IFRIC agenda decision – Vendor payments during handover periods

IFRS Interpretations Committee (the Committee) agenda decisions are those issues the Committee decided not to include on its agenda. Although not authoritative guidance, these decisions are regarded as being highly persuasive in practice. All entities reporting under IFRS® Accounting Standards should be aware of these decisions, as they could impact how particular transactions and balances are accounted for.

This April 2024 agenda decision relates to a request about how to account for payments to the sellers of an acquired business if those payments are contingent on the seller’s continued employment during a post-acquisition handover period.

Fact pattern

Entity B acquires a business. As part of the acquisition agreement, the sellers must continue as employees of the acquired business. Their continued employment ensures appropriate knowledge transfer from the sellers to the new management team (i.e., an orderly handover of the business).

The sellers are compensated for their services at a level comparable to other management executives. Entity B agrees to make additional payments to the sellers, contingent on the following:

• Performance of the acquired business, and
• Continued employment of sellers for a limited period after acquisition to complete the handover.

The sellers are entitled to receive additional payments if their employment is terminated due to specific circumstances, such as death or disability, or if the entity agrees. The sellers forfeit the additional payments if their employment is terminated in any other circumstance.

Findings

Evidence gathered by the Committee indicated no significant diversity in accounting for these types of payments. The Committee found in practice that entities apply the January 2013 agenda decision, Continuing employment (IFRS 3 Business Combinations). Such payments are accounted for as compensation for post-combination services rather than as additional purchase consideration for the acquisition, unless the service condition is not substantive.
 

In the January 2013 agenda decision, the Committee observed that where contingent payments are automatically forfeited if employment terminates, they would be considered compensation for post-combination services, and not additional consideration for an acquisition. This would apply unless the service condition is not substantive (IFRS 3, paragraph B55(a)).

Next steps

The Committee concluded that the matter did not have widespread effect and decided not to add a standard-setting project to its work plan.

Need help?

Please contact our IFRS^® Advisory team if you need assistance with your business combination accounting, including contingent vendor payments.

For more on the above, please contact your local BDO representative.

This article has been based on an article that originally appeared on BDO Australia, read the original article here.