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IFRS 3 — Acquisition of control over a joint operation

Date recorded:

The Committee received a request to clarify whether a previously held interest in the assets and liabilities of a joint operation is re-measured to the fair value, on obtaining control over a joint operation. Paragraphs 41 and 42 of IFRS 3 Business Combinations require business combinations achieved in stages to be accounted for as follows:

  1. a previously held equity interest in the acquiree is remeasured to its acquisition-date fair value
  2. any resulting gain or loss is recognised in profit or loss or other comprehensive income, as appropriate.

IFRS 3 only gives explicit guidance for the acquisition of control over a business that is held through an equity interest, as opposed to a business that is held through rights to assets of the business itself and obligations for the liabilities of the business itself. The question in particular focuses on whether a previously held interest in a joint operation is remeasured to its acquisition-date fair value on the acquisition of control over the joint operation. In particular, this question arises if the joint operation is not structured through a separate legal entity. The submitter noted there is diversity in practice and the two main approaches adopted are:

  • IFRS 3 approach or the remeasurement approach, or
  • Modified IFRS 3 approach.

The Committee looked at this issue in January 2012 and decided not to address it as it was beyond the scope of the project Acquisition of an Interest in a Joint Operation.

During the discussions with this submitter, staff noted the following additional argument for the IFRS 3 approach or the remeasurement approach and a variation of the modified IFRS 3 approach.

Paragraph 18 of IFRS 3 requires the acquirer to recognise and measure the identifiable assets and the liabilities of the business itself at acquisition-date fair values. Consequently, 100 per cent of the identifiable assets and the liabilities of the joint operation are remeasured to fair value, because these are the assets and liabilities of the business over which control has been obtained.

With the variation Staff propose the entity would record the assets and liabilities of the previously held interest at its fair value recognising a gain or loss in the income statement. With the modified IFRS 3 approach, the previously held assets and liabilities are held at its carrying value and hence there is no gain or loss in the income statement.

The staff paper only focuses on whether a previously held interest in a joint operation is remeasured to its acquisition-date fair value, if the business is not housed in an entity. The latter issue of whether an acquirer who obtains control over a joint operation should also recognise any non-controlling interests in the business, and their shares in the assets and liabilities related to the business, of the joint operation over which control has been acquired, is not addressed due to limited scope.

Staff’s conclusion on the paper was dependent on the Committee’s decision on if there is diversity in practice. If the Committee believes there is diversity, staff suggested the Committee should issue an IFRIC interpretation, as the issue can be resolved efficiently within the confines of existing IFRSs and the Conceptual Framework. In the case the Committee believe there is no diversity, staff suggested the Committee do not take this onto its agenda.

There was general agreement within the Committee that IFRS 11 Joint Arrangements has been recently published and is being applied for the first time by prepares of financial statements and therefore there is insufficient outlook on the effects of it currently. Members suggested waiting until IFRS 11 is fully operational and also the post implementation review of IFRS 3 was complete. Staff are then to bring a more comprehensive list of issues in relation to IFRS 11.

One member found the staff paper confusing as it did not differentiate between a business and a non-business (i.e. an asset). If a business is not being acquired then IFRS 3 does not apply.

Another member also suggested that in relation to the measurement of joint operations staff should consider how to revalue the assets and liabilities the entity controls separately from those assets and liabilities the joint operation controls.

A member added that rather than focusing on a particular issue staff should present the Committee with a variety of measurement issues from the implementation of IFRS 11. Such issues may not be very common in practice currently, however they are getting increasingly common, as more and more firms adopt IFRS 11.

Another member suggested focusing on what the important aspect is and when to re-measure, either when control passes or when the asset is sold and derecognised. As the issue is so complex it cannot be an interpretation and therefore the Committee should consider taking this issue to the Board.

The Committee concluded that Staff should collect issues they have received to date with regards to IFRS 11 (staff mentioned they have already performed an outreach to address this). Staff should also address the interaction between IFRS 11 and IFRS 3 and then present the updated paper to the board in due course.

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