How to identify intangible assets

Despite the widespread economic impact of COVID-19, the Australian market activity rebounded strongly in the second half of 2020 with a resurgence in company acquisitions and mergers. Although such transactions can have significant benefits for an acquiring company, the related accounting is often complex.

AASB 3 ‘Business Combinations’ requires an extensive analysis to be performed, in order to accurately detect, recognise and measure at fair value the tangible and intangible assets and liabilities acquired in a business combination.

In particular, the accounting for intangible assets acquired in a business combination is challenging for a number of reasons, including:

1. Intangible assets are by nature less detectable than tangible ones
2. Many are not recognised in the acquiree’s pre-combination financial statements
3. Determining their fair value usually involves estimation techniques as quoted prices are rarely available.

Due to this, the excess consideration may incorrectly be recognised as purchased goodwill, and an appropriate analysis, in determining whether the recognition of an identifiable intangible asset(s) will be required. To perform this analysis, you need to determine whether the asset is identifiable as defined within AASB 138 Intangible Assets, being separable or arising from contractual or legal rights.

The detection of identifiable intangible assets depends on the context of the acquisition. Useful sources to detect identifiable assets in the context of a business combination are, for example:

Therefore, should you be currently in the process of acquiring, or looking into potential acquisitions, ensure that you take into consideration the above matters so as to identify all assets that are being acquired, as all reported amounts of intangible assets and goodwill will be closely scrutinised by investors, analysts and regulators.

Should you need any assistance and/or guidance please do not hesitate to contact your local PKF expert.