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FRC response to the IASB’s request for information on the Post-Implementation Review of IFRS 3

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03 Jun 2014

The Financial Reporting Council (FRC) has published a comment letter responding to the International Accounting Standard Board’s (IASB’s) request for information on the Post-Implementation Review of IFRS 3 Business Combinations.

The IASB issued a Request for Information (RFI) in January 2014 seeking comments from stakeholders to identify whether IFRS 3 'Business Combinations' provides information that is useful to users of financial statements; whether there are areas of IFRS 3 that are difficult to implement and may prevent the consistent implementation of the standard; and whether unexpected costs have arisen in connection with applying or enforcing the standard.

The FRC’s response has been informed from the results of an outreach meeting held in March 2014 and also the findings in its research paper ‘Investor views on intangible assets and their amortisation’.

The key responses from the FRC outreach activity were:

  • Respondents commented that the definition of a business in IFRS 3 is “too broad”.  It was highlighted that differences in interpretations by preparers “result in substantively similar transactions being treated as either business combinations or asset acquisitions”.
  • Many preparers highlighted the difficulties in determining many of the fair value measurement requirements of the standard, from valuing intangible assets that are not separable from the business to previously held equity interests on gaining control.
  • Preparers highlighted the cost of separately identifying and measuring all intangible assets.  Auditors noted the “significant challenge” in auditing the valuations of such intangible assets as “they are often heavily based on management judgments”. 
  • There was a “high level of dissatisfaction” from investors, preparers and auditors with the requirements of IFRS 3 to recognise all intangible assets acquired in a business combination “irrespective of their nature or the ability to reliably measure their fair value”.  This was supported by the FRC findings in its research paper.
  • A number of respondents commented that the disclosures made following an acquisition “are often insufficient for users to fully assess the performance of the investment over time” and called for a “more holistic view from the disclosures”.  Respondents highlighted that the current disclosures under IFRS 3 “are very detailed and fail to provide an overall assessment of the investment and how it has performed compared to management’s stated objectives in making the acquisition or the expectations of future performance at the time of the acquisition”.

A number of suggestions were made for improving the standard.  The “most widely expressed” were:

require the separate recognition and measurement of fewer intangible assets - this could be done by re-introducing the reliable measurement recognition criteria, particularly in respect of intangible assets that are not separable from the business;

reduce complexity and the use of judgmental valuations in areas such as stepped acquisitions, the treatment of non-controlling interests and partial disposals; and

move to a model of disclosures that concentrates on high level objectives and provides for a holistic view of the investment and its performance, rather than specifying a list of detailed requirements.

Additionally the FRC comment that greater clarity in the definitions or explanatory guidance and examples in the standard would help to reduce “interpretive differences improve comparability and ensure that the accounting treatment properly reflects the substance of the transactions”.

Based on the results of the outreach and the suggestions for improving the standard as a result, the FRC indicate that the IASB should “undertake a project to improve IFRS 3”. 

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