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IFRS 3 — Continuing employment

Date recorded:

The Committee previously considered a request for guidance on the accounting for contingent payments to selling shareholders in circumstances in which those selling shareholders become employees. The request for clarification relates to whether IFRS 3 Business Combinations should be conclusive in determining that an arrangement in which payments to an employee are forfeited upon termination is remuneration for post-combination services and not part of the consideration for an acquisition, or whether this is an indicator but not, on its own, determinative that the payment is compensation. The request arose as a result of the submitter’s assertion that IFRS 3 provides conflicting guidance; that being that paragraph B55 of IFRS 3, which provides application guidance for determining whether arrangements for contingent payments to employees or selling shareholders are part of the business combination or are separate transactions, introduces subparagraphs (a) to (h) as indicators. However, while subparagraphs (b) to (h) use inconclusive language (such as ‘may indicate’ or ‘might suggest’), subparagraph (a) uses conclusive language in stating ‘...A contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is remuneration for post combination services...’.

In past meetings, the Committee noted that IFRS 3 is part of the joint effort by the IASB and US Financial Accounting Standards Board (FASB) to promote convergence of IFRS and US GAAP accounting standards. Consequently, the Committee instructed the staff to consult both the IASB and FASB to determine whether IFRS 3 (IFRSs only) and Topic 805 Business Combinations (US GAAP only) should be conclusive in the fact pattern described above.

At this meeting, the Committee was advised that the Post-Implementation Review of FASB Statement No. 141R Business Combinations (now codified in ASC 805) is in progress, and that the opportunity to coordinate any work on this issue with FASB would arise after the conclusion of the Post-Implementation Review of FASB Statement No. 141R. As a result, the staff recommended that the Committee not add this issue to its agenda for the moment to avoid creating divergence with the wording of US GAAP on a standard that had previously achieved convergence.

Committee members were in agreement with the staff recommendation. However, they expressed concerns with the proposed tentative agenda decision wording. Specifically, the tentative agenda decision wording reflected preliminary views amongst IASB and FASB members which were not subject to full due process. Thus, they felt reference to preliminary views should be deleted.

Likewise, many Committee members expressed concerns that the proposed tentative agenda decision, reflecting only that the Committee would not add this issue to its agenda until the completion of the FASB’s Post-Implementation Review of FASB Statement No. 141R, would not resolve the current diversity in practice. This led to debate as to whether the tentative agenda decision should reflect a Committee view as to whether paragraph B55(a) of IFRS 3 is indicative or conclusive. Most Committee members saw the wording as conclusive. However, a few saw the wording as indicative. The Committee Chair noted that the tentative agenda decision should not encourage diversity where it does not currently exist. Reflecting on the views of the majority of the Committee, he noted that an arrangement in which contingent payments are automatically forfeited if employment terminates is remuneration for post-combination services as long as the arrangement is substantive. The tentative agenda decision will be updated accordingly.

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