The Committee received a request for clarification on whether an asset with relatively simple associated processes meets the definition of a business in accordance with IFRS 3. In particular, the submission questioned whether the acquisition of a contract to provide services alongside the acquisition of an asset constitutes a business combination.

The particular submission highlighted diversity in practice in acquisitions of a single investment property with lease agreements with multiple tenants over varying periods and associated processes, such as cleaning, maintenance and administrative services (e.g., rent collection). The submission noted that while some consider the acquisition of such an investment property together with an obligation to render services to be a business combination as defined in IFRS 3, others believe that it is the acquisition of only a single investment property.

Following the July 2011 Committee meeting in which the Committee asked the staff to perform further research on whether IFRS 3 and IAS 40 Investment Property are mutually exclusive (i.e., can the acquisition of an investment property be a business combination) and whether it would be possible to develop guidance on how to determine if and when an obligation incurred in order to provide services in association with the acquisition of an asset would lead to a business combination, the staff presented its analysis. Analysis included feedback from National Standard Setters which suggested that the issue is widespread and has practical relevance, with significant diversity in practice.

Based on this outreach and other relevant analyses, the staff proposed amending the application guidance in Appendix B of IFRS 3 and adding application guidance to IAS 40, which includes concepts such as follows:

• A contract requiring the provision of ongoing services related to an asset should be viewed as creating a rebuttable presumption that there are processes that give rise, together with the asset, to a business.
• A service that the customer would obtain from an external supplier if the owner of the asset would not render it is an indicator that the service is related to the asset in the sense that it forms part of an integrated set of activities and assets that constitutes a business.
• The presumption that there is a business because of a contract to provide ongoing services related to an asset is rebutted, if the services delivered are insignificant compared to the customers' right to use the asset (i.e., the access to the asset).

Many Committee members disagreed with the proposals by the staff. Specifically, several Committee members expressed a desire to focus on the definition of a business – specifically clarifying paragraphs B7 – B11 of IFRS 3 on what constitutes a business. Specific concerns with the guidance in paragraphs B7 – B11 included apparent contradiction in paragraphs B8 and B11, as well as the nature of elements required in a business, where multiple Committee members noted that the focus on the capability of producing output was too broad as nearly every asset was capable of producing an output if aggregated with other inputs. Thus, several Committee members requested that this issue (i.e., clarifying paragraphs B7 – B11 of IFRS 3) be taken to the IASB as part of a larger project.

Another Committee member highlighted his view that IFRS 3 and IAS 40 are not mutually exclusive, and ancillary services under the two standards differ. Thus, he expressed a possible way forward of clarifying the mutual exclusivity through an annual improvement. However, the broader issue of clarifying paragraphs B7 – B11 of IFRS 3 would be left open. Yet another view was to clarify paragraph 20 of IAS 40 through an annual improvement, which would require measurement of a business combination under IFRS 3 with reference to IFRS 3 in defining a business. Thus, preparers would be forced to evaluate under IFRS 3 instead of bypassing IFRS 3 in performing an IAS 40 assessment.

Following extensive discussion, the Committee tentatively decided:

• to defer any final decisions while the staff conducts additional outreach of interested parties from a range of industry sectors on this topic;
• to consider the possibility of limiting the issue to an annual improvement directed at the real estate sector (absent specific interests of other sectors throughout outreach outlined above), although many did not support limiting the scope in this way; and
• to request that the staff perform further analysis on transitional provisions and the potential impact of the above decisions on current practice.

The Committee deferred further work on two topics given the interrelationship of the topics to two projects currently being discussed by the IASB (the revenue and leasing projects). The deferred Committee topics include:

• IFRIC 15-2 Agreements for the Construction of Real Estate: Clarification of 'continuous transfer': The submission requests clarification of the meaning and application of the concept of continuous transfer in paragraph 17 of IFRIC 15 in the context of the sale of apartments off plan.
• IAS 16-5 Property, Plant and Equipment: Contingent pricing of PPE and intangible assets: The submission requests clarification on how to account for contingent pricing for the outright purchase of a single item of PPE or an intangible asset.

The Committee had no additional questions or comments for the staff on these items, but expressed a desire to consider the IFRIC 15-2 submission during the November 2011 meeting.

The Committee received a request for clarification as to whether, under certain circumstances, IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment should be applied by analogy to other levies charged for participation in a market on a specified date to identify the event that gives rise to a liability. The request focuses on the date of recognition of the liability and whether analogy to IFRIC 6 should be made. Four specific examples were provided in the submission: UK bank levies, feeds paid to the Federal Government by pharmaceutical manufacturers in the US, Hungarian bank levies, and the railway tax in France. These examples are thought to refer to the taxes being conditional on the entity existing or participating in a particular activity at a specified date (similar to the decommissioning liability discussed in IFRIC 6).

Following previous meeting decisions to add the issue of whether the obligating event is the participation in an activity on the date specified by the legislation, or whether other factors create an earlier obligation, to its agenda, the focus of September 2011 deliberations was to consider staff analysis of the accounting treatment applicable to levies charged for participation in a market on a specific date. The Committee was asked to consider when the liability for the obligation to pay a levy should be recognised and whether the liability for the obligation to pay a levy is associated with an asset or an expense.

The staff's analysis presented a general conclusion that a situation of an entity participating in a market in exchange for the payment of a levy is equivalent to that of a purchase of an operating license. This view resulted in three primary questions: is the transaction associated with the obligation to pay a levy executory, does the right to participate in the market meet the definition of an asset and when does the entity have a present obligation to pay the levy?

No tentative decisions were reached, as the Committee asked the staff to bring back further analysis. However, the Committee's deliberations were marked by three key findings / themes:

Scope

Committee members expressed general concern with generalising all 'levies' as a right for the entity to participate in a specific market for a specific period. For example, Committee members discussed bank levies not linked to participation as an effective punitive tax or fine as opposed to a right to participate in a specific market (e.g., a bank levy may strictly relate to a means of raising capital as opposed to the receipt of any participation right in a market). Thus, one Committee member suggested that the scope of levies considered by the Committee in this request should be limited to government-imposed obligations; contractual arrangements would be scoped out of this assessment. Likewise, the Committee member expressed a desire to scope out fines, taxes, or levies where there is not an exchange transaction. Thus, only 'licenses' (those payments in which an entity receives a recognisable benefit for a period of time) would be within the scope of the Committee's assessment. Many Committee members supported this view, but expressed a desire to consider the scope in a future meeting. Committee members also expressed a desire to consider other types of levies which may exist in practice to determine any unintended consequences resulting from any decision reached in scoping.

Spreading / recognition

Committee members discussed liability recognition considering guidance in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Many Committee members expressed a desire to spread costs over the period in which an entity receives a recognisable benefit, while other Committee members were focused on the timing of fulfilment of the performance obligation in recognition of a liability. The example discussed by the Committee was an annual levy imposed for participation in a specific market (e.g., in Fiscal 2011) in which measurement of the levy was based on financial data in the previous annual financial reporting period (e.g., Fiscal 2010) and it was virtually certain at the end of the previous annual financial reporting period that the entity would have to pay the levy. The question raised by the Committee was whether: the general operations of the entity in a particular market gives rise to a constructive obligation at the end of the measurement period (e.g., Fiscal 2010), the obligation is derived at a point of time (e.g., at first activity in Fiscal 2011) or the costs can be accrued throughout Fiscal 2011 being the period in which the entity benefits from the levy.

Many Committee members agreed that the obligating event is the participation in the market identified by the legislation for the levies (consistent with IFRIC 6 guidance in paragraphs 9 and BC10). That is, a stated intention to participate in a market during a future measurement period does not create a constructive obligation and a liability should be recognised when the entity benefits from the right to participate in the market and has a present obligation to pay the levy. However, others supported accruing the costs throughout the period of benefit, especially if a single payment supports rights for multiple years. One Committee member noted that the above example was indicative of two separate obligating events (participation in 2010 and participation in 2011) and wondered whether recognition should be spread according to the separate obligations. No tentative decision was reached on this topic and the Committee acknowledged that it would have to consider measurement of the liability at a future date.

Asset recognition

Committee members immediately questioned whether the liability for the obligation to pay a levy is associated with an asset or an expense. Committee members outlined paragraphs 4.4 – 4.6 of the Conceptual Framework, as well as IAS 38 Intangible Assets, in assessing whether a right to participate in a market meets the definition of intangible asset, with many Committee members expressing concern with whether the 'right' was 'controlled by the entity' as outlined in IAS 38. Another Committee members noted that to the extent that an entity has received the right of participation and either paid or established a liability for the cost of that right but has not yet consumed all of the benefits, there is an economic benefit (akin to an asset) to the entity, which was discussed in the context of acquisition accounting in a business combination. The Committee members elected to focus on the obligating event (liability) first before concluding further on asset recognition (as the two topics are inter-related).

In the context of earlier discussions (e.g. common control transactions and identifying the acquirer), the Committee considered whether a framework should be developed for drafting agenda decisions given wording concerns raised either by Committee members or through constituent outreach. Specifically, the inclusion of an analysis of an issue is a controversial proposal in Committee opinions. While some believe that explanations in agenda decisions contribute to transparency of rejection decisions, others note that agenda decisions lead to 'quasi-interpretations' that are non-authoritative and not subject to the full due process, and thus, should be avoided.

Committee members generally agreed that they would like to address this issue. However, the majority of the Committee preferred to consider this issue as part of the Committee's effectiveness review with the IASB. Thus, no further discussion was held on this topic.

In August 2011 the IASB received a request to amend IFRS 1 First-time adoption of IFRSs to allow first-time adopters of IFRSs the same prospective application provisions in certain IFRSs as has been afforded to existing preparers of IFRS financial statements. The submitter noted that while some of the recent Annual Improvements to IFRSs required prospective application for existing IFRS preparers, no corresponding amendments were made to IFRS 1 for the benefit of first-time adopters. The submitter suggested that similar transition guidance should be included in IFRS 1 and that such amendments should be made as soon as possible to permit entities adopting IFRSs in 2011 to take advantage of any such amendments.

The staff believed that one issue in particular, relating to an amendment made to IAS 20 Accounting for Government Grants and Disclosures of Government Assistance as part of Annual Improvements issued in April 2008 could be addressed more quickly via a separate amendment to IFRS 1 (i.e. to allow first-time adopters to apply paragraph 10A of IAS 20 prospectively). Government loans with a below-market rate of interest have historically been measured at cost on initial recognition. Paragraph 10A requires them to be measured at fair value on initial recognition in accordance with IFRS 9 Financial Instruments. Retrospective application by first-time adopters will therefore require entities to determine the fair value of liabilities as at the date the loan was originated. Many such loans have historically been measured at cost in accordance with previous GAAP. Paragraph 52 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors states that it is impracticable to estimate a fair value that is not based on an observable price or observable inputs retrospectively. As such, the staff believed that measuring the fair value of government loans with a below-market rate of interest at a past date is impracticable. The staff made an initial assessment of the merits of the submission and asked the Committee for its views to inform the Board's discussion of the issue.

The majority of the Committee members did not have any issue with the staff proposals. Several Committee members questioned why a special exception should be made. The staff emphasised the impracticability aspect.

In May 2011, the Committee received a request to clarify the applicability of IFRS 3 by: (a) joint operators for the acquisition of interests in joint operations as defined in IFRS 11 Joint Arrangements; and (b) venturers for the acquisition of interests in jointly controlled operations or assets as specified in IAS 31 Interests in Joint Ventures in circumstances where the activity of the joint operation, or the activity of the jointly controlled operations or assets, constitutes a business as defined in IFRS 3. The Committee was asked whether the acquirer of such an interest should apply the principles in IFRS 3 on the initial recognition of the interest or whether the acquirer should instead account for it as the acquisition of a group of assets.

The Committee discussed the issue in the July 2011 meeting, with the July 2011 IFRIC Update reporting that the Committee noted that the issue raised the question of what unit of account (the joint arrangement or the interest in the joint arrangement) is to be considered for the application of IFRS 3 and whether the activities and assets related to that unit of account can constitute a business. More specifically, the question is whether, and how, to recognise goodwill, if present, on the acquisition of an interest in a joint operation as defined in IFRS 11 or jointly controlled operations or assets as specified in IAS 31. The Committee directed the staff to do further analysis on this issue with the aim of assessing whether the issue could be solved through annual improvement.

The staff concluded from its analysis of the issue that IFRS 3 is the IFRS applicable to the particular assets and liabilities arising from the acquisition of an interest in a joint operation if the joint operation includes a business as defined in IFRS 3. The staff noted that significant uncertainty (and therefore diversity) exists in accounting for the acquisition of an interest in jointly controlled operations or assets as specified in IAS 31 in circumstances where the activity of the jointly controlled operations or assets constitutes a business as defined in IFRS 3. This is because there is no explicit guidance in IAS 31 for such transactions. The staff expects that this significant diversity in practice will continue under IFRS 11 unless the Committee or the Board provide some kind of clarification. However, the staff also noted that some of the guidance in IFRS 3 would not be applicable to the acquisition of interests in joint operations. For example, the acquirer of an interest in a joint operation does not recognise non-controlling interests in the acquiree; it only recognises its share of the assets and liabilities related to its interest in the joint operation, not the shares of the other parties to the joint operation.

To avoid significant diversity in practice continuing after the adoption of IFRS 11, the staff recommended developing application guidance for IFRS 11 on this issue. This guidance could explain how to account for the acquisition of an interest in jointly controlled operations or assets in circumstances where the activity of the jointly controlled operations or assets constitutes a business as defined in IFRS 3. The application guidance would clarify which guidance in IFRS 3, and which guidance related to business combinations in other standards such as IAS 12 Income Taxes, should be applied in accounting for this kind of transaction. The staff felt that such application guidance could be introduced to IFRS 11 by an annual improvement because it is clarifying the requirements of IFRS 11.

To address the issue above, several Committee members suggested that the scope exemption of IFRS 3 be modified to exclude joint arrangements. These Committee members noted that either forming or acquiring joint activity under IFRS 11 could give rise to potential goodwill and noted that the measurement attributes in IFRS 3 is different from IFRS 11. Some Committee members noted that given that the forming or acquiring of joint activity does not result in a business combination, goodwill should not be recognised. Rather, the excess would either be absorbed in cost or as a potential intangible. Several other Committee members disagreed with this view and noted that goodwill could arise and IFRS 3 could be applied by analogy. The Committee asked for the issue to be brought back and for the staff to explore the alternatives further and include worked examples.

The Committee received a request for guidance on the classification of cash payments for deferred and contingent considerations under IAS 7 Statement of Cash Flows. More specifically, the submitter asked the Committee to clarify whether: (i) the settlement of contingent consideration should be classified as an operating, an investing or a financing activity in the statement of cash flows; and (ii) whether the subsequent settlement of deferred consideration for a business combination should be classified as an investing or a financing activity in the statement of cash flows.

The staff presented to the Committee its analysis that paragraphs 16 in IAS 7 provided sufficient guidance for the classification of cash payments for deferred and contingent considerations in the statement of cash flows. Cash payments for the contingent/deferred consideration recognised at the acquisition date and any adjustment arising during the measurement period (as defined in paragraphs 45-50 of IFRS 3) should be classified as investing activities in accordance with paragraph 16 of IAS 7, because these cash flows lead to the recognition of the acquiree's net assets in a business combination. Cash payments relating to interest resulting from accretion of the discount on the contingent/deferred consideration liability balance should be classified in financing or operating cash flow in accordance with other interest expenses, as stated in paragraphs 31—34 of IAS 7. All other cash payments in excess of the acquisition date fair value of the contingent/deferred consideration should be classified as operating activities, because these cash flows do not result in a recognised asset.

While many Committee members agreed with the analysis of the staff, most were concerned with the wording of any tentative agenda decision not to add this issue to the Committee's agenda as a result of clarity of the guidance. General concerns expressed by the Committee during deliberations included the following:

• A few Committee members cited diversity in practice on this topic and expressed a desire to include this topic as part of an Annual Improvement. However, other Committee members expressed a concern with the scope of this project given that other cash flow projects have already been undertaken in recent years. This led to a debate as to whether a larger cash flow project should be undertaken.
• Certain Committee members further referenced the accounting for finance leases which provides for a unique application compared to the guidance above.
• Certain Committee members desired to exclude guidance in the agenda decision out of fear that the agenda decision would appear interpretative.

As a result of deliberations, the Committee expressed the following tentative views:

• Diversity in practice appears prevalent. Thus, a straight rejection of the issue appears inappropriate.
• Support exists for adding this item as an Annual Improvement project. Many supported limiting the project scope to operating cash flows under business combinations as opposed to a larger cash flow project. The staff will bring back further analysis on a potential project scope at a future meeting.
• The IASB is currently working on its leasing project, which includes cash flow considerations relating to currently termed 'finance leases'. The Committee expressed a desire to understand the outcome of these deliberations given interpretation concerns outlined above.

The Committee received a request for clarification relating to whether the expected manner of recovery in paragraph 51 of  IAS 12 Income Taxes should in any circumstances reflect disposal of the shares of the entity holding the asset (a corporate wrapper) rather than disposal of the asset itself. Specifically, the issue considered involved the measurement of deferred tax resulting from the subsequent measurement of an investment property at fair value.

The Committee observed that the question was asked because of an underlying concern relating to IAS 12 as to how deferred tax should be calculated for assets accounted for at fair value.

The Committee, considering the guidance in paragraphs 35-39 of IAS 12, noted that the requirements in IAS 12 are clear that the expected manner of recovery should reflect recovery of both:

• investment property when measuring a deferred tax liability for the investment property itself (i.e., an inside basis difference); and
• investment in a corporate wrapper when measuring a deferred tax liability for investment in the corporate wrapper (i.e., an outside basis difference).

An entity would be required to recognise both forms of deferred tax (i.e., the asset and the corporate wrapper) unless meeting the exceptions described in paragraph 39 of IAS 12 which would eliminate the requirement to recognise the outside basis deferred tax difference. The Committee noted that an entity is unable to avoid recognition of the inside basis deferred tax difference.

Given clarity in current guidance, the Committee tentatively decided not to add this issue to its agenda.

The Committee received a request to clarify the meaning of the 'date of initial application' in the transitional requirements of IFRS 10 Consolidated Financial Statements. The issue considered whether the date of initial application in IFRS 10 refers to the beginning of the first reporting period in which the entity adopts IFRS 10 (i.e., the current period) or the beginning of the earliest period presented in the first financial statements in which the entity adopts IFRS 10 (i.e., retrospectively restate all prior periods presented at the date of initial application of the standard).

The staff noted that the date of initial application is the date on which an investor assesses whether it controls an entity under the provisions of IFRS 10. The staff noted that the intention of the staff writing the transitional requirements of IFRS 10 was that the date of initial application is the beginning of the first reporting period in which the entity adopts the standard (i.e., 1 January 2013 for a 31 December year-end reporter that applies IFRS 10 for the first time in 2013).

However, the staff noted divergent interpretations of the meaning of the date of initial application in IFRS 10, with some entities / firms referring to the date of initial application as the beginning of the earliest period presented in the first financial statements in which the entity adopts IFRS 10. Many Committee members supported this divergent view, as they cited paragraphs C2 and C4(a) of IFRS 10 which require that the standard is retrospectively applied (with some exceptions).

Other Committee members noted that the decision on this submission has relevance in other standards as well which use the term 'date of initial application' is used. They requested that the term be defined in IFRSs — noting that IAS 19 Employee Benefits uses the term in a different context.

In considering possible situations in which retrospective application should not be required, a few Committee members sought a scope exception to retrospective application when an interest is sold prior to application of IFRS 10 (e.g., if an interest is sold in an entity prior to application of IFRS 10, an entity could apply the guidance of IAS 27 Separate Financial Statements to the prior period without restatement at application of IFRS 10). Many Committee members agreed with this view as a practical way to avoid confusing the concepts of 'date of initial application' and retrospective application.

Additionally, certain Committee members expressed a desire to clarify with the staff drafting IFRS 10 that the intention of the term 'date of initial application' was the beginning of the first reporting period in which the entity adopts the standard.

Thus, the Committee tentatively decided to: (i) clarify the intention of the term 'date of initial application' by the staff drafting IFRS 10, (ii) seek the addition of a IFRS 10 scope exception for retrospective application when an interest is sold prior to applying IFRS 10 (which the Committee intends to bring to the IASB in October 2011), and (iii) consider the addition of 'date of initial application' as a defined term in IFRSs.