Definition of a business

Date recorded:


The Board continued its deliberation of the feedback received on the exposure draft (ED) Definition of a Business and Accounting for Previously Held Interests. In April 2017, the Board discussed the comments received on the proposed screening test. The purpose of this session was to analyse the feedback received on the other proposals included in the ED.

Staff analysis and recommendation

Based on an analysis of the feedback received, the Staff recommended that the Board make minor clarifications in relation to the following aspects of the proposed amendments:

1. Minimum requirements to be a business

Most respondents agreed with the proposed clarification that for a set of assets and activities to be a business, it must include, at a minimum, an input and a substantive process that together contribute to the ability to create outputs. A couple of respondents observed that it is not clear which inputs and processes should be acquired in order to constitute a business, and that the minimum elements of a business should be expanded to include non-readily available inputs that are required to contribute to the creation of outputs.

The Staff think that it would be impossible to specify which inputs and processes should be acquired in order to constitute a business, because that varies depending on facts and circumstances. They also believe that making a distinction between inputs that are readily available and those that are not would add unnecessary complexity to the minimum requirements to be a business.

The Staff recommended that the Board clarify that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together are required to contribute significantly to the ability to create outputs. The word ‘significantly’ is added to align with the FASB’s related amendments published in January 2017.

2. Revised definition of output

Most respondents agreed with the proposal to narrow the definition of output to focus on goods and services provided to customers, investment income or other revenues. A few respondents asked for clarification of the term ‘other revenues’ as they believe that this term could be broadly interpreted which would give rise to diversity in practice.

The Staff acknowledged these concerns and recommended that the Board:

  • (a) Clarify in the definition of output that ‘other revenues’ means other income arising from contracts that are within the entity’s ordinary activities but are not within the scope of IFRS 15.
  • (b) Move from the Basis of Conclusions to the body of the Standard, the statement that an acquired set of assets that is integrated by the acquirer and no longer generates revenues after the transaction is considered as a set of assets that has output.

3. The definition of a business in Appendix A to IFRS 3

Some respondents noted that the definition of a business in Appendix A to IFRS 3 is inconsistent with the definition proposed in paragraph B7 of the ED, and suggested that the Board align the two.

The Staff agree with the respondents’ suggestions and recommended that the Board update the definition in Appendix A.

4. Evaluating whether an acquired process is substantive

Many respondents supported the proposed guidance on identifying a substantive process. However, some respondents expressed concerns or requested further clarifications on the proposed guidance, including the guidance on acquired outsourcing agreements. They believe that the proposed assessment is complex and highly judgemental. They recommend that the Board simplify the proposed guidance or provide additional examples on how to apply it.

The proposed guidance requires an entity to assess whether the acquired set of activities has outputs, a workforce and if so, what are the functions performed by the workforce, a process, whether that process is substantive, and whether it is a ‘critical’ process or one that is ‘unique, scarce, or cannot be replaced within significant cost, effort or delay’. BC22 to BC29 to the proposed amendments contain the rationale behind these layers of requirements, some of which are similar yet distinct. For example, BC26 explains that ‘critical’ is a lower threshold than ‘unique, scare, or cannot be replaced’, and that when an acquired set of assets does not include an organised workforce, more persuasive evidence is needed to establish the existence of a business. Given the explanations in the Basis for Conclusions, the Staff believe that there are valid reasons for the different requirements.

In light of the above, the Staff considered but rejected all but one suggestion to simplify the substantive process guidance. The rejection was made on grounds that the suggestions are not narrow enough to identify only those acquisitions that really constitute a business, or that they are not necessarily simpler to apply than the proposed guidance.

The suggestion taken up by the Staff and which it recommends to the Board is to specify in the final amendments that difficulties in replacing an acquired workforce may indicate that the workforce performs a substantive process.

In relation to the guidance on acquired outsourcing agreements, the Staff agree with the suggestion to include an example illustrating how the guidance on outsourcing agreements can be applied. There were a couple of niche requests that the Staff rejected on cost/benefits grounds or that the suggestion is inconsistent with the proposed amendments.

5. Illustrative examples

The respondents were generally supportive of these examples. Suggested improvements include alignment with the FASB’s examples, as well as re-drafting to help clarify the understandability and consistency of the examples.

The Staff agree with the respondents’ suggestions and recommended the same to the Board.

6. Goodwill

Most respondents agreed with the proposal to specify that presence of an insignificant amount of goodwill did not mean that the acquired assets should automatically be considered a business.

A few respondents observed that the reference to the presence of goodwill as an indicator that an acquiree constituted a business might not be consistent with the new guidance on substantive process. They believe that this test has limited conceptual merit. Since the determination of whether goodwill is present is performed after the determination of whether a transaction is a business, its use as an indicator that an acquiree is a business would be circular. These respondents suggested clarifying this potential inconsistency, or deleting the presence of goodwill as a separate indicator.

The Staff agree that the use of goodwill as a separate indicator may create more confusion than benefits. They recommended that the Board remove this indicator from the final amendments.

7. Convergence with the FASB ASU

Most respondents recommended that the wording of the Board’s proposals be aligned with that of the FASB’s related amendments published in January 2017 to the extent that the two boards had reached converged conclusions.

The Staff believe that convergence with the FASB’s amendments, albeit important, should not be a determinative factor when determining whether to accept or reject a comment.

It should also be noted that apart from the recommendation in point (1) above, all the other proposed changes are either inconsistent with, or are not included in, the FASB’s related amendments. The Staff plan to present a comparison between the IASB’s proposed amendments to IFRS 3 and the FASB’s related amendments at a future meeting.


The Board approved all the Staff recommendations. Apart from drafting issues, no substantive comments were raised.

A few Board members disagreed with aligning the definition of a business with the revised definition of output. To them, changing a definition (and not just application guidance) such that it is different from the FASB’s definition would warrant re-deliberation. They also believe that as a business incorporates more than just outputs, it is justifiable for a business to scope in more things than outputs. Other Board members disagreed, primarily because the inconsistency arose from Staff oversight and not to fix it would create confusion in practice.

With regard to adding an example to illustrate how the guidance on outsourcing agreements can be applied, the Board cautioned the Staff against adding guidance on whether an outsourced workforce is like an acquired workforce. This is because the Board deliberately provided limited guidance on that aspect during deliberation of the ED.

With regard to the removal of using goodwill as an indicator, most Board members agreed with the removal but a couple of Board members had reservations (once again because of divergence with the FASB’s related amendments). A Board member suggested explaining the reason for removal in the basis for conclusions and that the Board continue to believe the presence of economic goodwill is an indicator that the acquired process is substantive.

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