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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 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.

Staff analysis

The paper provided an analysis of:

  • (a) problems that could arise if the reference were updated without making any other amendments to IFRS 3
  • (b) four different ways in which the Board could avoid the problems identified

The staff analysis considered the potential conflicts that could arise if IFRS 3:11 is updated for the new Conceptual Framework. The issues identified included potential conflicts with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IFRIC 21 Levies, contingent assets in scope of IAS 37 and other IFRS Standards that prohibit recognition of assets or liabilities with a low probability of future inflows outflows.

The analysis demonstrated that only the first issue of a conflict with IAS 37 and IFRIC 21 is likely to cause a problem and so staff have identified potential solutions for this. The four approaches put forward are:

  • (a) Approach A—leave the reference to the 1989 Framework in IFRS 3 for now, updating it only if and when the Board amends IAS 37 to align that Standard’s requirements with the 2018 Conceptual Framework.
  • (b) Approach B—start the process of updating the reference now, developing proposals that avoid conflicts between IFRS 3 and IAS 37 (as interpreted by IFRIC 21) by:
    • (i) not only updating the reference; but also
    • (ii) adding requirements to IFRS 3 for the subsequent recognition and measurement of liabilities assumed on the acquisition of a business and within the scope of IAS 37, including levies within the scope of IFRIC 21. Acquirers would apply the new IFRS 3 requirements to those liabilities, instead of the recognition and measurement requirements of IAS 37 and IFRIC 21, until the liabilities were extinguished.
  • (c) Approach C1—start the process of updating the reference now, developing proposals that avoid conflicts between IFRS 3 and IAS 37 (as interpreted by IFRIC 21) by:
    • (i) updating the reference to the 2018 Conceptual Framework; and
    • (ii) creating an exception to the initial recognition requirements in IFRS 3. This would be an exception to the requirement to apply the definitions in the 2018 Conceptual Framework to identify the assets and liabilities recognised on the acquisition of a business for all assets and liabilities specifically addressed by another IFRS Standard.
  • (d) Approach C2—As for C1, except that the exceptions would only apply to levies within scope of IFRIC 21 and other liabilities within the scope of IAS 37.

Staff recommendations

The staff recommended that the Board apply approach C2 in the paper, i.e.:

  • (a) start the process of updating the reference now, instead of waiting until it has completed a possible future project to amend IAS 37
  • (b) develop proposals that avoid conflicts between IFRS 3 and IAS 37 (as interpreted by IFRIC 21) by:
    • (i) not only updating the reference; but also
    • (ii) adding an exception to the initial recognition requirements in IFRS 3, specifying that levies within the scope of IFRIC 21 and other liabilities within the scope of IAS 37 should be recognised on the acquisition of a business only if they would be identified as liabilities applying IFRIC 21 or IAS 37 respectively.

Board Discussion

The majority of Board Members agreed with the staff recommendations.

One Board member identified that the paper discussed the recognition criteria of IFRS 3 in the context of the 2018 Conceptual Framework versus the recognition criteria of other Standards. It was suggested, where relevant, that the derecognition criteria of other Standards should also be considered to identify any conflicts. It was noted that this is not relevant for IAS 37 as that Standard does not include derecognition criteria.

Another Board member clarified that conflicts between IAS 16 Property, Plant and Equipment and IFRS 3 are unlikely to arise in practice as the fair value attributed to an item of PPE for the purchase price allocation would be low if the chance of future inflows were low and, as such, there would be no need to impair on day 2.

Board Decision

The Board voted in favour of all staff recommendations.

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