IFRS 3 Application of the definition of a business

The following examples illustrate the application of the concentration test and the evaluation of whether a set is a business.


Example: Life sciences IFRS 3 Application of definition of a business

Pharma Co. purchases a legal entity that holds a Phase 3 compound (i.e., a compound in the clinical research phase) developed to treat diabetes, a Phase 3 compound to treat Alzheimer’s disease and the related at-market CRO and CMO contracts for each compound. Included with each project are the historical know-how, formula protocols, designs and procedures expected to be needed to complete the related phase of testing. No employees, other assets or other activities are transferred. Assume both Phase 3 compounds have equal fair value.

Application of the concentration test IFRS 3 Application of definition of a business

Pharma Co. concludes that, while the compounds are separate Intellectual Property Research & Development assets in the same major asset class, the assets are not similar because the risks associated with creating outputs from each asset differ significantly. This is because the compounds (1) are intended to treat significantly different medical conditions, (2) have significantly different potential customer bases and (3) have significantly different expected markets and regulatory risks. Therefore, substantially all of the fair value of the gross assets acquired (the concentration test) is not concentrated in a single identifiable asset or a group of similar identifiable assets. Pharma Co. must then evaluate whether the set includes an input and a substantive process that together significantly contribute to the ability to create outputs.

Determination of whether an input and substantive process exist IFRS 3 Application of definition of a business

Pharma Co. concludes the set does not contain a substantive process because the set is not generating outputs and does not include employees that form an organized workforce. Therefore, the set does not include a substantive process and is not a business. The acquisition is not treated as a business combination but an asset acquisition.

IFRS 3 Application of definition of a business

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