Internet Gold – Golden Lines Ltd.
Notes to the Consolidated Financial Statements
(All amounts in thousands NIS, except where otherwise stated)
Note 2 – Reporting Principles and Accounting Policies (cont’d)
U. Recently adopted Israeli Accounting Standards (cont’d)
(2) As from January 1, 2007 the Company implements Accounting Standard No. 30, “Intangible Assets” (hereinafter – Standard 30) of the Israel Accounting Standards Board. Standard 30 explains the accounting treatment of intangible assets and defines how to measure the book value of these assets, as well as the disclosures that are required.
Standard 30 discusses the different cases in which the entity may recognize an intangible asset including as follows: upon a separate acquisition, upon an acquisition as part of a business combination, upon an acquisition through a government grant, upon an exchange of assets and upon the creation of an internal intangible asset. As regards the last, Standard 30 provides that an intangible asset deriving from research shall not be recognized as an asset whereas an intangible asset deriving from development shall be recognized as an asset only if the entity can prove compliance with a number of cumulative conditions as follows: technical feasibility of completing it so that it will be available for use or sale, the entity intends to complete it, to use or to sell it and is able to do so, it has been proven how the entity anticipates to generate future economic benefits, that there exist technical, financial and other resources for completion of the development and the use or sale of the intangible asset, and the entity is able to reliably measure the outflow that can be attributed to the intangible asset during its development.
Standard 30 discusses the assessment of whether the useful life of the intangible asset is finite or indefinite, as well as the amortization period, the amortization method and the residual value of an intangible asset having a finite useful life. In accordance with Standard 30, the
amortization period and the amortization method of an intangible asset having a finite useful life shall be reviewed at least at the end of each fiscal year. Furthermore, an intangible asset having an indefinite useful life shall not be amortized and an impairment examination shall be performed at least once a year, or more frequently if events or circumstances indicate a possible impairment in its value.
Standard 30 supersedes the provisions relating to intangible assets, other than goodwill, that derive from the acquisition of an investee company as provided in Accounting Standard No. 20 (Revised), “The Accounting Treatment of Goodwill and Intangible Assets of an Investee Company”.
Standard 30 has been initially implemented retroactively for all reported periods. In accordance with Standard 30, the Company reclassified the costs of computer software, which are separable from their underlying asset, in the net amount of NIS 27,498 as of December 31, 2006, from property and equipment to other assets.
V. Recently issued accounting standards
The Company will prepare its consolidated financial statements for the period beginning as from January 1, 2008, according to U.S. GAAP. For a description of recently issued accounting standards under U.S. GAAP, see Note 23C.
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Internet Gold – Golden Lines Ltd.
Notes to the Consolidated Financial Statements
(All amounts in thousands NIS, except where otherwise stated)
Note 3 – Acquisitions
The following summarizes significant business acquisitions completed during the reported periods:
Acquisitions Completed in 2006 The Golden Lines Acquisition
On December 31, 2006, 012 acquired 100% of the outstanding shares of Golden Lines for a total cash consideration of approximately NIS 615 million (including NIS 1.1 million of direct acquisition cost, and NIS 15.6 million of expenses related to a foreign currency derivative entered into in respect of the purchase price). The consideration for the acquisition was paid in two installments in January 2007 and March 2007 bearing interest at the rate of 6.5% since the dates the agreements were signed.
On July 25, 2006, 012 signed an agreement for the acquisition of 60% of the issued share capital of Golden Lines; the acquisition was subject among other things to the regulatory approval of the Israeli Anti-Trust Commission. On December 20, 2006, an amendment to the aforementioned agreement was executed, according to which 012 acquired an additional 37.72% of the issued share capital of Golden Lines. In addition, in December 2006, a share purchase agreement was signed between 012 and a minority interest shareholder in Golden Lines (“Mirabline”) for the purchase of the remaining 2.28% of the issued share capital of Golden Lines. Mirabline received additional consideration of NIS 1 million following the completion of the 012 IPO.
The acquisition date was determined to be December 31, 2006, when all required approvals for the acquisition including the Anti-Trust Commission and all debtors and others were obtained.
The assets and liabilities of Golden Lines have been appraised by BDO Ziv Haft Consulting and Management Ltd. for inclusion in the balance sheet based on their fair value as of the date of the acquisition. Long-lived assets such as property and equipment were recorded using the estimate replacement cost fair market value of the assets, which takes into account changes in technology, usage, and relative obsolescence and depreciation of the assets. In addition, assets and liabilities that would not normally be recorded in ordinary operations were recorded at their acquisition values (i.e., customer relationships that were developed by the acquired company). Debt instruments and investments were valued in relation to current market conditions and other assets and liabilities were valued based on the acquiring company’s estimates. After all values had been assigned to assets and liabilities, the remainder of the purchase price was recorded as goodwill.
The allocation process required an analysis of acquired property and equipment, contracts, customer lists and relationships, contractual commitments, legal contingencies and brand value to identify and record the fair value of all assets acquired and liabilities assumed. In valuing acquired assets and assumed liabilities, fair values were based on, but not limited to: future expected discounted cash flows for customer relationships; current replacement cost for similar capacity and obsolescence for certain property and equipment; comparable market rates for contractual obligations and certain investments and liabilities; expected settlement amounts for litigation and contingencies; and appropriate discount rates and growth rates.
The purchase price allocation for the Golden Lines acquisition is subject to revision as additional information on income tax implications of the acquisition becomes available. Any change in the fair value of the net assets of the acquired company will change the amount of the purchase price allocable to goodwill.
Internet Gold – Golden Lines Ltd.
Notes to the Consolidated Financial Statements
(All amounts in thousands NIS, except where otherwise stated)
Note 3 – Acquisitions (cont’d)
Acquisitions Completed in 2006 (cont’d) The Golden Lines Acquisition (cont’d)
The following table summarizes the preliminary estimated fair values of the Golden Lines assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date.
The customer base intangible asset is amortized over 8-10 years according to the economic benefit expected from those customers each period.
Licenses acquired are amortized over the contractual term of the license (20 years).
Nirshamim Lalimudim Ltd. (“Nirshamim”)
In May 2006, the Company acquired the remaining 50% of the shares of Nirshamim in exchange for consideration of NIS 2,541. Of the purchase price, NIS 2,477 was allocated to goodwill and NIS 64 was allocated to minority interest in combined subsidiaries. Goodwill is not deductible for tax purposes.
Internet Gold – Golden Lines Ltd.
Notes to the Consolidated Financial Statements
(All amounts in thousands NIS, except where otherwise stated)