IASB addresses definition of a business and accounting for previously held interests
28 Jun 2016
In a combination of two of its current implementation projects, the IASB has today published 'Definition of a Business and Accounting for Previously Held Interests (Proposed amendments to IFRS 3 and IFRS 11)'. Comments on the exposure draft are requested by 31 October 2016.
The post-implementation review of IFRS 3 Business Combinations revealed that entities have difficulties when determining whether they have acquired a business or a group of assets. As the accounting requirements for goodwill, acquisition costs and deferred tax differ on the acquisition of a business and on the acquisition of a group of assets, the IASB decided to issue narrow scope amendments aimed at resolving the difficulties that arise when an entity is determining whether it has acquired a business or a group of assets.
At the same time, the IFRS Interpretations Committee received and discussed several issues around transactions involving previously held interests in order to determine whether or not previously held interests should be remeasured. The Interpretations Committee recommended to the IASB to make certain amendments and the IASB agreed to follow the Committee's recommendation, provided the amendments were grouped with and conditional on other amendments relating to the definition of a business.
As a consequence, the IASB now issues one exposure draft addressing the definition of a business as well as the accounting for previously held interests in the assets and liabilities of a joint operation in transactions in which an investor obtains control or joint control of a joint operation that meets the definition of a business.
The amendments proposed in ED/2016/1 Definition of a Business and Accounting for Previously Held Interests (Proposed amendments to IFRS 3 and IFRS 11) are:
Definition of a business (changes to the implementation guidance of IFRS 3 only)
- A business consists of inputs and processes applied to those inputs that have the ability to contribute to creating outputs, while a business need not include all of the inputs or processes that the seller used in operating that business and need not have an output. However, if there is no output, the set is a business only if it includes an organised workforce with the necessary skills, knowledge, or experience to perform an acquired substantive process that is critical to the ability to develop or convert another acquired input into output.
- If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the set of activities and assets is not a business.
- Tangible and intangible assets, different classes of tangible assets, identifiable intangible assets in different intangible asset classes, financial assets and non-financial assets, and different classes of financial assets shall not be combined into a single asset or considered a group of similar assets.
Accounting for previously held interests (changes to IFRS 3 and the implementation guidance of IFRS 11)
- Acquisition of control over a joint operation that meets the definition of a business is a significant economic event that warrants remeasurement of previously held interests in the assets and liabilities of the joint operation at fair value at the time an investor obtains control of the joint operation.
- Acquisition of joint control over a joint operation that meets the definition of a business is not an event that warrants remeasurement of previously held interests in the assets and liabilities of the joint operation at the time an investor obtains joint control over the joint operation.
Interaction with the FASB
The exposure draft notes that IFRS 3 is the result of a joint project between the IASB and the FASB and the business combinations requirements under IFRSs and US GAAP are substantially converged. However, even though the FASB (that had received similar feedback) and the IASB have worked together to respond to problems with the definition of a business, the IASB decided to expose amendments to the application guidance of IFRS 3 that are different from the wording exposed by the FASB in November 2015 although the results are expected to be substantially the same.
Effective date and transition requirements
The ED proposes that the amendments would be applied to business combinations for which the acquisition date is on or after the effective date. Earlier application would be permitted.
Please click for:
- (link to IASB website)
- IFRS in Focus newsletter explaining the amendments
- Our IAS Plus project page on IFRS 3 — Definition of a business
- Our IAS Plus project page on IFRS 3/IFRS 11 — Remeasurement of previously held interests