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IFRS 3 – Definition of a business (continuing)

Date recorded:

The Committee had previously 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 Committee previously discussed this issue at the September 2011 meeting. During that meeting, the Committee observed that IFRS 3 and IAS 40 Investment Property are not mutually exclusive and that an entity acquiring an investment property should consider whether it meets the definition of a business under IFRS 3. The Committee asked the staff to analyse whether a clarification can be made to IAS 40 through the annual improvements process.

During the November meeting, the staff suggested that the Committee recommend to the Board that clarifying amendments be made to IAS 40 through the 2011-2013 annual improvements process and applied prospectively. That clarifying amendment would add after paragraph 14 the following:

"Judgement is also needed to determine whether the acquisition of an investment property is the acquisition of a single asset or a business combination within the scope of IFRS 3 Business Combinations. Reference should be made to IFRS 3 to determine whether it is a business combination. The discussion in paragraphs 7-15 of this standard relates to whether or not the property is an owner-occupied property or an investment property and not to whether or not the acquisition of the property is a business combination as defined in IFRS 3 and an investment property as defined in this standard requires the separate application of both standards independently of each other."

The Committee was generally supportive of the staff recommendations although several Committee members questioned if it addressed the bigger issue of what is a business under IFRS 3. The staff acknowledged that the recommendation did not address that issue but it would be addressed separately in the future. The Committee ultimately agreed to recommend to the Board the amendment to IAS 40 of the staff's suggested clarification above through the 2011-2013 annual improvements process with prospective application.