How to identify intangible assets

Despite the widespread economic impact of COVID-19, the Australian market activity rebounded strongly in the second half of 2020 with a resurgence in company acquisitions and mergers. Although such transactions can have significant benefits for an acquiring company, the related accounting is often complex.

AASB 3 ‘Business Combinations’ 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 acquired in a business combination.

In particular, the accounting for intangible assets acquired in a business combination is challenging for a number of reasons, including:

  1. Intangible assets are by nature less detectable than tangible ones
  2. Many are not recognised in the acquiree’s pre-combination financial statements
  3. Determining their fair value usually involves estimation techniques as quoted prices are rarely available.

Due to this, the excess consideration may incorrectly be recognised as purchased goodwill, and an appropriate analysis, in determining whether the recognition of an identifiable intangible asset(s) will be required. To perform this analysis, you need to determine whether the asset is identifiable as defined within AASB 138 Intangible Assets, being separable or arising from contractual or legal rights.

The detection of identifiable intangible assets depends on the context of the acquisition. Useful sources to detect identifiable assets in the context of a business combination are, for example:

Source of information

Possible indicators

Acquiree’s financial statements and other internal reports

Some intangible assets will have been recognised in the acquiree’s financial statements. Other financial information may also provide indirect indicators eg:

  • Significant marketing costs may be an indicator of the relative importance of brands, trademarks and related intangible assets
  • Significant expenditures on research and development may indicate the existence of technology-based intangible assets
  • Significant expenditure related to customer care may point to customer relationship intangible assets.

Purchase agreement and accompanying documents

May include references to certain trademarks, patents or other intangible assets that are established by contract or legal rights.

May include non-compete provisions that sometimes give rise to a potential intangible asset.

Due diligence reports

May include information that assists in understanding the acquired business, resources and how revenues are generated.

Website materials, press releases and investor relation communications

May contain discussions, by either acquiree or acquirer, of the unique characteristics of the business which may translate into potential intangible assets.

Industry practice

Results of similar business combinations may provide indicators of the types of intangible assets that are typically recognised in such situations.

Therefore, should you be currently in the process of acquiring, or looking into potential acquisitions, ensure that you take into consideration the above matters so as to identify all assets that are being acquired, as all reported amounts of intangible assets and goodwill will be closely scrutinised by investors, analysts and regulators.

Should you need any assistance and/or guidance please do not hesitate to contact your local PKF expert.

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