IFRS 11 – Acquisition of interest in joint operation (continuing)
The Committee had previously received a request to clarify the applicability of IFRS 3 Business Combinations by (1) joint operators for the acquisition of interests in joint operations under IFRS 11 Joint Arrangements and (2) venturers for the acquisition of interests in jointly controlled operations or assets under IAS 31 Interests in Joint Ventures, when the activity of the joint operation or the activity of the jointly controlled operation or assets constitutes a business as defined in IFRS 3. Specifically, the Committee was asked whether the acquirer of such an interest should apply the principles in IFRS 3 on initial recognition of the interest or whether the acquirer should instead account of it as the acquisition of a group of assets.
During the September 2011 Committee meeting, the Committee asked the staff to analyse whether a premium paid for synergies can be recognised as a separate asset under another standard in circumstances when an entity acquires an interest in a joint operation that contains a business, whether IFRS 3 could be applied by analogy or whether further guidance should be developed on this issue.
The staff presented the Committee the results of their additional analysis. Under IAS 38, synergies cannot be recognised as a separate asset if they relate to a business and can only be sold, transferred, licensed, rented or exchanged together with the entire business or combined businesses. The Committee members generally agreed with the staff analysis regarding recognising intangible assets under IAS 38. One Committee member suggested that a joint arrangement constitutes a contract and that perhaps the premium paid could be allocated to the identifiable contract as an intangible rather than a general goodwill amount.
The staff then presented their analysis with respect to whether guidance in IFRS exists to account for the acquisition of an interest in a joint operation that constitutes a business under IFRS 3. The staff noted that in practice their appear to be three approaches used in accounting for the acquisition of interests in jointly controlled operations or assets as specified in IAS 31 when the activity constitutes a business. The first approach is a 'fair value approach' where IFRS 3 is analogised to and identifiable assets and liabilities are measured at fair value and the residual amount is recognised as goodwill. Under the fair value approach, transaction costs are not capitalised and deferred taxes are recognised. The second approach is the 'cost approach' where the total cost is allocated to the individual identifiable assets and liabilities on a relative fair value basis such that any premium is allocated out to the identifiable assets. Under the cost approach, transaction costs are capitalised and deferred taxes are not recognised. The third approach is the 'combination approach' in which the identifiable assets and liabilities are measured at fair value and the residual amount is recognised as a separate asset (i.e. goodwill). This approach is based on the cost approach but utilises guidance in IFRS 3 to issues not addressed in other IFRSs. The combination approach differs from the fair value approach in that the guidance in IFRS 3 is not applied when it is also addressed in other standards (so that transaction costs are capitalised, contingent liabilities and deferred taxes are not recognised, etc).
The staff recommended the Committee develop an interpretation based on the combination approach as they felt it more closely aligns with the requirements in the IFRSs that apply to the assets and liabilities recognised on the acquisition of an interest in a joint operation and the measurement basis most commonly adopted by entities in preparing their financial statements is historical cost.
Several Committee members expressed concern with the staff's recommendation of the combination approach. Their concerns focused on the lack of a technical basis for the combination approach and the fact that it permits 'cherry-picking' of only those concepts in IFRSs that preparers want to utilise. A majority of the Committee members supported the fair value approach is the preferred approach.
The Committee then began discussions of whether they should address the current diversity through either an interpretation or whether this should be an amendment to either IFRS 3 or IFRS 11. The Committee members had various views on this issue. Some expressed concern with changing the scope of IFRS 3 and potential unintended consequences. Some Committee members felt that such a change would be beyond the scope of an interpretation and required amending a standard while others felt that this was exactly the purpose of an interpretation.
The Committee asked the staff to further analyse how to proceed with this issue and bring back to the Committee at a future meeting potential pros and cons of proceeding with either 1) an interpretation, 2) an amendment to IFRS 3, or 3) an amendment to IFRS 11.
The Committee then discussed the scope exception in paragraph 2(a) of IFRS 3 for 'the formation of a joint venture'. The Board did not update the language in IFRS 3 when IFRS 11 was issued to reflect joint arrangements rather than just joint ventures. The Committee unanimously agreed to recommend to the Board to amend paragraph 2(a) of IFRS 3 to reflect the new term joint arrangements in IFRS 11 through the 2011-2013 annual improvements process and applied retrospectively.