A ‘business’ is defined in IFRS 3 as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of:
- Providing goods or services to customers
- Generating investment income (such as dividends or interest), or
- Generating other income from ordinary activities.
IFRS 3, paragraphs B7-B12D provide extensive guidance on the definition of a ‘business’. A ‘business’ consists of inputs and substantive processes applied to those inputs that have the ability to contribute to the creation of outputs.
An input is an economic resource that creates outputs or has the ability to contribute to the creation of outputs, when one or more processes are applied to it. Examples include:
- Non-current assets such as plant and equipment, intangible assets and rights-to-use non-current assets
- Intellectual property, and
- The ability to obtain access to necessary materials or rights and employees.
A process is any system, standard, protocol, convention or rule that, when applied to an input or inputs, creates outputs, or has the ability to contribute to the creation of outputs. Examples include:
- Strategic management processes
- Operational processes, and
- Resource management processes.
Processes are usually documented, but not always. The intellectual capacity of an organised workforce that has the necessary skills and experience to follow rules and conventions may provide the necessary processes that are capable of being applied to inputs to create outputs.
Accounting, billing, payroll and other administrative systems are not processes used to create outputs.
Outputs are the result of inputs and processes applied to inputs that:
- Provide goods or services to customers
- Generate investment income (such as dividends or interest), or
- Generate other income from ordinary activities.
As is evident from the above diagram, outputs are not required for there to be an integrated set of activities and assets (i.e., a business). The two essential elements for a business are merely inputs, and a substantive process, which together significantly contribute to the ability to create outputs. While businesses usually have liabilities, it should be noted that a business does not always have liabilities.
As noted above, a ‘business’ must, as a minimum, contain an input and a substantive process. IFRS 3 contains a complex set of requirements and examples to determine whether an acquired process is substantive, with different rules, depending on whether the acquired set of activities and assets:
- Has outputs, or
- Does not have outputs (e.g., an early stage company that has not started generating revenue).
The diagram below shows the criteria for determining whether a set of activities and assets that does not have outputs at the acquisition date is a substantive process.
Where a set of activities and assets has outputs at the acquisition date, there are two approaches for determining whether an acquired process is substantive. If the test in either approach is met, the acquired process is substantive, otherwise it is not substantive.
If the transaction includes a minimum of an input and a substantive process, or an input, a substantive process and an output, it would meet the definition of a business combination and be accounted for under IFRS 3.