Background

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.

In June 2016, the IASB published ED/2016/1 Definition of a Business and Accounting for Previously Held Interests (Proposed amendments to IFRS 3 and IFRS 11), combining two of its implementation projects at that time. The proposed amendments regarding the accounting for previously held interests were finalised as part of the annual improvements 2015-2017 on 12 December 2017. The proposed amendments regarding the definition of a business are being finalised today.

Changes

The amendments in Definition of a Business (Amendments to IFRS 3) are changes to Appendix A Defined terms, the application guidance, and the illustrative examples of IFRS 3 only. They:

• clarify that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs;
• narrow the definitions of a business and of outputs by focusing on goods and services provided to customers and by removing the reference to an ability to reduce costs;
• add guidance and illustrative examples to help entities assess whether a substantive process has been acquired;
• remove the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs; and
• add an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business.

Interaction with the FASB

The amendments note 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 amendments to the application guidance of IFRS 3 are different from the amendments issued by the FASB in 2017. Nevertheless, the IASB expects that the amendments in conjunction with the FASB amendments will lead to more consistency in applying the definition of a business between entities applying IFRSs and entities applying US GAAP.

Effective date and transition requirements

The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020 and to asset acquisitions that occur on or after the beginning of that period. Earlier application is permitted.

Additional information

Please click for:

• IASB press release (link to IASB website)
• IFRS in Focus newsletter
• Our IAS Plus project page on IFRS 3 — Definition of a business
• Updated EFRAG endorsement status report