Background

In its September meeting, the IFRS IC received a submission about how an entity accounts for payments (as part of the acquisition agreement) to the sellers of an acquired business when those payments are contingent on the sellers’ continued employment during a post-acquisition handover period. The continued employment aims to ensure the appropriate transfer of knowledge from the sellers to the new management team. The sellers are compensated for their services at a level comparable to other management executives. The sellers are also entitled to additional payments that are contingent upon meeting a specified level of financial performance and the continued employment during a limited period. The sellers can receive the additional payments if employment is terminated only due to specified circumstances, but the additional payments are forfeited if the employment is terminated in any other circumstances. The submitter asked whether the entity may split the accounting for the additional payments between remuneration for post-combination services, and additional consideration for the business combination. Most of the IFRS IC members agreed that there is no diversity in practice for this matter and entities apply the accounting described in the Contingent payments to shareholders and continuing employment (January 2013 agenda decision) and account for the payments as compensation for post-combination services rather than as additional consideration for the acquisition, unless the service condition is not substantive. The IFRS IC decided to publish a tentative agenda decision stating that no further action is required.

11 comment letters were received and most of the respondents agreed (or did not disagree) with the IFRS IC’s decision not to add a standard-setting project to the working plan. Some respondents disagreed with this and said that the IASB should reconsider the requirement of IFRS 3:B55(a).

Staff analysis

Respondents who disagreed with the IFRS IC’s conclusion and a few who agreed with the IFRS IC’s conclusion expressed concerns about the outcome of applying the accounting described in the previous January 2013 agenda decision in some situations. Some of them said the requirement in IFRS 3:B55(a) is principles-based and it does not faithfully reflect the economic substance of the arrangement. Thus, the information is not useful to the users of financial statements. They said that the automatic forfeiture of the contingent consideration if employment is terminated should not be conclusive of whether the remuneration is for post-combination services but instead is an indicator to consider. The staff acknowledged this comment, but they considered it is the role of the IASB rather than that of the IFRS IC to assess the usefulness of the information that results from the application of the requirements in IFRS standards. The IASB had considered concerns such as those raised by respondents during the PIR of IFRS 3. However, the IASB did not identify this matter as a high priority in its 2015 agenda consultation or the recently completed agenda consultation.

Staff recommendation

The staff recommended finalising the agenda decision with some drafting changes.

IFRS IC discussion

Only two IFRS IC members commented on this agenda item. One of them said that she did not agree with some respondents in that the agenda decision has not considered all the factors in IFRS 3:B55. She was of the opinion that it is clear in this scenario that the payment is for post-acquisition services applying IFRS 3:B55(a) given that, if the employee leaves the employment, they cannot get the remuneration. Another IFRS IC member said that she did not understand why the submitter re-opened the issue given the previous January 2013 agenda decision. She echoed some respondents in that the factor in IFRS 3:55(a) might need to be discussed in the agenda decision, but it is not a priority.

 IFRS IC decision

The IFRS IC, by a unanimous vote, decided to publish the final agenda decision with no further changes to the drafting.