Background

The IFRS IC received a submission about how an entity accounts for payments (as part of the acquisition agreement) to the sellers of an acquired business when those payments are contingent on the sellers’ continued employment during a post-acquisition handover period. The continued employment aims to ensure the appropriate transfer of knowledge from the sellers to the new management team. The sellers are compensated for their services at a level comparable to other management executives and are entitled to additional payments that are contingent upon meeting a specified level of financial performance and the continued employment during a limited period. The sellers can receive the additional payments if employment terminates only due to specified circumstances, but the additional payments are forfeited if employment terminates in any other circumstances. The submitter asked whether the entity may split the accounting for the additional payments between remuneration for post-combination services, and additional consideration for the business combination.

Staff analysis

The staff sent an information request to members of the International Forum of Accounting Standard-Setters (IFASS), securities regulators and large accounting firms. Most respondents said that fact patterns such as the one described in the submission are common across many jurisdictions and many industries, particularly those that require expert technical knowledge or that are heavily reliant on customer relationships or human capital. The payments contingent on continued employment are generally material or can be material for affected entities. All respondents said that entities apply, or generally apply, the accounting treatment described in the agenda decision Contingent payments to shareholders and continuing employment (published in January 2013)—that is, entities recognise these payments as remuneration for post-combination services rather than additional consideration for the acquisition. Many of them said that there is no diversity in accounting treatment and a few of them said the accounting treatment described in the agenda decision published in January 2013 is the treatment enforced by auditors and regulators, although some respondents said some stakeholders disagreed with the outcome because it does not always reflect the economic substance of the arrangement and could even result in recognising a gain from a bargain purchase.

Since the results from the outreach do not indicate significant diversity in how entities account for payments contingent on continued employment in fact patterns described, the staff says that the matter does not satisfy the criterion in the paragraph 5.16(a) of the Due Process Handbook to be added as a standard-setting project.

Staff recommendation

The staff recommended that the IFRS IC does not to add a standard-setting project to the work plan and instead publish a tentative agenda decision explaining its reasons for not adding a standard-setting project.

IFRS IC discussion

IFRS IC members agreed with the technical analysis in the staff paper that the accounting conclusion is clear and there is no diversity in practice for this matter. However, some IFRS IC members were concerned that the agenda decision does not give an explicit conclusion on the accounting treatment, and therefore readers may read it as suggesting that they are not prohibited from accounting for the contingent payment as additional consideration for the acquisition. In addition, one IFRS IC member suggested that it would be beneficial to add a reference to IFRS 3:B55A to make the accounting conclusion clearer. On the other hand, some IFRS IC members appreciated the reference to the previous agenda decision, where the analysis and conclusion was clearly laid out. In their view, this is clear and efficient without the need to repeat in the current agenda decision. One IFRS IC member suggested to add in the agenda decision that the IASB had not identified the matter as a high priority when the previous agenda decision was published. This would help emphasise that this matter is not important enough to be on the work plan of the IASB. The Chair said that giving an explicit accounting conclusion and adding the suggested reference may result in an impression that the agenda decision is giving an accounting analysis, which is not intended given the agenda decision concludes that there is no diversity in practice and the matter is not widespread. Therefore, he recommended not making ant changes in response to the suggestions by IFRS IC members.

Some IFRS IC members also gave editorial comments to make the fact pattern clearer and these were agreed by the IFRS IC.

IFRS IC decision

The IFRS IC, by a unanimous vote, decided to publish a tentative agenda decision with some edits to the staff proposal suggested during the meeting.