Reacquired rights – Short version Reacquired rights
Reacquired rights feature in IFRS 3 as a specific exception to the standard’s measurement principle in such business combinations. The standard stipulates that a reacquired right is an intangible that must be recognised separately from goodwill. Reacquired rights
The general measurement principle of IFRS 3 would require initial recognition at the acquisition date fair value. However, as a result of the exception in .29 the amount at which the intangible asset must be recognised is the value on the basis of its remaining contractual term (whereas the actual acquisition date fair value may take into account the potential for renewal of the initial contract/extension of the period). Reacquired rights
Thirdly, a gain or loss amounting to lesser of the favourable/unfavourable portion relative to the entity must be recognised and the the amount of any stated provision in the contract available to the counterparty to whom the the contract is unfavourable. Reacquired rights
The recognised intangible is then carried at the amortised value.
Reacquired rights – As part of a business combination, an acquirer may reacquire a right that it had previously granted to the acquiree to use one or more of the acquirer’s recognised or unrecognised assets. Examples of such rights include a right to use the acquirer’s trade name under a franchise agreement or a right to use the acquirer’s technology under a technology licensing agreement. A reacquired right is an identifiable intangible asset that the acquirer recognises separately from goodwill.
Measuring a reacquired right
The acquirer shall measure the value of a reacquired right recognised as an intangible asset on the basis of the remaining contractual term of the related contract regardless of whether market participants would consider potential contractual renewals when measuring its fair value.
Subsequent accounting for reacquired rights
A reacquired right recognised as an intangible asset shall be amortised over the remaining contractual period of the contract in which the right was granted. An acquirer that subsequently sells a reacquired right to a third party shall include the carrying amount of the intangible asset in determining the gain or loss on the sale.
Settlement gain or loss
If the terms of the contract giving rise to a reacquired right are favourable or unfavourable relative to the terms of current market transactions for the same or similar items, the acquirer shall recognise a settlement gain or loss. Below guidance for measuring that settlement gain or loss is provided.
If the business combination in effect settles a pre-existing relationship, the acquirer recognises a gain or loss, measured as follows:
- for a pre-existing non-contractual relationship (such as a lawsuit), fair value.
- 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. (An unfavourable contract is a contract that is unfavourable in terms of current market terms. It is not necessarily an onerous contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
- the amount of any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavourable.If (ii) is less than (i), the difference is included as part of the business combination accounting.
The amount of gain or loss recognised may depend in part on whether the acquirer had previously recognised a related asset or liability, and the reported gain or loss therefore may differ from the amount calculated by applying the above requirements.
Example – Reacquired franchise
A company in the fast-food industry has granted a restaurant operator an exclusive 5 year right to operate franchised restaurants in Country X. One year later, the company acquires the restaurant operator. The reacquired right to operate restaurants in Country X is recognised as a separate intangible asset in the business combination accounting.
It is not treated as a settlement of a pre-existing relationship because it continues to exist. In valuing the right, no value is attributed to the possibility of contract renewals (unlike many other contract-based intangibles). The reacquired right must be amortised over the remaining 4 year term. The reason for this evident departure from normal fair value measurement is that a reacquired right is no longer a contract with a third party.
See also: The IFRS Foundation