Question

Plaza Corporation acquires all of the assets and liabilities of Spiceland Company. How are Spiceland’s research and development costs of ongoing projects reported on Plaza’s books at the date of acquisition?

               a.     Included as part of goodwill

               b.    Identifiable asset, at fair value

               c.     Operating expense, at fair value

               d.    Loss on acquisition, at Spiceland’s cost

Answer 1

Solution: b.    Identifiable asset, at fair value

Note : The given answer is justified both in International Financial Reporting standards (IFRS) and with regard to U.S. generally accepted accounting practices (“GAAP”).See the explanation below.

Explanation:

An identifiable asset is anything that has commercial or exchange value and can provide future economic benefits. Identifiable assets can be tangible or intangible.

1. IPR&D Recognition criteria ( As per US GAAP)

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 requires that an acquirer of a business record, separately from goodwill, the identifiable assets (tangible and intangible) and liabilities assumed of the acquired entity at their acquisition date fair values. In-process research and development (“IPR&D”) is one intangible asset that meets the FASB’s definition of an intangible asset separately identifiable from goodwill.

IPR&D assets that are 1) separately identifiable from goodwill under the guidance of FASB ASC 805 and 2) to be used in R&D activities are recognized and measured at Fair Value regardless of whether those assets have an alternative future use, and are assigned an indefinite useful life until completion or abandonment of the associated R&D efforts. Conversely, acquired intangible R&D assets that are the result of R&D activities are recorded at Fair Value on the acquisition date, but are generally assigned a finite useful life and amortized.

2. Recognition criteria for intangible assets acquired as part of a business combination ( As per IFRS )

IFRS 3 stipulates that, if an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value at the acquisition date. The fair value of the asset reflects market participants’ expectations at the acquisition date as to the economic benefits that will flow from it, even if there is uncertainty about the timing or the amount of those benefits. Therefore, the probability criterion, as set out , is always considered to be satisfied for intangible assets acquired in a business combination. [IAS 38:33]

The acquirer should recognise an intangible asset acquired in a business combination, separately from goodwill, irrespective of whether the asset was previously recognised by the acquiree. This should include any in-process research and development project of the acquiree if the project meets the definition of an intangible asset, and its fair value can be measured reliably. [IAS 38:34]