IFRS 3 — Continuing employment

Date recorded:

As part of its May 2012 meeting, the Committee considered a request for guidance on the accounting for contingent payments to selling shareholders in circumstances in which those selling shareholders become employees. The request for clarification relates to whether IFRS 3 Business Combinations is conclusive in determining whether an arrangement in which payments to an employee are forfeited upon termination is remuneration for post-combination services and not part of the consideration for an acquisition, or whether this is an indicator but not, on its own, determinative that the payment is compensation.

The question arises because paragraph B55 of IFRS 3, which provides application guidance for determining whether arrangements for contingent payments to employees or selling shareholders are part of the business combination or are separate transactions, introduces subparagraphs (a) to (h) as indicators. However, while subparagraphs (b) to (h) use inconclusive language (such as ‘may indicate’ or ‘might suggest’), subparagraph (a) uses conclusive language in stating ‘...A contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is remuneration for post combination services...’. Therefore, questions have arisen as to whether paragraph B55(a) of IFRS 3 is, on its own, conclusive that payments to an employee which are forfeited upon termination are remuneration for post-combination services.

At that meeting, the Committee noted that IFRS 3 was part of the joint effort by the IASB and US Financial Accounting Standards Board (FASB) to promote convergence of IFRS and US GAAP accounting standards. Consequently, the Committee instructed the staff to consult both the IASB and FASB to determine whether IFRS 3 (IFRSs only) and Topic 805 Business Combinations (US GAAP only) should be conclusive in the fact pattern described above.

At the July 2012 meeting, the staff provided the Committee with a summary of feedback received from its informal consultation with many IASB members on this issue. The preliminary view of many IASB members is that they would prefer that the guidance in paragraph B55(a) be indicative; consequently, entities would apply judgement in determining whether payments that are contingent on the continuing employment of the selling shareholder are post-combination expenses. However, many IASB members acknowledged an inconsistency between the current wording of paragraph B55(a) and the introduction of paragraph B55 which should be resolved.

IASB members also shared the general concern expressed by the Committee as part of its May 2012 meeting that IFRS 3 is part of the joint effort by the IASB and FASB to promote convergence of IFRS and US GAAP accounting standards, and therefore, any decisions to amend IFRS 3 should be considered in the context of not creating divergence with US GAAP. The staff noted that its consultation with the FASB to determine whether Topic 805 is conclusive in the fact pattern described above is ongoing. The staff intends to update the Committee on the results of that consultation as part of the September 2012 meeting.

The Committee was not asked to make any tentative decisions at this meeting, as the meeting only served to summarise feedback from the IASB. However, multiple Committee members voiced questions and possible responses. One Committee members suggested deleting the conclusive language example included in paragraph B55(a) regarding continuing employment so that paragraph B55(a) too is read as an indicator. Another Committee member supported this view and noted that duration of a continuing employment agreement should be considered in conjunction with any automatic forfeiture if an employment terminates in order to avoid volatility in profit and loss. Committee members also discussed some of the historic issues raised to the US Securities and Exchange Commission (SEC) regarding continuing employment in an attempt to confirm treatment under US GAAP.

However, the Committee decided that in advance of discussing this topic further, it would wait for feedback from the FASB. Dependent on the results of that consultation, the Committee will seek direction from the IASB as to whether and how IFRSs should be amended.

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