GEOTÉRMICA DE BAJA TEMPERATURA
5.6. JUSTIFICACIÓN DE CUMPLIMIENTO DE AHORRO ENERGETICO (HE‐1)
5.6.1. BASE DE DATOS
When a company acquires another company all its intangible assets must be recognised and measured. IFRS 3 (Business combinations) has an extensive list of acquired intangible assets. It includes many types of assets under the fol-lowing headings:
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O Marketing related intangible assets – including trademarks, internet domain names and newspaper mastheads.
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O Customer related intangible assets – including customer lists, order backlogs, customer contracts and non contractual customer relationships.
O
O Artistic related intangible assets – including copyrights for books, plays and musical works.
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O Contract based intangible assets – including licencing agreements, management contracts and broadcasting rights.
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O Technology based intangible assets – including patented technology, databases and trade secrets.
Under IFRS, when a company makes an acquisition, any rights arising from contractual or other legal rights and customer related intangible assets are shown as intangible assets. They are unlikely to be shown as intangible assets under UK GAAP, as FRS 10 (Goodwill and intangible assets) only allows intangible assets to be recognised if they can be sold separately from the business as a whole.
Research and development
Research and development is a problem for accountants. It’s an investment in the long-term future of the business, but isn’t always commercially suc-cessful. Just think about Blue Ray and HD, both great products but only one was commercially successful. Historically some countries capitalised all their research and development as an intangible asset, whereas others expensed it all through the income statement, and others expensed research but capital-ised development costs.
IAS 38 requires companies to divide research and development into a research phase and a development phase. If it’s impossible to distinguish these phases
all expenditure must be treated as research. All research expenditure should be expensed to the income statement as it is incurred. Most development costs are also expensed, however some development expenditure must be capitalised if it meets certain conditions. This is development expenditure on new, or substantially improved, products or processes, where all of the following conditions are met:
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O The company intends to complete and subsequently use or sell the product.
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O The company has the ability to use or sell the product.
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O The product is technically feasible and commercially viable.
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O The related expenditure can be reliably measured.
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O The company has to demonstrate how the asset will bring it future economic benefits.
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O The company has all of the resources necessary to complete the project.
Any capitalised development costs are amortised over the periods that are expected to benefit from their use.
SSAP 13 (Accounting for research and development) allows development expenditure to be capitalised if similar criteria are met, or it has a readily ascertainable market value. It can be capitalised if:
• there is a clearly defined project;
• the related expenditure is separately identifiable;
• it is reasonably certain that the project is both technically feasible and commercially viable;
• the project is expected to be profitable, having considered all current and future costs;
• the company has the resources to complete the project.
SSAP 13 is less stringent than IAS 38, as the company doesn’t have to demonstrate the future benefits arising from the asset; it just has to have a reasonable expectation of future benefits.
Goodwill
I mentioned goodwill in the last chapter, but now I’d like to explain it in more detail. Goodwill arises as companies usually pay more to acquire another company than its business is worth on its balance sheet. What would you pay for a company that has net assets worth 50 million, but is generating 10 million profit a year? I know you’d pay more than 50 million, as you’re not just buying the assets, you would also have another 10 million profit every year and some extra cash. The difference between the purchase price and the value of the business shown in the accounts is called goodwill.
It is simply the difference between the purchase price of a company and the value of the net assets acquired – effectively a premium paid to acquire the company’s future profits and cash flows.
I’ll illustrate the accounting treatment for goodwill by using a simple exam-ple in Examexam-ple 3.5.
Firstly I need to tell you about my business – its net assets are currently £200 million, and I have agreed to buy the company I discussed earlier for £70 million in cash. My summarised balance sheet, before the acquisition, was as follows:
£ million Property, plant and equipment 200
Cash and cash equivalents 120
Other current assets 130
Current liabilities (150)
Non current loans (100)
200 Shareholders’ equity:
Share capital 50
Retained earnings 150
200
I now have to consolidate my newly acquired subsidiary into my accounts.
Following the acquisition my cash reduces by the £70 million I paid to acquire the business. In exchange I’ll receive its £50 million net assets. Now look what happens when I try to add up the two balance sheets to prepare my new balance sheet.
Example 3.5
Now there’s one thing you probably already know about balance sheets – they’re supposed to balance! There are supposed to be two numbers at the bottom of the balance sheet that are the same. The consolidated balance sheet’s net assets of £180 million should be the same as the shareholders’
equity of £200 million! The balance sheet doesn’t balance as I have paid more for a business than it was worth on its balance sheet – and that differ-ence of £20 million is goodwill.
I can make the balance sheet balance in one of two ways:
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O Reduce the shareholders’ equity, by reducing the retained earnings by the amount of goodwill. Before December 1998 UK companies did this, and sizeable amounts of goodwill have been written off through retained earnings. Any goodwill previously written off through reserves remains there even when the companies they acquired are sold terminated (when it is deducted to arrive at the profit, or loss, on disposal). (For example, IMI discloses in its 2008 balance sheet that ‘the aggregate amount of goodwill arising from relevant historical acquisitions prior to 1 January 2004 which had been deducted from the profit and loss account reserves and incorporated into the IFRS transitional balance sheet as at 1 January 2004 amounted to £364 million’.
Other current assets 130 50 180
Current liabilities (150) (20) (170)
Long-term loans (100) (10) (110)
200 50 180
Shareholders’ equity:
Share capital 50 50
Retained earnings 150 150
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O Increase the net assets, by creating an intangible asset. All UK companies have had to do this since for any acquisitions acquired since December 1998.
You will see that the balance sheet now balances:
£m Property, plant and equipment 230
Goodwill 20
Cash 50
Other current assets 180
Current liabilities (170)
Long-term loans (110)
200 Shareholders’ equity:
Share capital 50
Retained earnings 150
200
Unfortunately my example is quite simple, as the value of the acquisi-tion’s assets didn’t change when they were consolidated and the cost was simply the cash I paid to acquire the business. It’s rarely that simple, as the Companies Acts and the accounting standards require companies to consoli-date the acquisition’s assets and liabilities ‘at their fair values as at the consoli-date of acquisition’ and using the purchaser’s accounting policies.
Consequently companies make two adjustments when consolidating acqui-sitions into the group accounts:
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O Aligning the acquisition’s accounting policies with the group’s.
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O Restating the values of the acquisition’s assets and liabilities to fair values.
Goodwill can subsequently be revised, as it may take some time in a com-plex acquisition to identify all the assets, liabilities and contingent liabilities existing at the acquisition date and then perform a full, reliable fair value exercise. A company has 12 months from the acquisition’s date to finalise the accounting and goodwill for an acquisition.
Goodwill is subject to an annual impairment review, although it must be reviewed more frequently if there is an indication that the goodwill has been impaired. Like all assets, goodwill cannot be shown on the balance sheet above its recoverable amount. The impairment review compares the value of the acquisition with the present value of its future cash flows and ensures that if there has been an overpayment any loss is recognised immediately.
IMI didn’t make any acquisitions in 2008, but it acquired two companies in 2007. Here’s its note on the acquisitions:
4 Acquisitions
There were no acquisitions during the year. The 2007 acquisitions of Pneumatex AG (Pneumatex) and Kloehn Company Limited (Kloehn) contributed £37m of additional revenue and £4.1m of additional operating profit in the year (2007: £15m and £1.8m respectively).
In 2007 the business of Kloehn, a leading US provider of specialist pumping and fluid handling systems for the life science sector, was acquired on 29 June 2007 which is reported within Fluid Power, and a 70% share in Pneumatex, a specialist provider of water conditioning equipment for building heating, cooling and related systems was acquired on 28 September 2007, reported within Indoor Climate.
2007 net assets acquired:
Total 2007 Carrying values
at acquisition
Fair value adjustments
Fair value of net assets acquired
£m £m £m
Customer relationships 6.6 6.6
Order books 1.0 1.0
Property, plant and equipment 3.6 0.3 3.9
Inventories 8.3 (0.7) 7.6
Trade & other receivables 13.5 – 13.5
Trade & other payables (10.0) (3.9) (13.9)
Tax (1.5) (0.5) (2.0)
Net identifiable assets and liabilities 13.9 2.8 16.7
Minority share (2.9)
13.8
Other minority interests acquired 2.0
Total net assets acquired 15.8
Purchase consideration 53.3
Goodwill 37.5
Cash impact of acquisitions
2007
£m
Purchase consideration net of cash acquired 52.2
Deferred consideration to pay 1.1
Total 53.3
You can see that the notes give you a lot of information about an acquisition:
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O The fair value adjustments bring the asset values to their realisable value, align the accounting policies and recognise assets and liabilities that weren’t previously shown in the accounts.
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O Goodwill is the balancing item, the difference between the fair value of the assets and the consideration paid.
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O You can also see how the acquisition has contributed to other aspects of the group’s performance since its acquisition.
I’ve talked about companies paying more than the acquisition’s net asset value. Sometimes it is possible to buy a company for less than its net asset value. In May 2000 BMW sold most of Rover Cars to the Phoenix Corporation for £10 – well below its asset value. In this case the company has made a ‘bargain purchase’, although it may not be a bargain purchase as you and I would understand the term. (The reason Rover was sold for £10 is that it was making huge losses.) The first thing the company has to do in this situation is to assess whether it has correctly identified all the assets acquired and the liabilities assumed. If this reassessment still results in a bargain purchase gain, the gain is shown in the income statement. It doesn’t have to be shown on a separate line, however the company must disclose the amount of any gain that it has recognised and the line where it has been shown.
The methodology for arriving at fair value, intangible asset values and residual goodwill is described in the Accounting Policies in note 1(g) to these financial statements. The goodwill recognised on the acquisition principally relates to skills present within the assembled workforce, customer service capability and the geographical and sector presence of these businesses.
The fair value adjustments principally relate to harmonisation with Group IFRSs compliant accounting policies, recognition of intangible assets (which principally comprise the value of non-contractual customer relationships and the order book at acquisition) and the reflection of adjustments to move the carrying value of the identifiable net assets from cost to fair value.