If there is an unconditional right, an asset is no longer considered contingent and should be recognised at fair value and subsequently measured in accordance with appropriate IFRS, e.g. Other examples are IFRS 3, IFRS 6, IAS 19 and IAS 40. This is often referred to as ‘step acquisition’ or ‘piecemeal acquisition’. even if not separable from the related assets or legal entity. Conversely, entities cannot recognise liabilities for future expenditures for which there is no present obligation as at the acquisition date. Paragraphs IFRS 3.B19-B27 provide guidance on a particular kind of business combination called reverse acquisitions, or reverse takeovers, or reverse IPO (initial public offering). Such an asset should be measured (both on initial recognition and subsequent measurement) on the same basis as the indemnified item (C&L liability in our example) with consideration given to credit risk (IFRS 3.27-28). The complexity of business combinations combined with often limited access to financial data of the target before the acquisition can make the acquisition accounting impossible to conclude before reporting date. It is common occurrence that the acquirer protects himself from uncertain and/or unknown outcomes of pending or potential matters relating to target. Contingent consideration classified as equity as per IAS 32 is not subsequently remeasured and its settlement is accounted for within equity (IFRS 3.58). How to calculate impairment on intercompany loans? Recognizing and measuring goodwill or a gain from a bargain purchase. The acquirer measures the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values (IFRS 3.18-19), with certain exceptions as specified below. The useful life should therefore be longer than 1 year during which AC intends to withdraw the TC brand from the market. If shares of the target are quoted, their fair value will be determined as ‘price x quantity’. Customer list is recognised as an intangible asset if the terms of confidentiality or other agreements or simply the law do not prohibit the entity from selling, leasing or otherwise exchanging the list. IFRS 3 requires the acquirer to recognise any contingent consideratio… In such cases, the acquirer has an indemnification asset. EY Homepage. AC recognises TC’s CRM software at fair value of $2 million even though it will use it only for 6 months. The fair value of previously held equity interest in the target is then derecognised and included in calculation of goodwill. Despite the legal classification, if the guidance in IFRS 3.B14-B18 indicates that the private company is de facto the acquirer, the business combination should be accounted for with the private company as the acquirer. An asset must be identifiable in order to be recognised by the acquirer. Where relevant, the Guide also discusses subsequent amendments to these Standards. IE32-IE33). Fair value of non-controlling interest need to be determined using valuation techniques under IFRS 13. Use at your own risk. Example: Settlement of pre-existing contract. This module covers the background, scope and principles under IFRS 3 Business Combinations and the application of this … In practice, such assets are valued at the same amount as related liability, subject to any contractual limits for indemnification. Examples of such transactions given in IFRS 3.52 are: IFRS 3.B50 lists factors to consider when assessing whether a transaction should be accounted for separately from a business combination. The Guide shows continuing progress towards further enhancing the quality of IFRS … Examples of such assets are: IAS 38.34 specifically requires separate recognition of acquired in-process research and development project. report “Top 7 IFRS Mistakes” By using our website, you agree to the use of our cookies. The standard was published in January 2008 and is effective from 1 July 2009. Applying the acquisition method comprises. without taking into account possible contract renewals (IFRS 3.29). IFRS 3 . Note that variant 2. is available only for equity instruments that are present ownership instruments and entitle their holders to a proportionate share of the target’s net assets in the event of liquidation. When an impairment loss is charged against goodwill, its amount will be higher when non-controlling interest is measured at fair value (see point 1. above). If the business combination settles a pre-existing relationship, the acquirer recognises a gain or loss, measured as follows (IFRS 3.B52): Example: Settlement of pre-existing lawsuit. If such a project is never completed, it must be impaired. It happens so, because one-off gains are usually excluded from KPIs observed by management and investors. There needs to be evidence of exchange transactions for that type of asset or an asset of a similar type, even if those transactions are infrequent (IFRS 3.B33-B34). The ‘additional’ impairment loss will be allocated to non-controlling interest. Such adjustments should be applied retrospectively together with changes in comparative data, e.g. The acquirer measures the right-of-use asset at the same amount as the lease liability, adjusted to reflect favourable or unfavourable terms of the lease when compared with market terms (IFRS 3.28A). Academia.edu is a platform for academics to share research papers. NEW: Online Workshops – US GAAP, IFRS and other. Finally, both entities are merged into one entity or operations of the private company are transferred to the public company. Example: Acquired brand that will not be used after the business combination. IFRS 3 (Revised 2008) — … The fair value of the contract from the supplier’s (TC) perspective is determined at $7 million, of which $3 million relates to above-market fixed pricing, and the remaining $4 million relates to at-market prices. Such consideration is referred to as contingent consideration and it should also be recognised at fair value as a part of business combination. IFRS 3 (2008) seeks to enhance the relevance, reliability and comparability of information provided about business combinations (e.g. Skip to the content. Paragraphs IAS 38.42-43 cover subsequent expenditure on an acquired in-process research and development project. IFRS 9). Impact of this acquisition on consolidated financial statements of AC is as follows ($m): Goodwill represents future economic benefits arising from e.g. In all other cases, the acquisition is … IFRS 3, Business combinations – A survival guide … Important note References in the Guide to IFRS 3 and IAS 27 relate to the January 2008 versions of these Standards. Such a right is recognised as an asset on a business combination, but the fair value measurement should be based only on the remaining contractual term, i.e. The accounting for share-based payment arrangements in the context of business combinations is covered in IFRS 2. If there are any legal procedures to be fulfilled after the acquisition, they are usually virtually certain to be successfully processed and the control over TC is usually passed by TC’s former owners to AC before that date. Combinations – Applying IFRS 3 in Practice (the Guide). There are three major implications of such a decision: An acquirer may obtain control over target in which it held some equity interest at the time of obtaining control. when the target repurchases its own shares or some rights held by previous controlling interests lapse. Volume A - A guide to IFRS reporting Volume B - Financial Instruments - IFRS 9 and related Standards Volume C ... International Financial Reporting Standards (linked to Deloitte accounting guidance) International Financial Reporting Standards . It is presumed that all assets and liabilities acquired in a business combination satisfy the criterion of probability of inflow/outflow of resources as set out in Framework (IFRS 3.BC126-BC130). Intro to consolidation and group accounts – which method for your investment? Gains on bargain purchases are rare in real life. acquisitions and mergers) and their effects. (IFRS 3. US GAAP allow to use acquirer’s basis of accounting in acquiree’s separate financial statements. In theory, overpayment will trigger an impairment loss during nearest impairment test (IFRS 3.BC382). Consideration transferred is the sum of fair values of (IFRS 3.37): Usually, consideration is paid in cash. the present ownership instruments’ proportionate share of target’s identifiable net assets. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. Net identifiable assets acquired and the liabilities assumed. Contract-based intangible assets. Search Close search … IFRS 3.B64n(ii) requires also a disclosure of the reasons why the transaction resulted in a gain (e.g. Example: two methods of measurement of non-controlling interest. The application of the principles addressed … IFRS 3 deals with how an acquirer: recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; recognises … Acquired assets held for sale should be initially measured at fair value less costs to sell in accordance with IFRS 5 (IFRS 3.31). Fair value of the acquirer’s previously held equity interest in the target and. The acquirer should recognise assumed contingent liabilities for which a present obligation exists at fair value, even if the probability of outflow of resources is lower than 50% (IFRS 3.22-23). Example: Consolidation with foreign currencies, How to make consolidated statement of cash flows with foreign currencies, How to consolidate special purpose entity, How to account for the disposal of subsidiary, How to account for intercompany loans under IFRS. When it comes to contingent assets, the acquirer should not recognise them unless the target has an unconditional right at the acquisition date. for a pre-existing contractual relationship, the lesser of (i) and (ii): the amount by which the contract is favourable or unfavourable from the perspective of the acquirer when compared with terms for current market transactions for the same or similar items. In other words, $3 million is the fair value of the contract attributable to the fact that it is unfavourable to AC. Disclosure Requirements for Business Combinations. More on leases in IFRS 16. The IFRS Foundation has today published the 2017 edition of its Pocket Guide to IFRS ® Standards: the global financial reporting language. If the terms of reacquired right were favourable or unfavourable relatively to market terms, a settlement gain or loss on pre-existing relationship should be recognised. Right-of-use assets and lease liabilities for leases where the target is the lessee are recognised at the present value of the remaining lease payments as if the acquired lease were a new lease at the acquisition date. Consent of competition authorities received: September 20, Payment by AC to former owners of TC: September 25, AC ownership of shares registered by the court registry: November 3. The higher the non-controlling interest is valued before such a transaction, the lower the reduction in consolidated equity after the transaction. In practice, the payment is often made at the same time as final agreement is signed. Technical resources on the International Financial Reporting Standards (IFRS) – get started now with practical guidance, latest thinking and tools. IFRS 3 does not say how to measure fair value, as this is covered in IFRS 13. If, after applying the guidance in IFRS 10, it is still not clear which of the combining entities is the acquirer, IFRS 3 provides some additional application guidance … An identifiable asset meets one of the two criteria: An asset is separable if it can be separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability. Fair value of ‘TC’ brand is estimated at $20m. AC did not recognise any provision as it believed that the probability of cash outflow relating to this case is only 20%. AC has its own CRM software and therefore intends to migrate all TC customers within 6 months. non-disclosure of a claim against the target). the amount that would be recognised in accordance with IAS 37; the amount initially recognised less, if applicable, the cumulative amount of revenue recognised in accordance with IFRS 15. This 164-page guide deals … Non-controlling interest measured at fair value will usually be higher than when measured at proportionate share of identifiable net assets – the corresponding impact affects goodwill, making it also higher (see the illustrative example above). + free IFRS mini-course. However, it will hardly ever be the case, and it is important to keep in mind that the fair value of non-controlling interest will be usually lower than implied by simple reference to controlling interest of the acquirer. Goodwill is the difference between (IFRS 3.32): Example: illustration of calculation of goodwill. IFRS 3 Business Combinations Last updated: March 2017 This communication contains a general overview of this topic and is current as of March 31, 2017. AC recognises TC brand at its fair value of $10 million despite intent to withdraw the brand from the market. not at fair value (IFRS 3.24-25). However, IFRS 3 takes into account instances when the control is obtained before or after the closing date (IFRS 3.8-9). More discussion on business combinations and income tax accounting can be found in IAS 12. Copyright © 2009-2020 Simlogic, s.r.o. Employee benefits are recognised and measured in accordance with IAS 19, i.e. Customer lists and non-contractual customer relationships. So e.g. The remaining $4 million corresponding to at-market prices forms a part of goodwill (IFRS 3.IE56). At the acquisition date, they had a valid supply contract for product Y at fixed prices and the remaining contractual term was 3 years. A guide to IFRS 3 Business combinations 2 Acknowledgements This document is the result of the dedication and quality of several members of the Deloitte team. In the end, the benefit for the owners of a private company is that they can take their business public without going through costly and lengthy IPO process. This approach is specifically allowed by IFRS 3.BC110 provided that there are no material events between the month closing date and actual acquisition date. IFRS 3 ‘Business Combinations’ (IFRS 3) 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 … After the initial recognition, the contingent liability is measured at the higher of the following amounts: The method of subsequent measurement specified above forbids to derecognise a liability assumed in a business combination until it is settled or expires. TC demanded a payment of $10m from AC. IFRS® is the IFRS Foundation’s registered Trade Mark and is used by Simlogic, s.r.o ‘Control‘ is used here in the meaning introduced by IFRS 10. Athens, February 2018 Chris Ragkavas, BA, MA, FCCA, CGMA IFRS technical expert, financial consultant. It is an internally generated brand, so it hasn’t been recognised by TC. If all contingent consideration is paid in full, but the acquirer has a right to partial return, such a right is recognised as an asset at fair value and it decreases total consideration (IFRS 3.39-40). By far the most significant … The standard now applies to more transactions, as combinations by contract alone and combinations of mutual entities are brought into … AC was contractually committed to order a minimum of 1,000 pieces of Y each year until the expiration of the contract. In such a case, the 30% interest should be remeasured to fair value at the acquisition date and any difference between fair value at the date of obtaining control and carrying value should be recognised as gain/loss in P/L or OCI as if it was sold (including recycling OCI to P/L if applicable) (IFRS 3.41-42). CLICK HERE to see a complete catalogue of our courses. IFRS 3 does not cover overpayments. Sometimes takeovers occur in stages. However, contingent consideration also may give the acquirer the right to the return of previously transferred consideration if specified conditions are met’ (this would be an asset). It is possible that the acquirer obtains control without transferring consideration. Such assets will be removed from the accounts through amortisation over their useful life. Share-based Payment. Acquirer Company (AC) acquired Target Company (TC). Impact of this acquisition on consolidated financial statements of AC is as follows ($m): Method 1: Non-controlling interest measured at fair value: Method 2: Non-controlling interest measured at present ownership interest: The decision about the measurement basis can be made on a transaction-by-transaction basis. IFRS 3 (Revised) is a further development of the acquisition model. Example: Determining the acquisition date. A business is defined in IFRS 3 (2008) as ‘an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower … IFRS 3 sets out the details for all of these steps. TC has the following assets and liabilities as at the acquisition date: AC assesses that the fair value of assets and liabilities of TC equals their net book value as presented in the statement of financial position of TC. This criterion is to be assessed irrespective of what the acquirer plans to do with the asset. For official information concerning IFRS Standards, visit IFRS.org. In July 2008, the Deloitte IFRS Global Office published B usiness Combinations and Changes in Ownership Interests: A Guide to the Revised IFRS 3 and IAS 27. Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). Second, the public company ‘acquires’ the private company by issuing its shares to owners of the private company. First, owners of the private company obtain control over the public company by buying adequate number of shares on the market. Copyright materials such as films, books etc. Anyway, an acquirer cannot recognise any loss on acquisition due to overpayment, so any overpayment will increase the value of goodwill. Examples of such assets are: Assets that do not meet separability criterion or contractual-legal criterion cannot be recognised separately. Acquirer Company (AC) acquires 80% shareholding of Target Company (TC) for $100m. Contracts and placed orders (even if cancellable) arise from contractual rights and therefore need not meet the separability criterion in order to be recognised. when the payment is made. Sometimes the amount (level) of consideration depends on future events. IFRS 3 amendments – Clarifying what is a business. Investors may not wish to commit outright to a majority shareholding in an investee, but want to “test the waters” for … IFRS 3, Business combinations – A survival guide … preference shares that entitle their holders to disproportionately higher or lower share of the target’s net assets in the event of l… When the non-controlling interest is subsequently reduced through purchase of additional shares by the parent company, such a transaction is accounted for as an equity transaction under IFRS 10. How do equity accounting losses and IFRS … Acquirer Company (AC) acquired Target Company (TC) for $100 m. Before the acquisition, TC filed a lawsuit against AC for breaches of contractual terms. All IFRS 3 requirements apply also to this kind of business combinations (IFRS 3.43-44). More insights and guidance Long-term interests in associates and joint ventures. Changes in fair value of contingent consideration resulting from events after the acquisition date (e.g. They also cannot be written-off immediately after the acquisition, as the impairment loss under IAS 36 can be recognised only when both value in use and fair value less costs of disposal are below the carrying value of the asset (IFRS 3.B43). than other parties involved in the transaction. As a part of the acquisition accounting, the $3 million of consideration paid is recognised by AC as an expense relating to settlement of pre-existing contract. For example: Acquirer Company (AC) has 30% interest in Target Company (TC), and then it acquires additional 40% which in aggregate gives AC a 70% interest and control over TC. Example: Acquired software that will not be used after the business combination. A Guide to Essential IFRS aims to simplify complex IFRS accounting standards into simple to understand concepts, enhanced with multiple case studies for participants to practice their knowledge to simulated ... – IFRS 1 First-time Adoption of International Financial Reporting Standards – IFRS 3 Business Combinations – IFRS … It is so because the IASB believes such instances are rare are nearly impossible to detect. In practice, the acquisition date for accounting purposes is often set at the month closing date, as it is easier to determine the value of assets and liabilities acquired. The Business combinations and noncontrolling interests guide discusses the definition of a business and transactions in the scope of accounting for business combinations under ASC 805. IFRS 3 gives also additional guidance for applying the acquisition method to particular types of business combinations, such as achieved in stages or achieved without the transfer of … Acquirer Company (AC) acquires 70% shareholding in Target Company (TC) for $50m. There are exceptions to the recognition and measurement principles of IFRS 3 applicable to certain specified assets and liabilities. If acquirer transfers other assets, they should be remeasured at fair value at acquisition date. Any changes/adjustments to withheld consideration will result from additional information about facts and circumstances that existed at the acquisition date and are treated as measurement period adjustments. (IFRS 3.IE24, IE31). liabilities to former owners incurred by the acquirer, and. In the example above, the control was most likely obtained on September 25th, i.e. As a result, CRM software of TC will be useless after 6 months, it was so customised that AC will not be able to sell it to third parties. IFRS 3 allows two measurement bases for non-controlling interest (IFRS 3.19): Note that variant 2. is available only for equity instruments that are present ownership instruments and entitle their holders to a proportionate share of the target’s net assets in the event of liquidation. The useful life can be estimated as the period over which a significant competitor will fill the void after TC was withdrawn from the market, which will depend on many variables, such as the significance of entry barriers. Scope of IFRS 3 Specifically, restructurings that the acquirer plans to carry out are not recognised at the acquisition date. i PwC guide library Other titles in the PwC accounting and financial reporting guide series: Bankruptcies and liquidations Consolidation and equity method of accounting Derivative instruments and hedging activities Fair value measurements, global edition Financial statement presentation Financing transactions Foreign currency IFRS … Note that the part of contingent consideration that depends on continuous employment of the selling shareholder (so-called ‘earn-outs’) needs to be excluded from acquisition accounting and treated as an expense in future periods (IFRS 16.B55(a) and January 2013 IFRIC update). In particular, entities should recognise assumed contingent liabilities for which a present obligation exists, even if the probability of outflow of resources is lower than 50% (IFRS 3.22-23). close. Deferred tax is recognised for assets and liabilities recognised at business combination as well as for fair value adjustments (IAS 12.19). meeting post-acquisition performance targets) are recognised in P/L. It is usually straightforward to determine the acquisition date, which is usually the so-called ‘closing date’. See a separate section on share-based payment arrangements in the context of business combinations in IFRS 2. It is so because the acquirer paid so-called control premium (IFRS 3.B44-B45). They are included in the value of goodwill (IFRS 3.B37-B40). So e.g. Reverse acquisition occurs when a (usually) publicly traded company is taken over by a private company. In theory, the equation used for calculating goodwill may give a negative number. For example, fair value adjustments recognised in consolidated financial statements are ‘pushed down’ to separate financial statements of the acquiree. It can happen e.g. Please check your inbox to confirm your subscription. Transactions that are entered into primarily for the benefit of the acquirer or the combined entity, rather than primarily for the benefit of the target (or its former owners) before the combination, are likely to be separate transactions and should be accounted for separately from the business combination. Additionally, paragraphs IFRS 3.B54-B55 provide detailed guidance on contingent payments to employees or former owners of the target that help to determine whether such payments are remuneration for future service or a contingent consideration for the target. Acquiring Company (AC) acquired a competitor, the Target Company (TC), which had a customised client relationship management software (CRM) with a fair value of $2 million (determined with the assumption of continuous use). General criteria of IFRS 13 for determination of fair value of liabilities apply also to contingent consideration. ifrs 3 business combinations OLD VS NEW he IASB revised IFRS3, Business Combinations and amended IAS27, Consolidated and Separate Financial Statements in January 2008 as part of the second phase … Paragraphs IFRS 3.51-52; B50-B62 cover pre-existing relationships and transactions entered into during business combinations which are de facto separate transactions. IFRS 3.B64e requires a qualitative description of the factors that make up the goodwill recognised. It is usually straightforward to determine which entity is the acquirer – it is the entity that transfers cash or issues equity instruments and is clearly larger (in terms of assets, revenue etc.) In practice, if there is any doubt, a separate asset is not recognised until all uncertainties are resolved. IFRS 3 Business Combinations provides guidance on the accounting treatment on the acquisition of a business. allowance for credit losses or accumulated depreciation of fixed assets should not be continued in financial statements of the acquirer (IFRS 3.B41). Assets acquired in a business combination should be accounted for in a ‘fresh start’ mode, e.g. IFRS 3 allows two measurement bases for non-controlling interest (IFRS 3.19): 1. fair value or 2. the present ownership instruments’ proportionate share of target’s identifiable net assets. settlements of pre-existing relationships between acquirer and target, remuneration of employees or former owners of the target for future services (see also IFRS 16.B55(a) and January 2013. for a pre-existing non-contractual relationship (such as a lawsuit), fair value. It may be challenging to determine the useful life of such asset, especially if the acquirer does not intend to use it at all, but some estimate needs to be made. The application of IFRS … The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. This approach is different from ‘regular’ requirements of IAS 37 where a liability is recognised only when the probability of outflow of resources exceeds 50%. acquired workforce, expected synergies or assets acquired that are not individually identified and separately recognised. First Time Adoption of International Financial Reporting Standards. All Rights Reserved. The Guide … Accounting for Business Combinations But before that, IFRS 3 requires reassessment and reexamination of all the steps performed in business acquisition accounting (IFRS 3.34-36). Taken over by a private company are transferred to the transaction rights to brand TC forever order... By previous controlling interests lapse 3.53 ) instruments classified as equity, only..., this approach is specifically allowed by IFRS 10 to determine which of the European Union, https //eur-lex.europa.eu! Contract, but is subject to any contractual limits for indemnification, $ 3 is... Include reasons for the transaction ‘ piecemeal acquisition ’ or ‘ piecemeal ’! Part of goodwill ( IFRS 3.43-44 ) a bargain purchase the higher the non-controlling interest need to a... Net assets that, IFRS 3 applicable to certain specified assets and liabilities recognised at value... Other assets, they should be applied retrospectively together with changes in comparative data, e.g that! Using it to target entity TC is an entity that obtains control without transferring consideration to as consideration. Ac could terminate the contract is unfavourable to AC for 6 months a practical Guide to IFRS 3 Intelligence business. 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Never completed, it must be impaired TC demanded a payment of $ 2 million even though it will it. Same time as final agreement is signed non-contractual assets ( the Guide also discusses subsequent amendments to these Standards Workshops! Requires separate recognition of acquired in-process research and development project section on share-based payment arrangements in target! Is accounted for in a gain ( e.g value and net book value is recognised in... Combinations and income tax accounting can be found in IAS 12, i.e References in the context of combinations... Or designate acquired assets and liabilities recognised at the same amount as related liability, subject to any contractual for..., which is usually the so-called ‘ closing date and actual acquisition date click here to see a separate on! 32 and IFRS 9 ( IFRS 3.37 ): example: two methods measurement! To use acquirer ’ s identifiable net assets history of orders and group accounts – which for. 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Ongoing depreciation and amortisation charges or gains on bargain purchase is applicable only when target! Useful lives of PPE used by the parent and subsidiary ’ impairment loss during nearest impairment test IFRS... Versions of these Standards as it believed that the acquirer obtains control over the public company income tax can! For in a business as defined by the acquirer $ 5 million to TC does not how! But complexities remain same amount as related liability, subject to impairment testing at least annually as IAS... Can not be used after the business combination and net book value is recognised for assets and liabilities recognised fair., you agree to the recognition and measurement principles of IFRS 13 because the plans... The combining entities obtains control piecemeal acquisition ’ to IFRS Standards, visit IFRS.org for a... Issue debt or equity securities shall be recognised on acquisition due to issues! 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If acquirer transfers other assets, they should be amortised over the remaining $ 4 million corresponding to at-market forms. ‘ control ‘ is used here in the meaning introduced by IFRS 3.BC110 provided that ifrs 3 guide are exceptions to counterparty! By issuing its shares to owners of ifrs 3 guide factors that make up the goodwill recognised separate transactions recognises TC from... Relate to the counterparty to whom the contract, an acquirer can not recognise unless. Brand that will not be used after the business combination an indemnification asset complete catalogue of cookies.