Acquiring servicing mandates or a servicing book from another servicer: business combination vs asset acquisition; customer-contract intangibles

Servicers grow by taking over mandates from exiting or distressed competitors, sometimes with staff, systems and premises and sometimes as a bare assignment of contracts; the same price can produce goodwill, deferred tax considerations and expensed transaction costs under IFRS 3, or a single amortising intangible with capitalised costs under an asset acquisition, and a payment to the financier itself to win a mandate is neither: it is consideration payable to a customer that reduces revenue.

What exactly is transferred: only the mandate contracts (with the financiers' consent), or also an organised workforce, systems, processes, data and premises? Is substantially all of the fair value of the gross assets concentrated in a single identifiable asset or a group of similar identifiable assets, such as similar servicing contracts (the optional concentration test)? If not, do the acquired inputs and a substantive process together significantly contribute to the ability to create outputs? Is any part of the payment made to the financier (the customer) rather than to the transferring servicer, and is any part contingent on mandate renewals or staff retention?

1. Identify the transaction and the parties paid: amounts paid to the financier to obtain or retain its mandate are consideration payable to a customer and reduce revenue, not an intangible; an upfront payment of this kind is commonly carried as an asset and released against revenue over the mandate it relates to.
2. Optionally apply the concentration test; if met, the transaction is an asset acquisition.
3. Otherwise assess whether the acquired set includes inputs and a substantive process (for example an organised workforce with the skills to service the portfolios) that together significantly contribute to creating outputs; if so, it is a business.
4. For a business combination, identify the acquirer and acquisition date, recognise identifiable assets and liabilities at fair value (including customer contracts and relationships, acquired software and assumed employee obligations), recognise goodwill as the residual, and expense acquisition-related costs.
5. For an asset acquisition, allocate the cost (including directly attributable costs) to the identifiable assets and liabilities on the basis of relative fair values, with no goodwill.
6. Determine the useful life of mandate intangibles by reference to the remaining contract terms and renewals supported by evidence, and assess contingent consideration and payments for post-acquisition services separately.

In a business combination, measure customer contract intangibles at fair value, typically with an excess earnings method based on expected fees, servicing costs, attrition and contributory asset charges; measure contingent consideration at fair value at the acquisition date. In an asset acquisition, measure the intangible at cost, including directly attributable costs. In both cases amortise mandate intangibles over their useful lives and test for impairment when a mandate is terminated early or renewal becomes unlikely.

Disclose: (1) for a business combination, the name and description of the business acquired in general terms, consideration, assets and liabilities recognised by class, goodwill and the factors that make it up, and acquisition-related costs expensed; (2) for an asset acquisition, the policy and the carrying amount of mandate intangibles; (3) amortisation periods and methods; (4) significant judgements on whether the set acquired is a business; (5) any payments to customers treated as a reduction of revenue.

• Treating every mandate transfer as an asset acquisition without considering the workforce and processes that came with it
• recognising goodwill in an asset acquisition
• capitalising transaction costs in a business combination
• capitalising payments made to the financier to win the mandate as an intangible asset amortised through operating expenses instead of reducing revenue
• assuming indefinite lives for mandate intangibles or amortising them over expected renewals that are not supported
• ignoring assumed employee obligations such as end-of-service benefits.