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Updating a reference to the Conceptual Framework (Amendments to IFRS 3)

Date recorded:

When and how to update the reference (Agenda Paper 10)

Background

In March 2018, the Board issued the 2018 Conceptual Framework to replace its previous Conceptual Framework for Financial Reporting published in 2010 (2010 Conceptual Framework). The 2010 Conceptual Framework had itself replaced the 1989 Framework. Most references to the Framework included in IFRS Standards were updated to the 2018 Framework at this time, however, paragraph 11 of IFRS 3 Business Combinations was not updated as this could have caused conflicts for entities applying IFRS 3.

Potential conflicts occur as the definition of assets and liabilities in the 2018 Framework differ to those in the 1989 Framework, IAS 38 Intangible Assets and IAS 37 Provisions, Contingent Liabilities and Contingent Assets potentially leading to day 2 gains or losses post-acquisition for some balances recognised. This paper has been prepared for the purpose of identifying whether, and how, to update the reference to the Framework in IFRS 3.

In November 2018, the Board tentatively decided to update IFRS 3 to refer to the 2018 Framework and to add an exception to the recognition requirements in IFRS 3 to specify that levies within the scope of IFRIC 21 Levies and obligations within scope of IAS 37 would only be recognised in a business combination if they would be identified as liabilities in accordance with IAS 37 or IFRIC 21.

Staff analysis

The paper considered the following areas:

  • Harmonising the proposed exception with existing IFRS 3 requirements for contingent liabilities—The proposed exception should state that obligations within the scope of IFRIC 21 or IAS 37 should be recognised on acquisition of a business only if they would be identified as present obligations applying those Standards.
  • Clarifying IFRS 3 requirements for contingent assets—There have been concerns that the reference to the Framework may result in changes to recognition of contingent assets. The Board and staff are satisfied that this is not the case but propose to clarify this within the Standard.
  • Transition arrangements and early application—Other recent amendments to IFRS 3 have been implemented prospectively and similar wording is proposed for these amendments. Early application is proposed to be allowed so long as the Amendments to References to the Conceptual Framework in IFRS Standards is also early adopted.
  • Due process matters—The staff outlined that the due process steps have been met and an Exposure Draft can be prepared for balloting.

Staff recommendations

The staff recommended the following in relation to the three technical matters:

  • specifying that levies within the scope of IFRIC 21 and other obligations within the scope of IAS 37 should be recognised on the acquisition of a business only if they would be identified as present obligations applying IFRIC 21 or IAS 37;
  • clarifying in IFRS 3 that, in applying that Standard’s recognition principle, an acquirer does not recognise contingent assets;
  • applying the amendments prospectively, permitting early application, and , if before 1 January 2020, requiring early application of as the Amendments to References to the Conceptual Framework in IFRS Standards at the same time.

In relation to due process the staff recommended that the Board allow 120 days for comment on the proposed amendments and for an Exposure Draft to be prepared for balloting.

Board Discussion

One Board member asked if the thought process and analysis on recognition of contingent assets could be included in the Basis for Conclusions to help users of the Standards to ‘join the dots’.

There was no further significant discussion.

Board Decisions

The Board unanimously agreed with all staff recommendations.

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