Buyers in the region often book almost the entire premium over net assets as goodwill. IFRS 3 requires more, and a proper allocation changes the post-acquisition results materially.
Key takeaways
- IFRS 3 requires identifiable intangibles to be recognised separately from goodwill if they meet the contractual-legal or separability criterion.
- In Gulf acquisitions the most common are customer contracts and relationships, brands, licences and concessions, and technology.
- Amortisation of recognised intangibles reduces post-acquisition profit, which is why the allocation should be modelled before the deal closes.
When an acquirer obtains control of a business, IFRS 3 requires the consideration transferred to be allocated to the identifiable assets acquired and liabilities assumed at their acquisition-date fair values, with goodwill as the residual. In practice, many Gulf acquirers record the net book value of the target's assets, treat the entire excess as goodwill, and move on. That is not an allocation, and auditors are increasingly unwilling to accept it.
What must be recognised
An intangible asset is identifiable, and therefore recognised separately from goodwill, if it arises from contractual or legal rights or if it is separable, meaning it could be sold, licensed or exchanged on its own. The standard's illustrative examples are long, but in regional transactions a handful recur:
- Customer contracts and relationships. Supply agreements, framework contracts with government entities, distribution rights and the customer relationships that underlie recurring revenue. These are usually the largest intangible in a services, distribution or contracting acquisition.
- Brands and trade names. Recognised where the brand drives customer choice and pricing, common in retail, food and consumer businesses.
- Licences, permits and concessions. Regulatory licences (financial services, healthcare, education), operating concessions and land rights that are contractual and often the reason for the acquisition.
- Technology and software. Proprietary platforms, developed software and databases.
- Order backlog. Contracted but unperformed work in contracting and engineering businesses.
How they are valued
Customer relationships are commonly valued using the multi-period excess earnings method, which isolates the cash flows attributable to the relationships after charging for the contribution of other assets. Brands, technology and licences use the relief-from-royalty method, which capitalises the royalties the acquirer would otherwise pay to license the asset. Non-compete agreements and certain contracts use a with-and-without approach. Each requires assumptions on attrition, royalty rates, useful lives and discount rates that must be sourced and documented.
Why it matters after the deal
Goodwill is not amortised; it is tested annually for impairment. Recognised intangibles are amortised over their useful lives, which reduces post-acquisition profit. An acquisition that records SAR 100 million of customer relationships with a seven-year life carries SAR 14 million of annual amortisation that would not exist had the amount been left in goodwill. Boards and lenders should see this modelled before closing, not discover it in the first set of consolidated accounts. Deferred tax on fair value adjustments and the effect on Zakat computations are similar surprises.
Timing
IFRS 3 allows a measurement period of up to twelve months from the acquisition date to finalise provisional amounts. Use it deliberately: complete the allocation before the first year-end where possible, and disclose clearly where amounts remain provisional.