In summary:IFRS 3 Redefinition of a business
- The IASB issued narrow-scope amendments to IFRS 3 to help entities determine whether an acquired set of activities and assets is a business or not.
- The amendments clarify the minimum requirements to be a business, remove the assessment of a market participant’s ability to replace missing elements, and narrow the definition of outputs.
- The amendments add guidance to assess whether an acquired process is substantive and add illustrative examples.
- The amendments introduce an optional concentration test to permit a simplified assessment.
- The amendments are effective for annual reporting periods beginning on or after 1 January 2020 and apply prospectively. Earlier application is permitted.
Introduction IFRS 3 Redefinition of a business
IFRS 3 continues to adopt a market participant’s perspective to determine whether an acquired set of activities and assets is a business. The amendments: clarify the minimum requirements for a business; remove the assessment of whether market participants are capable of replacing any missing elements; add guidance to help entities assess whether an acquired process is substantive; narrow the definitions of a business and of outputs; and introduce an optional fair value concentration test. The Board also added examples to illustrate the application of the guidance in IFRS 3 on the definition of a business.
Acquiring a business IFRS 3 Redefinition of a business
Determining whether an acquired set of activities and assets is a business or not, could result in significantly different accounting outcomes, both at the date of acquisition (i.e., at initial recognition) and subsequently. The previous guidance on the definition of a business created some diversity in practice. IFRS 3 Redefinition of a business
Since the amendments apply prospectively to transactions or other events that occur on or after the date of first application, most entities will likely not be affected by these amendments on transition. However, entities considering the acquisition of a set of activities and assets after first applying the amendments should update their accounting policies on a timely basis.
Entities also need to be aware that the amendments could be relevant in other areas of IFRS. For example, the definition of a business may also be relevant where a parent loses control of a subsidiary and has early adopted Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28), as issued in September 2014.
Market participant’s perspective IFRS 3 Redefinition of a business
IFRS 3 adopts a market participant’s perspective in determining whether an acquired set of activities and assets is a business. This means that it is irrelevant whether the seller operated the set as a business or whether the acquirer intends to operate the set as a business. Such a fact-driven assessment, as included in the superseeded version of IFRS 3, may not provide the most useful information, as it does not consider the business rationale, strategic considerations and objectives of the acquirer. However, the IASB decided not to make any changes in this respect, because an assessment made from a market participant’s perspective and driven by facts (rather than the acquirer’s intentions) helps to prevent similar transactions being accounted for differently. Also, the Board noted that bringing more subjective elements into the determination would likely have increased diversity in practice.
Here is an overview of the amendments IFRS 3