Employment contracts illustrate one of the most significant limitations of intangible asset accounting. Every business leader knows that people are the most valuable asset in the organisation. Yet under both IAS 38 and IFRS 3, the assembled workforce is explicitly excluded from separate recognition as an identifiable intangible asset — it lacks the separability criterion because employees can leave at will.
However, the employment contract itself is a different matter. As a contract-based intangible asset under IFRS 3, an employment contract can be separately recognised when it provides the acquirer with specific, contractual economic benefits — typically through below-market compensation, non-competition provisions, or exclusive services arrangements.
The distinction between the workforce (not recognisable) and specific employment contracts (potentially recognisable) is subtle but consequential.
| Aspect | Assembled Workforce | Employment Contracts |
|---|---|---|
| What it represents | The collective skills, knowledge, and experience of the team | Specific contractual terms binding individual employees |
| IFRS 3 recognition | Not separately recognised (absorbed into goodwill) | Recognised when terms are favourable |
| Why excluded/included | Lacks separability — employees can resign | Arises from contractual rights |
| Valuation role | Contributory asset charge in MPEEM | Separate intangible asset at fair value |
| Typical measurement | Replacement cost (used as CAC in MPEEM) | PV of below-market compensation savings |
The assembled workforce is the single most significant intangible asset that IFRS 3 does not allow to be separately recognised. Its value is captured indirectly through the contributory asset charge in MPEEM calculations and, residually, through goodwill. Only specific employment contracts with favourable terms qualify for separate recognition.
An employment contract creates recognisable intangible value when:
Below-market compensation: A key employee is locked into a contract at compensation significantly below what the market would demand. The present value of the below-market differential over the remaining contract term is the intangible asset.
Non-competition provisions: Employment contracts with enforceable non-competition clauses prevent key employees from joining competitors. The value of these provisions is assessed using the With-and-Without method (see our NCA valuation guide).
Exclusive services: Contracts that prevent key individuals from providing services to others — common in entertainment, sports, and professional services — create value by ensuring the acquirer retains exclusive access to the individual's talent.
Long-term commitment: Employment contracts with significant remaining terms (3-5+ years) and substantial termination penalties create stability value that reduces the risk of key person departure.
Review employment agreements for senior management and key technical or commercial staff. Focus on contracts with remaining terms exceeding 12 months and compensation significantly below market.
Benchmark the contractual compensation (salary, bonus, equity) against current market rates for equivalent roles. The differential is the annual favourable term.
Consider the likelihood that the employee will remain through the contract term. Contracts in at-will employment jurisdictions or where the employee has strong external demand carry higher departure risk.
Apply a risk-adjusted discount rate reflecting the probability of the employee remaining and the certainty of the compensation differential.
Although the assembled workforce cannot be separately recognised, it plays a critical role in the PPA through contributory asset charges. In the MPEEM, a charge for the use of the assembled workforce is deducted from excess earnings attributable to other intangible assets (typically customer relationships).
The workforce contributory charge is typically calculated as:
A technology company is acquired with a CTO on a 4-year contract at £180,000 base salary. Market rate for an equivalent CTO is £280,000. The annual below-market saving is £100,000. Assuming 90% probability of retention over the remaining 3 years and a 10% discount rate, the favourable employment contract is valued at approximately £237,000. Separately, the broader assembled workforce of 150 engineers has a replacement cost of approximately £12 million — but this is captured as a contributory charge, not a separate asset.
In sports and entertainment acquisitions, employment contracts (player contracts, talent deals, exclusive artist agreements) are frequently the most valuable identifiable intangible assets. A football club's squad is, in accounting terms, a portfolio of employment contracts valued at the transfer market equivalent. These contracts have clear separability — they can be traded — and demonstrable fair values.
While employment contracts create intangible value, they also highlight key person risk. If a small number of employment contracts represent a significant proportion of the total intangible value, the acquirer faces concentration risk. Departure of those individuals — through contract expiry, mutual termination, or breach — could impair the value significantly.
Many key employees hold equity awards (options, RSUs, carried interest) that are not captured in the employment contract's base compensation. Under IFRS 3, pre-existing equity awards assumed in the acquisition may need to be separated into pre-combination service (part of the consideration) and post-combination service (future compensation expense). This distinction affects both the purchase price allocation and the post-acquisition expense recognition.
Employment contract valuations are sensitive to retention assumptions. An employment contract that the employee is likely to break — because the compensation is below market, the role has changed, or the cultural fit is poor post-acquisition — has limited value regardless of its contractual terms. Valuations must realistically assess the probability of contract fulfilment.
Employment contracts are one of eight contract-based intangible assets under IFRS 3. For the complete taxonomy, see 35 types of intangible assets. For a deeper look at human capital valuation, read measuring human capital in the AI age.
Ivan Gowan is the Founder and CEO of Opagio. He brings 25 years of experience building and scaling technology platforms in financial services. Meet the team.
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