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EFRAG 'major concerns' re IFRS 3 proposals

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

06 Aug 2005

The European Financial Reporting Advisory Group (EFRAG) has invited comments on its draft letter to the IASB on the exposure draft of Business Combinations Phase II, which involves proposed amendments to IFRS 3, IAS 27, IAS 37, and IAS 19. .

The European Financial Reporting Advisory Group (EFRAG) has invited comments on its draft letter to the IASB on the exposure draft of Business Combinations Phase II, which involves proposed amendments to IFRS 3, IAS 27, IAS 37, and IAS 19.

We would at the outset like to make clear our support for the objective of this project to achieve convergence if it is convergence to the better accounting solution and can be achieved with reasonable efforts. We have nevertheless some major concerns...

EFRAG's concerns relate to:

  • Structure and Process of the Project, including non-issuance of a discussion paper, shortness of the comment period (especially for Europe), failure to achieve IFRS-US GAAP convergence, increased use of fair values before a debate on measurement has taken place, and changes to concepts in the Framework:

    We have a major concern with the fact that the Board proposes changes to concepts that are contained in the Framework without either first discussing those potential changes in the context of the Framework itself or actually proposing to change the Framework.

  • Technical issues, including whether a single method of accounting is appropriate for all business combinations (particularly for combinations involving mutual entities and by contract alone), subjective fair value measurements by unlisted companies or in illiquid markets, and definition of a business.
  • Proposed changes to IAS 27. EFRAG is "not convinced that the entity view is superior to the current 'parent-only' approach".
  • Proposed changes to IAS 37. EFRAG has concerns (a) about building probability into the measurement of non-financial liabilities rather than (as IAS 37 currently does) into the recognition criteria and (b) about measuring non-financial liabilities at the amount that an entity would rationally pay to settle the present obligation or to transfer it to a third party.
Click to Download EFRAG's Letter (DOC 232k). Comment deadline is 21 October 2005. The United Kingdom Accounting Standards Board has Invited Comment on the IASB's Proposals while expressing concerns similar to EFRAG's:

The ASB is issuing the proposed standards in accordance with its policy of aligning UK accounting standards with IFRS. It notes, however, that the proposals raise a number of issues, and, arguably, some of these would not represent an improvement in UK financial reporting. Amongst the more controversial issues are:

  • the proposal that goodwill is to be recognised in full; that is, 100% of goodwill is recognised even if less than 100% is acquired;
  • the requirement in IFRS 3 that, after initial recognition, goodwill should be measured at cost less impairment losses, and amortisation is not be permitted;
  • unlike present requirements, liabilities will be recognised even where it is probable that no outflow will be required to settle the obligation. The probability of an outflow is reflected in the measurement of the liability.

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