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IFRS 3 — Continuing employment

Date recorded:

The Committee received a request for clarification on the accounting under IFRS 3 Business Combinations for contingent payments to selling shareholders in circumstances where those selling shareholders become employees. In particular, the Committee was asked to clarify whether IFRS 3. B55(a) is conclusive in determining that an arrangement in which payments to an employee that are forfeited upon termination of employment is remuneration for post-combination services and not part of the consideration for an acquisition.

B55 If it is not clear whether an arrangement for payments to employees or selling shareholders is part of the exchange for the acquiree or is a transaction separate from the business combination, the acquirer should consider the following indicators:

(a) Continuing employment—The terms of continuing employment by the selling shareholders who become key employees may be an indicator of the substance of a contingent consideration arrangement. The relevant terms of continuing employment may be included in an employment agreement, acquisition agreement or some other document. A contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is remuneration for post-combination services. Arrangements in which the contingent payments are not affected by employment termination may indicate that the contingent payments are additional consideration rather than remuneration.

The staff noted that the wording used in IFRS 3. B55(a) is, on its own, conclusive or appears determinative. However, the staff was of the view that the paragraph should be amended because it is not consistent with the inconclusive language used:

  1. in the principle stated in IFRS 3. 52: “A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity, rather than primarily for the benefit of the acquiree (or its former owners) before the combination, is likely to be a separate transaction..”;
  2. in IFRS 3. BC 120: “The boards also concluded that the focus of the principle should be on identifying whether a business combination includes separate transactions that should be accounted for separately in accordance with their economic substance rather than solely on assessing whether a transaction is part of the exchange for the acquiree…” ;
  3. in its application guidance stated in IFRS 3. B54: “Whether arrangements for contingent payments to employees or selling shareholders are contingent consideration in the business combination or are separate transactions depends on the nature of the arrangements. Understanding the reasons why the acquisition agreement includes a provision for contingent payments, who initiated the arrangement and when the parties entered into the arrangement may be helpful in assessing the nature of the arrangement” and
  4. in IFRS 3. B55(d): “Incremental payments to employees—If selling shareholders who do not become employees receive lower contingent payments on a per-share basis than the selling shareholders who become employees of the combined entity, that fact may indicate that the incremental amount of contingent payments to the selling shareholders who become employees is remuneration”. The staff also noted that the current wording of IFRS 3. B55(a) is not consistent with this paragraph because the entire amount of the contingent payments is remuneration (if the entire amount of the contingent payments are forfeited upon termination of employment), while according to IFRS 3. B55(d) the incremental amount of the contingent payments may be remuneration and the remaining amount may be part of the consideration for the business combination. In other words, the only way to reconcile these two paragraphs is to consider paragraph B55(a) as an indicator.

Moreover, the staff was of the view that the Board had not intended to use conclusive language in IFRS 3. B55(a). The staff also performed outreach with national standard-setters and noted that the issue is widespread and significant diversity exists in practice. The staff also noted that the issue could be resolved efficiently within the confines of IFRS 3 and that the Committee would be able to reach a consensus on the issue on a timely basis. There is currently no IASB project on IFRS 3. As such, the staff proposed an amendment to IFRS 3. B55(a) to clarify that a contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is a strong indicator that the arrangement is remuneration for post-combination services.

A Committee member felt that the Board had intentionally used conclusive language in IFRS 3. B55(a) whereas a few other Committee members believed that the Board had not intended to use conclusive language. Several Committee members were supportive of the staff’s proposed amendment to revise IFRS 3. B55(a) as a strong indicator. However, some other Committee members expressed concern that it was unclear what the parameters of a strong indicator were and that this could cause more diversity in practice. In addition, some Committee members noted that adopting the proposed amendment could also create a GAAP difference given that the US views IFRS 3. B55(a) as a determinative factor and that this could have repercussions for the converged standard. A Committee member suggested asking the Board what they had intended at the time of the issuance of the standard.

Given the mixed views expressed by Committee, the Committee tentatively decided to seek the Board’s views on what they thought was the right answer and then to bring back the issue for further discussion at a later Committee meeting.

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