IFRS 3 – Definition of a business (new)
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 Business Combinations.
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.
The staff presented an analysis as to whether the acquisition is indicative of a business or a single asset which considered whether: the contract to provide ongoing services and the related asset give rise to a business; services underlying the asset are part of an integrated set of activities / assets; and services alongside the customer's rights to use the asset are significant.
A majority of the Committee expressed strong concerns with the analysis prepared by the staff, in which they noted the assessment did not consider IAS 40 Investment Property in analysing the fact pattern given. These Committee members requested analysis by the staff as to distinguishing characteristics of the scope of IAS 40 as compared to IFRS 3 in this and similar circumstances.
Other Committee members noted that the scope of the submission was limited to the acquisition of an investment property which was considered part of the acquisition of a business, and likewise, noted that in their view, IAS 40 and IFRS 3 were not mutually exclusive.
Given concerns raised by a majority of the Committee regarding the analysis performed by the staff, the Committee asked the staff to perform further analysis on the following general questions:
- Is IFRS 3 mutually exclusive of IAS 40?
- How should scope application of IFRS 3 and IAS 40 be determined? Committee members highlighted the importance of services linked to the property, and their relative significance (e.g., are services other than ancillary, as outlined in IAS 40), in this determination.
- Is this particular submission, and others like it, indicative of a purchase of a business or property?
The staff will perform further analysis considering the above questions for deliberation in a future Committee meeting.