Kolber Manufacturing Limited designs, manufactures, and distributes safety boots. In January 2020, Kolber purchased another business that manufactures and distributes safety shoes, to complement its existing business. The total purchase price was $10 million in cash paid immediately and another $5 million in cash to be paid in one year’s time. The company’s current interest cost was 6%. The assets and liabilities purchased include accounts receivable, finished goods inventories, land and plant, manufacturing equipment and office equipment, accounts payable, and a loan that is secured by the manufacturing equipment. In addition, a trademark was included (which has six years remaining on its current legal life), as well as existing customer relationships (although there are no outstanding contracts with these customers), and a non-compete agreement with the existing owners that they will not start any similar business for the next five years. The company reports under IFRS.

Instructions

You are the controller of Kolber and have been given the task of recording the purchase in the company’s books.

a. Outline how you might go about determining how to allocate the purchase price to the intangible assets and any goodwill purchased. In addition, consider how each of these assets is subsequently reported and what the effect will be on net earnings in subsequent years given your decisions now.

b. If this company reported under ASPE, explain how the impairment test for goodwill would differ from the IFRS method.