Retail & consumer Retail & consumer

Issue in practice for the retail & consumer industry -

re-acquired rights in a business combination
Application date: The revised standard is effective for annual periods beginning on or after 1 July
2009.
What is the issue?
In 2008 the International Accounting Standards Board
revised the accounting rules associated with business
combinations and reporting in consolidated and separate
financial statements (IFRS 3R & IAS 27R respectively).
The revisions make significant changes to the way that
entities account for acquisitions and disposals.
One issue in particular has arisen when applying the
revised standards in practice. The new accounting rules
associated with re-acquired rights has become a
challenging issue for the retail & consumer industry.
What are re-acquired rights?
Where an acquisition involves re-acquired rights (eg,
acquisitions of existing licensees, franchisees or
distributors to whom specific contractual rights were
granted), an intangible asset must be recognised in the
consolidated balance sheet, which reduces the amount
of goodwill that is recognised in the business
combination. The intangible asset is amortised over its
remaining contractual period, so it will reduce the
reported profit for the remaining life of the asset.
The value of re-acquired rights does not reflect the
assumptions a market participant would make (IFRS 3R
specifically excludes fair value measurement for re-
acquired rights). Rather, the value of a re-acquired right
is determined based on the estimated cash flows over
the remaining contractual life, even if market participants
would reflect expected renewals in their measurement of
that right. The basis for this treatment is that a
contractual right acquired from a third party (which would
reflect market-based assumptions) is not the same as a
re-acquired right by an entity.
What issues have arisen in practice?
Where an entity re-acquires rights in a business
combination, the acquirer must ensure these are valued
correctly. IFRS 3R requires them to be measured based
on the remaining contractual terms without taking into
account possible renewals. This may mean that:
more intangible assets will be recognised because
IFRS 3 (prior to the amendment) was silent on the
treatment of re-acquired rights;
the amortisation recognised post combination will
result in lower earnings; and
earnings may be impacted as a result of the
settlement of any off-market pricing value of re-
acquired contractual rights.
Why is this a common issue for the
retail & consumer industry?
It is common for retail & consumer entities to expand
their businesses through acquiring existing trading
partners (such as licensees, franchisees, distributors) to
capitalise on the readily available sales or distribution
network. This is a particularly important strategy for
entities operating in, or planning to operate in, markets
that are hard to penetrate.
Previously there was no clear guidance on the
recognition of re-acquired rights. In our experience, most
acquirers that recognised re-acquired rights assumed
indefinite renewals of the contractual right, which
effectively makes the re-acquired right an intangible
asset with an indefinite life. In these cases, no
amortisation was charged on the intangible asset and an
impact on entities operating results only occurs where
an impairment is recorded.
However, the new IFRS 3R makes clear that the re-
acquired right should be recognised as an intangible
asset and measured only on the basis of the remaining
contractual terms within the contract that gave rise to the
right. This approach does not take into consideration
potential renewals of the contract. The reason being that
a renewal of the contractual term of the rights occurring
after the business combination is not part of what was
acquired in the business combination. Hence, the value
of the re-acquired right is likely to be lower and the
amortisation period finite, which typically results in an
amortisation charge (previously there was none).
Further, if the terms within the contract that gave rise to
the re-acquired right are favourable or unfavourable
(relative to the terms of current market transactions for
the same or similar terms) the acquirer must recognise a
settlement gain or loss as appropriate. This will have an
immediate effect (in the year of the acquisition) and a
long-term effect (across the original contractual period of
the re-acquired right) on the acquirers financial results.

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