Accounting Manual - A04 - Business Combinations and Goodwill

Group Finance
Date of Approval: November 2015
Approved by: Kevin Dangerfield
Policy Owner: Group Accounting Manager
Next review date: December 2016
Version No. 2015 V1
Business combinations and goodwill
Purpose
To ensure that all business combinations are accounted for as acquisitions.
1 Goodwill arising on acquisitions
1.1 Goodwill is the difference between the acquisition cost of a business and the aggregate fair
value of its separable net tangible and intangible assets.
1.2 Goodwill is estimated immediately on acquisition, but any adjustments or fair value of
assets and liabilities before the end of the first full accounting period after the acquisition
must be recognised as a change to the value of goodwill.
1.3 Any subsequent change in goodwill is recognised through the income statement.
1.4 Current group policy is to capitalise goodwill on businesses acquired. Goodwill which was
capitalised by subsidiaries prior to 5 January 2005 must continue to be accounted for on a
consistent basis, unless otherwise notified by the Director of Finance. Any changes to the
treatment of such items requires the prior approval of the Director of Finance.
1.5 Any consideration that is contingent on events occurring after the acquisition date (such as
future performance of the business) is initially recognised based on the likely outcome at
the date of acquisition. This is then reviewed at a frequency no less than each subsequent
external reporting date and updated to reflect the revised likely outcome. For acquisitions
occurring after 3 January 2010 any change resulting from re-measurement of the
contingent consideration is subsequently recognised through the income statement.
www.morganadvancedmaterials.com
Morgan Advanced Materials plc Registered in England & Wales at Quadrant, 55-57 High Street, Windsor, Berkshire SL4 1LP UK Company No. 286773
2 Acquisition cost
2.1 The acquisition cost is the sum of the fair values, at the date of exchange, of the:
• Assets given;
• Liabilities incurred or assumed;
• Equity instruments issued by the acquirer;
• For acquisitions occurring after 3 January 2010 all transaction costs are recognised
in the income statement as a non-exceptional item.
3 Recognition of assets and liabilities at fair value
3.1 Fair value is defined as the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length
transaction.
3.2 In an acquisition situation, items which might otherwise not be capitalised must be included
as assets and liabilities. The recognition criteria which must be used are:
• an asset (other than an intangible) must be included if it is probable that future
economic benefits will flow to the acquirer, and its fair value can be measured
reliably;
• a liability (other than a contingency) must be included if it is probable that an outflow
of resources will be required to settle the obligation, and its fair value can be
measured reliably;
• Intangible assets must be included if their fair value can be measured reliably.
Examples include the margin on the order book acquired, customer relationships
and contracts, patents, trademarks and recipes.
• A contingent liability is recognised if it is a present obligation arising from past
events and its fair value can be measured reliably
3.3 The fair value of an item will be judged based on the following criteria, in descending order
of reliability:
• a quoted market price;
• an arms-length transaction for the item or an equivalent item;
• a pricing model;
• a discounted cash flow calculation.
3.4 Examples of valuation criteria for specific items are as follows:

• Receivables at net realisable value;
• Finished goods at selling price, less disposal costs and a reasonable profit
allowance for the selling effort of the acquirer – this will be less than the difference
between cost and sales price;
• Land and buildings at appraised market value;
• Plant and equipment at market value or depreciated replacement cost;
• Intangible assets using IAS 38 criteria;
• Provisions, where the outflow of resources is probable and can be reliably
estimated, included at present value (IAS 37 criteria);
• Pension assets/obligations, at the present value of the defined benefit obligation
less the fair value of plan assets (IAS 19 criteria);
• Leased assets using IAS 17 criteria;
• Deferred tax assets/liabilities at the fair value of acquired assets/liabilities compared
with the tax basis;
• Restructuring provisions to be included only if the acquired company already had an
existing valid liability at the date of acquisition.
• Research and development: in process research and development in recognised at
fair value.
Further guidance on other areas is available on request.
4 Internally-generated goodwill
4.1 Internally-generated goodwill does not satisfy the requirements for capitalisation of
intangible assets, and must not be capitalised on the balance sheet.
5 Amortisation and impairment
5.1 Positive goodwill is to be treated as an indefinite life asset, and will not be amortised for
Morgan reporting. Instead, an annual impairment review will be performed at Group level.
5.2 Negative goodwill is to be included immediately in the income statement.
5.3 Any amortisation already recognised for Morgan Group reporting must be held at the
balance as at 4 January 2005.
5.4 You will be instructed if there is any need to adjust any goodwill held in your books as a
result of this change in treatment or from an impairment review.
5.5 In some jurisdictions, tax relief may be available for goodwill. Where this is the case, an
appropriate amortisation period may be used for statutory reporting.
References
This manual is designed to be consistent with IFRS 3 (Revised 2008) Business Combinations and
all other Group policies/manuals issued. Any apparent conflict must be referred to the Director of
Finance for clarification.

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Group Finance

Date of Approval: November 2015

Approved by: Kevin Dangerfield

Policy Owner: Group Accounting Manager

Next review date: December 2016

Version No. 2015 V1

Business combinations and goodwill

To ensure that all business combinations are accounted for as acquisitions.

1 Goodwill arising on acquisitions

3 Recognition of assets and liabilities at fair value

3.4 Examples of valuation criteria for specific items are as follows:

5 Amortisation and impairment

5.2 Negative goodwill is to be included immediately in the income statement.

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