Customer relationship intangible assets acquired in a business combination
Acquirer Company (A) acquires Target Company (T) in a business combination. T has a five-year agreement to supply goods to Customer (C). Both T and A believe that C will renew the supply agreement at the end of the current contract. The supply agreement is not separable.
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Because T establishes its relationship with C through a contract, not only the supply agreement (whether cancellable or not) but also T"s customer relationship with C meet the contractual-legal criterion for identification as an intangible asset. Therefore, both the supply agreement and the customer relationship intangible asset are recognised separately from goodwill.
Sporting goods and electronics
A acquires T in a business combination. T manufactures goods in two distinct lines of business: sporting goods and electronics. Customer (C) purchases both sporting goods and electronics from T. T has a contract with C to be its exclusive provider of sporting goods, but has no contract for the supply of electronics to C. Both T and A believe that there is only one overall customer relationship between T and C.
As in the previous example, both the contract for the exclusive supply of sporting goods (whether cancellable or not) and the related customer relationship qualify for identification as an intangible asset because the contractual-legal criterion is met. Because T and A believe that there is only one customer relationship, the fair value of the intangible asset incorporates assumptions regarding T"s relationship with C for both sporting goods and electronics.
However, if A determined that there were two customer relationships with C – one for sporting goods and another for electronics – the customer relationship for electronics would only be recognised if it meets the separability criterion for identification as an intangible asset (because there is not a current or past contract it can be linked to).
Order backlog and recurring customers
A acquires T in a business combination on 31 December 2013. T does business with its customers solely through purchase and sales orders. At 31 December 2013, T has a backlog of customer purchase orders from 60 per cent of its customers, all of whom are recurring customers. The other 40 per cent of T"s customers are also recurring customers. However, as of 31 December 2013, T has no open purchase orders or other contracts with those customers.
The purchase orders from 60 per cent of T"s customers (whether cancellable or not) meet the contractual-legal criterion, so the order backlog is recognised as an intangible asset separate from goodwill. Additionally, because T a practice of establishing contracts (purchase and sales orders) with all of its customers, its relationship with all of its customers (not just the 60 per cent in respect of which there is a backlog of purchase orders) also arises through contractual rights, and therefore meets the contractual-legal criterion for identification as an intangible asset, even though T does not have contracts with 40% of those customers at 31 December 2013.
Motor insurance contracts
A acquires T, an Insurer, in a business combination. T has a portfolio of one-year motor insurance contracts that are cancellable by policyholders.
Because T establishes its relationships with policyholders through insurance contracts, the customer relationship with policyholders meets the contractual-legal criterion for identification as an intangible asset.