What is the Rule?
According to FRS 103 for Business Combinations, all intangible assets acquired in a business transaction must be separately identified and valued by the buyer. Applicable from Jan 2005.
This new requirement has affected the way companies think and work in the following areas:-
- states how business acquisitions should be accounted for
- the valuation of intangible assets
- defining the various types of intangibles acquired into registered trade marks, patented technology, trade secrect and/or the plain old goodwill
What is the big deal between the old and new rulings?
Under the old regime, the buyer can basically disregard its existence by letting it “rot away” ie. being amortised away somewhere in the balance sheet.
Under the current FRS103, the buyer’s management has to make an effort in protecting and enhancing these intangible assets’ value after acquiring them. Annual review for impairment is necessary.
Shareholders of the buying company or the investing community would be reminded to query its management over any significant impact on profit due to changes to valuation of intangibles. This happened to DBS Bank last year.
For the selling company, it would accelerate a sale if its management is able to crystalise the intangible assets to the buying company by compiling a comprehensive customer database, registering trade marks, patenting innovative technologies and protecting trade secrets.