The IASB has issued Definition of a Business and Accounting for Previously Held Interests, an exposure draft of proposed amendments to IFRS 3 and IFRS 11, with comments to be received by October 31, 2016
IFRS 3 defines a business as “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.” Following the Post-implementation Review of IFRS 3, the Board concluded in 2015 that many stakeholders have concerns about how to interpret and apply this definition. Among other things, problems arise from its inherent broadness; in assessing the relevance of the processes acquired as part of the acquired set of activities and assets, and the significance of the processes missing from the set; and in applying the definition when the entity acquired doesn’t generate revenues. The proposed amendments are intended to bring greater clarity to the concept.
The standard currently explains that a business “consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business.” The IASB now proposes tweaking this to say the following: “To constitute a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together have the ability to contribute to the creation of outputs. However, a business need not include all of the inputs or processes that the seller used in operating that business.” They observe: “In order to assess whether a transaction is the acquisition of a business, an entity first assesses whether substantially all of the fair value of the gross assets acquired are concentrated in a single asset or group of similar assets. If the fair value is concentrated in this way then the transaction is not the acquisition of a business.” You might (very) loosely sum it all up this way – a business requires a number of interlocking parts, and must in some way amount to more than the mere sum of those separate parts, but at the same time, it might not amount to more than the sum of its parts by as much as it once did in the past, or is capable of doing in the future.
Perhaps not surprisingly, the IASB’s attempt to flesh out these concepts rapidly becomes bogged down in terminology and technicality. I expect most respondents will find the proposals more helpful than not, but I’m not sure the response will be overwhelmingly positive. If nothing else though, readers should appreciate the addition of various new examples on the point. For instance:
- “An entity (Purchaser) purchases a temporarily closed-down manufacturing facility (land and building) and related equipment from Seller. Purchaser also hires the employees that worked in the facility. No other assets or other activities are transferred.”
In most situations, one would imagine the presence of an organized workforce to be a strong indication of a business, but it doesn’t get there in this case because the transaction doesn’t “include another acquired input that the workforce could develop or convert into outputs. This is because the facility and the equipment cannot be developed or converted into outputs.” I’m not sure how often one acquires the services of a bunch of people without acquiring any of the things that they were previously doing, but anyway, I expect it helps to make the point.
A further point of interest in some jurisdictions will be whether the amendments help or hinder in aligning with regulatory concepts of a business (for instance, for purposes of filing a business acquisition report in connection with significant acquisitions), the parameters of which also aren’t always clear…
Moving on, IFRS 3 already addresses the situation where an acquirer obtains control of an acquiree in which it already held an equity interest – it requires remeasuring the acquirer’s previously held equity interest in the acquiree at its acquisition-date fair value and recognizing the resulting gain or loss, if any, in profit or loss or other comprehensive income, as appropriate. The IASB identified some diversity in practice in applying this to an interest in a business constituting a joint operation (because of perceived ambiguity in what is meant by an “equity interest”). It proposes dealing with this by adding the following:
- “Obtaining control of a business that is a joint operation (as defined in IFRS 11 Joint Arrangements) for which the acquirer held an interest in its assets and liabilities immediately before the acquisition date (either as a joint operator or as a party to a joint arrangement as defined in IFRS 11) is a business combination achieved in stages. Therefore, the acquirer shall apply the requirements for a business combination achieved in stages, including remeasuring previously held interests in the joint operation in the manner (already described in the standard).”
That part of the exposure draft at least should be uncontroversial, one assumes…
The opinions expressed are solely those of the author