ESMA comments on the IASB’s proposed amendments to IFRS 3 and IFRS 11

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13 Oct, 2016

The European Securities and Markets Authority (ESMA) has responded to the IASB's Exposure Draft, ‘Definition of a Business and Accounting for Previously Held Interests (Proposed amendments to IFRS 3 and IFRS 11)’.

The amendments were published by the International Accounting Standards Board (IASB) in June 2016.  The IASB is proposing to amend IFRS 3 Business Combinations to provide clearer application guidance to help distinguish between a business and a group of assets when applying IFRS 3.  The proposed amendments would make it less likely that a small group of assets would be a business.  Among the changes will be to:

  • clarify that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together have the ability to contribute to the creation of outputs; and
  • specify that if substantially all of the fair value of the gross assets acquired (that is, the identifiable assets and unidentifiable assets acquired) is concentrated in a single identifiable asset or group of similar identifiable assets then it is not a business.

In addition the Board proposes clarifying that, when an entity obtains control of a business that is a joint operation, the entity applies the requirements for a business combination achieved in stages, including re-measuring previously held interests in the assets and liabilities of the joint operation to fair value. 

ESMA “welcomes the proposed amendments to the definition of a business” but encourages the IASB to further develop the proposed two-step approach and, in particular, “clarify how the assessment of concentration of fair value (screening test) should be carried out, notably the assessment whether a group of assets is sufficiently homogeneous to be considered a group of similar assets”. 

ESMA also agrees with the proposed amendments to IFRS 11 Joint Arrangements but notes that “this amendment captures only two of the practical issues related to the re-measurement of previously held interest in business combinations”.  ESMA would like a comprehensive project to be undertaken which considers acquisition and disposals of interest in businesses “in order to minimise structuring opportunities”. 

The full comment letter is available on the ESMA website.   

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