Definition of a business
In the October 2015 meeting, the IASB tentatively decided to change the application guidance related to the definition of a business, by proposing changes to IFRS 3 using the same changes being proposed by the FASB—the IASB and FASB definitions are the same. At that meeting, IASB members asked whether those changes would address the practical problems that had been raised with the IFRS Interpretations Committee.
The Interpretations Committee discussed the proposed amendments in its November 2015 meeting. Committee members agreed that the proposals should address the problems it had examined. However, they raised some comments and questions about the proposed amendments.
The staff identified the four main questions as follows:
(a) Is the assessment of whether substantially all of the fair value of the assets acquired is concentrated in a single asset (or group of similar assets) needed or workable?
(b) Are there circumstances under which the acquisition of an outsourcing agreement would represent acquisition of a substantive process?
(c) What is the impact of the proposed changes on vertical integration?
(d) Can examples be added for financial institutions and extractive activity entities?
Is the assessment of whether substantially all of the fair value of the assets acquired is concentrated in a single asset (or group of similar assets) needed or workable?
The IASB had previously decided that if substantially all of the fair value of the assets acquired is concentrated in a single asset (or group of similar assets), the acquired set of activities and assets would not constitute a business.
Some Committee members had noted that the existence of a process distinguishes a business from an asset and questioned whether the ‘substantially all’ threshold would therefore be needed.
The staff recommended that the threshold be retained. They conceded that the proposed guidance on substantive processes would lead to the same conclusion because a process would have a more than insignificant value and, therefore, the value of the acquired set of activities and assets would not be concentrated in one asset. However, the ‘substantially all’ threshold would be easier to apply and would be less subjective.
Furthermore, the staff proposed to clarify whether and how to apply the proposed threshold when a building is acquired with an in-place operating lease. When applying the FASB codification the acquirer recognises an intangible asset for in-place leases separately, whereas IFRS requires the acquirer to include the lease in the measurement of the leased property.
Staff identified two options:
- Option 1: Estimate the fair value of the building and the fair value of the lease separately for the purpose of this assessment.
- Option 2: Clarify that the building and the in-place operating lease shall be considered a single asset for the evaluation of the threshold.
Staff expressed a preference for Option 2 as Option 1 would create additional costs for the preparer. Furthermore, Option 2 would be consistent with the U.S. requirements in all common cases.
Are there circumstances under which the acquisition of an outsourcing agreement would represent acquisition of a substantive process?
The IASB had previously decided that to be considered a business, a transaction must include, at a minimum, an input and a substantive process that together contribute to the ability to create outputs.
Some Committee members were concerned that there would be no guidance on whether and how inputs and processes that have been outsourced should be considered in the assessment of whether an acquired set of assets constitutes a business.
The staff are in the view that the proposed guidance on substantive process does not distinguish between inputs and processes of the seller and processes that have been outsourced by the seller. Consequently, this means that the acquirer would need to consider whether the outsourced workforce performs a substantive process and whether the entity controls the substantive process.
The staff intend to clarify this in the proposed amendment.
What is the impact of the proposed changes on vertical integration?
The IASB had previously proposed to narrow the definition of an output to exclude returns in the form of lower costs or other economic benefits directly to investors or other owners, members or participants because many asset acquisitions may provide lower costs.
One IFRS Interpretations Committee member asked whether the focus on goods and services provided to customers would have an impact on a vertical integration (i.e. the acquisition of a supplier). Since the supplier does not provide goods or services to a customer after the acquisition, it might not be considered a business under the proposals.
The staff believe that the focus of this assessment is on whether the supplier is capable of generating revenues after the acquisition. Accordingly, it would be considered a business.
The staff recommend to add this explanation to the Basis for Conclusions.
Can examples be added for financial institutions and extractive activity entities?
The staff agree with the proposals by Interpretations Committee members to add examples for financial institutions and extractive activity entities.
They propose to add the examples included in the appendix of the agenda paper.
The Board were asked whether they agree with the staff recommendations to the above questions (see Agenda Paper 13).
All Board members agreed with the staff recommendations.
Thereafter, the Board was then asked to consider the due process steps taken for the proposed amendments to IFRS 3 (see Agenda Paper 13A) and the related proposed amendments to IFRS 11 relating to the remeasurement of previously held interests (see Agenda Paper 13B).
In both cases the Board was satisfied that the due process steps had been followed correctly, the comment period for each ED would be 120 days and the staff have permission to commence the balloting process. No Board members plan to dissent.