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EFRAG final comment letter on proposed amendments on the application of the definition of a business and accounting for previously held interests

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

10 Nov 2016

The European Financial Reporting Advisory Group (EFRAG) has issued its final comment letter on the IASB exposure draft ED/2016/1 'Definition of a Business and Accounting for Previously Held Interests '.

EFRAG “welcomes the IASB’s efforts to provide clarity on the definition of a business, and to help distinguish between a business and a group of assets” and supports the proposals.

EFRAG supports the idea of a ‘screening test’, but feels that, as currently drafted, it may, in some instances “result in inappropriate conclusions”.  It indicates that the screening test should only be retained “as a determinative assessment only if its relative simplicity can be maintained while avoiding inappropriate outcomes”.  Should the IASB retain the screening test in the proposed form, EFRAG identifies a number of concerns which it feels should be addressed.  

Regarding the proposed guidance on evaluating whether an acquired process is substantive, EFRAG agrees with having two sets of criteria depending on whether the set of activities and assets has outputs.  However, EFRAG has concerns on the presence of goodwill as an indicator, the guidance on acquired contracts and the role of the organised workforce. 

EFRAG also agrees with using illustrative examples but highlights that these should have a greater focus on guidance that requires significant judgement.  EFRAG also encourages a converged approach by the IASB and FASB regarding the proposals. 

On accounting for previously held interests, EFRAG is supportive:

  • of the IASB’s proposal to clarify the accounting for previously held interests in the assets and liabilities of a joint operation when an entity obtains control over a joint operation that meets the definition of a business; and
  • of the proposed accounting for previously held interests in respect to the transactions described in paragraph B33C of the ED on the amendments to IFRS 11 Joint Arrangements

The press release and final comment letter are available on the EFRAG website.

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