well as be a part of what the acquirer and the acquiree exchanged in the business combination transaction.
Professor Whittington argued that the probability test in paragraph 21(a) should be applied in testing the recognition of all intangibles, stating that issues relating to the recognition criteria in the Conceptual Framework should be resolved before having different recognition criteria for intangible assets acquired in a business combination. The justification for different criteria is presumably that there is an increased relevance of information in reporting the separate intangible assets rather than subsuming them into goodwill.
The application of these recognition requirements means that an acquirer must, in recognizing separately the acquiree’s intangible assets, recognize intangible assets that the acquiree has not recognized in its records, such as in-process research and development that cannot be recognized under IAS 38 as internally generated assets (discussed later in this section). Recognition by an acquirer of an acquiree’s in-process research and development project only depends on whether the project meets the definition of an intangible asset. It can be seen that entities that acquire intangible assets in a business combination will be able, and in fact are required, to recognize intangible assets that are not separately recognizable when acquired by other means.
In accordance with IFRS 3 Business Combinations, if an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value at the acquisition date.
Note firstly that it is IFRS 3 that determines the measurement of assets acquired in a business combination. Under IFRS 3 acquired assets are measured at fair value. Hence, intangible assets acquired in a business combination must be measured at initial recognition at fair value. This is then a departure from the general measurement rule in paragraph 24. Paragraph 33 of IAS 38 says that ‘the cost . . . is its fair value’; however, the acquiring entity does not attempt to measure the cost, rather it measures the fair value.