Contract-based Intangible Assets – FAQ | IFRS

Contract-based intangible assets

In a Business Combinations, contract-based intangible assets –by definition– are intangible assets and are therefore recognised separately from goodwill, provided that their fair values can be measured reliably. These intangible assets meet the definition of an intangible asset because they again –by definition– arise from contractual or other legal rights and are not tangible/visible/instantly recognisable.

Self explanatory examples are:Contract-based intangible assets

  1. Licensing, royalty and standstill agreements
  2. Advertising, construction, management, service or supply contracts
  3. Lease agreements Contract-based intangible assets
  4. Construction permits
  5. Franchise agreements
  6. Operating and broadcasting rights
  7. Use rights such as drilling, water, air, mineral, timber-cutting and route authorities
  8. Servicing contracts such as mortgage servicing contracts
    Contracts to service financial assets are one particular type of contract-based intangible asset. While servicing is inherent in all financial assets, it becomes a distinct asset (or liability):

    1. when contractually separated from the underlying financial asset by sale or securitisation of the assets with servicing retained; or
    2. through the separate purchase and assumption of the servicing.If mortgage loans, credit card receivables or other financial assets are acquired in a business combination with servicing retained, the inherent servicing rights are not a separate intangible asset because the fair value of those servicing rights is included in the measurement of the fair value of the acquired financial asset.
  9. Employment contracts that are beneficial contracts from the perspective of the employer because the pricing of those contracts is below their current market value

A contract is an enforceable agreement between two or more parties to either do a thing (or a set of things) or to not do a thing (or a set of things). The rights and duties encompassed in the contract can have a intangible value in a business combination. The contract document (or the oral agreement) itself is not the intangible asset. The legal rights and duties of the contract are the intangible asset. Before any valuation can be performed, there should be an enforceable contract. In order for the contract to be enforceable, it should meet certain (standard) legal requirements.

Contract valuation: Contract-based intangible assets

All intangible asset valuation approaches may be applicable to most contract valuations. These are:

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