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Customer relationships valuation

Introduction

Customer relationships valuation is based on valuation model. Here such a valuation model is presented to value customer contracts and the related customer relationship and the non-contractual customer relationships, as per IFRS 3 Business Combinations.

References (to familiarise yourself with the subject):

Customer contracts and the related customer relationships
Non-contractual customer relationships
Order or production backlog

What are the inputs to the model?

Revenue

Revenue – represents revenue from existing customer relationships for existing products. Includes contractual and non-contractual relationships (even those without current backlog or commitments). Separate valuation of a backlog revenue intangible asset can be considered if and when such backlog exists.

The model assumes a “market participant” point of view, therefore revenue/earnings assumptions … Read more

Overview of the amendments IFRS 3

In May 2019 amendments to IFRS 3 Business Combinations were published by IASB. See the introduction in Redefinition of a business.

IFRS 3 continues to adopt a market participant’s perspective to determine whether an acquired set of activities and assets is a business. The amendments: clarify the minimum requirements for a business; remove the assessment of whether market participants are capable of replacing any missing elements; add guidance to help entities assess whether an acquired process is substantive; narrow the definitions of a business and of outputs; and introduce an optional fair value concentration test. Overview of the amendments IFRS 3 Business Combinations

Minimum requirements to be a business  Overview of the amendments IFRS 3 Business Combinations

In the … Read more

Accounting treatment acquisition of a business or asset(s)

An entity has to determine whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition.

Whether the simplified (optional) concentration tests is applied or a detailed assessment applying the normal requirements in IFRS 3 is applied, in IFRS 3 (simplified in May 2019) the result of the assessment of what was acquired is the acquirer obtained control over a business (business combination or business acquisition) or a (group of similar) identifiable asset(s) (asset acquisition). Accounting treatment acquisition of a business or asset(s)

Major differences between Read more

IFRS 3 Identify a business

An entity shall determine whether a transaction or other event is a business combination by applying the definition in IFRS 3, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition. See also the accounting treatment acquisition of a business or asset(s) 

Guidance on identifying a business combination and the definition of a business are as follows:

The definition of a business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) … Read more

Acquisition of insurance contracts

Insurance contracts may be acquired in a transfer (often referred to as a portfolio transfer) or in a business combination, as defined in IFRS 3 Business Combinations.

In summary, insurance contracts acquired in a transfer or a business combination are classified and measured in the same way as those issued by the entity at the date of the combination or transfer, except that the fulfilment cash flows are recognised at that date.

1. Business combinations Acquisition of insurance contracts

IFRS 3 requires a group of insurance contracts acquired in a business combination to be measured at the acquisition date under IFRS 17, rather than at fair value [IFRS 3 31A], resulting in key differences for insurance contracts Read more

Earnings per share

The objective of IAS 33 Earnings per share is prescribing principles for the determination and presentation of earnings per share, so as to improve performance comparisons between different entities in the same reporting period and between different reporting periods for the same entity.

Earnings per share is mostly used in the consolidated financial statements of a group with a parent:

  1. whose ordinary shares or potential ordinary shares are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or
  2. that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing ordinary shares in a public market.
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