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Customer relationships valuation

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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, … Read more

IAS 38 Non-contractual customer relationships

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IAS 38 Non-contractual customer relationships, in Business Combinations, this is a intangible asset and is therefore recognised separately from goodwill, provided that its fair value can be measured reliably. This customer-related intangible asset does not arise from contractual or other legal rights, but meets the definition of an intangible asset because it is separable. IAS 38 Non-contractual customer relationships

IAS 38 Non-contractual customer relationships

If a customer relationship acquired in a business combination does not arise from a contract, the relationship is an intangible asset 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 … Read more

Investments in Joint Ventures Overview

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Investments in Joint Ventures Overview that is what this is……

An entity with joint control of an investee shall account for its investment in a joint venture using the equity method except when that investment qualifies for exemption in IAS 28. Investments in Joint Ventures Overview

The exemptions include:Investments in Joint Ventures Overview

  • if the entity is a parent that is exempt from preparing consolidated financial statements by the scope exception in paragraphs 4(a) of IFRS 10 Consolidated Financial Statements; or Investments in Joint Ventures Overview
  • all of the following apply: Investments in Joint Ventures Overview
    1. the entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those
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Identify and separate Intangible assets

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Identify and separate Intangible assets that is one of the most important exercises in a IFRS 3 business combination. The acquirer recognises, separately from goodwill, the identifiable intangible assets acquired in a business combination. An intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion. Identify and separate Intangible assets Identify and separate Intangible assets

An intangible asset that meets the contractual-legal criterion is identifiable even if the asset is not transferable or separable from the acquiree or from other rights and obligations. For example:

  1. an acquiree leases a manufacturing facility under an operating lease that has terms that are favourable relative to market terms.

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IFRS 3 Application of the definition of a business

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IFRS 3 Application of the definition of a business – Highlights

In October 2018, the International Accounting Standards Board (IASB or Board) issued amendments to the definition of a business in IFRS 3 Business Combinations. The amendments are intended to assist entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition.

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; … Read more

Overview of the amendments IFRS 3

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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 businessRead more

Accounting Policies to First IFRS Financial statements

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Accounting Policies to First IFRS Financial statements – An entity must use the same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements. Those accounting policies must comply with each IFRSs effective at the end of its first IFRS reporting period, unless there is a mandatory exception to retrospective application or an optional exemption from the requirements of IFRSs.

[IFRS 1, paras 7 – 9]Accounting Policies to First IFRS Financial statements

Note that:

  • An entity may apply a new IFRS that is not yet mandatory if that IFRSs permits early application.
  • The transitional provisions in IFRSs do not apply to a first-time adopter’s transition to IFRSs.

Mandatory Exceptions to Retrospective Application Read more

Disclosure requirements IFRS 4 and IFRS 17

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Disclosure requirements IFRS 4 and IFRS 17 – Explanation of recognized amounts from IFRS 4 to IFRS 17

1 Introduction Disclosure requirements IFRS 4 and IFRS 17

[IFRS 17 (98), IFRS 17 (93)-(96)]

Disclosure requirements IFRS 4 and IFRS 17IFRS 4 requires an entity to disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts. In order to comply with this objective, IFRS 4 outlines what should be disclosed regarding reconciliations, policies, methods and processes but provides limited guidance on how these disclosure requirements should be met.

IFRS 17 requirements are much more extensive. It requires the entity to provide specific reconciliations showing how the net carrying amounts of insurance contracts changed during the Read more

Transition to IFRS 17 Insurance contracts

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Transition to IFRS 17 Insurance contractsTransition to IFRS 17 Insurance contracts – IFRS 17 should be applied for annual reporting periods beginning on or after 1 January 2021. FRS 17 supersedes IFRS 4 [IFRS 17 C34]. Early adoption is permitted if the entity applies IFRS 9 and IFRS 15 not later than on the date of initial application of IFRS 17.

1 January 2021 is the date of initial application of IFRS 17 unless an entity early adopts IFRS 17 [IFRS 17 C1]. The transition date is the beginning of the reporting period immediately preceding the date of initial application. Therefore, if an entity adopts on 1 January 2021, the transition date is 1 January 2020 [IFRS 17 C2Read more

Disclosure recognised insurance amounts

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Explanation of recognised amounts Disclosure recognised insurance amountsDisclosure recognised insurance amounts

An entity is required to disclose the following:

  • Reconciliations that show how the net carrying amount of contracts within the scope of IFRS 17 changed during each period (see 1 below)
  • Disclosures for contracts other than those to which the entity applies the premium allocation approach:
    • Analysis of insurance revenue recognized in the period for contracts (see 2 below) Disclosure recognised insurance amounts
    • Analysis of the effect of contracts initially recognized in each period (see 3 below) Disclosure recognised insurance amounts
    • Explanation of when the entity expects to recognize the contractual service margin (CSM) at the end of the reporting period in profit
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