Case 5-2 LO2 When Valero Energy Corp. acquired Ultramar Diamond Shamrock Corp. (UDS) for US$6 billion, it created the second-largest refiner of petroleum products in North America, with over 23,000 employees in the United States and Canada, total assets of $10 billion, and combined revenues of $32 billion. Combined, it had 13 refineries with a total throughput capacity of just under 2 million barrels per day (BPD); it also became one of the continent's largest retailers, with more than 5,000 retail outlets in the United States and Canada. The Canadian operations of UDS continued to operate under the Ultramar brand. It was announced that the combination of Valero's complex refining system and an extensive UDS refining, logistics, and retail network created synergies and strate- gic benefits that would result in cost savings of approximately $200 million per year and the enhanced ability to compete effectively in a rapidly consolidating industry. The retail assets included in the acquisition were the brands Ultramar, Dia- mond Shamrock, Beacon, and Total. UDS had more than 2,500 company-owned sites in the United States and Canada, and also supplied 2,500 dealer, truck stop, and cardlock sites. The company-owned stores had extensive brand support pro- grams such as proprietary consumer and fleet credit cards, radio and television brand support, and strong in-store marketing programs, to which Valero was able to add its 350-store retail network in California. In addition, UDS operated one of the largest home heating oil businesses in North America, selling heating oil to approximately 250,000 households. The acquisition clearly included more than the physical assets of Ultramar Diamond Shamrock. A variety of unrecorded intangible assets were represented in the portfolio of assets held by UDS, and these are the matters that require your attention at this time. Required: With reference to IFRS 3, prepare a memorandum including the following items to the chief financial officer of Valero: Discuss the valuation of the various intangible assets included in this acquisition. Indicate which items should be included in the amount assigned to goodwill in the acquisition. Indicate which items should be separately identified as intangible assets. Discuss how you would measure the various items identified and what amortization policy (if any) is appropriate. (case prepared by Peter Secord, St. Mary's University) IFRS 3 B31 Intangible assets The acquirer shall recognise, separately from goodwill, the identifiable intangible assets acquired in a business combination. An intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion. IAS 38 35 Intangible asset acquired in a business combination If an intangible asset acquired in a business combination is separable or arises from contractual or other legal rights, sufficient information exists to measure reliably the fair value of the asset. When, for the estimates used to measure an intangible asset's fair value, there is a range of possible outcomes with different probabilities, that uncertainty enters into the measurement of the asset's fair value