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ABC Ltd. acquires PQR Ltd. and as part of acquiring a wireless spectrum licence held by PQR, ABC must pay an additional one-time amount to the regulator in PQR's jurisdiction to have the rights transferred. Identify the correct accounting:
ACharge to goodwill
BExpense as acquisition-related cost because it is incurred in connection with the business combination
CCapitalise to the intangible asset (spectrum licence) because the payment is necessary to obtain the right itself and is part of the fair value of the licence in the hands of the acquirer
DRecognise as a contingent consideration
Answer & Solution
Correct answer: C. Capitalise to the intangible asset (spectrum licence) because the payment is necessary to obtain the right itself and is part of the fair value of the licence in the hands of the acquirer
Payments to a regulator that are NECESSARY to obtain the asset itself (i.e. to transfer the right) form part of the asset's measurement, not acquisition-related cost. Acquisition-related costs are advisory/legal/finder/stamp-duty-type fees the acquirer pays to *effect* the combination, not to *create* the underlying asset rights.
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