The International Accounting Standards Board (“IASB”) has recently released an exposure draft, ED/2016/1 Definition of a Business and Accounting for Previously Held Interests (Proposed Amendments to IFRS 3 and IFRS 11) (“the Exposure Draft”), which proposes amendments to clarify:
- The definition of a business; and
- How an acquirer should account for previously held interests in a business if acquiring control, or joint control, of that business.
The proposals in the Exposure Draft are relevant for Tier 1 and Tier 2 for-profit entities (i.e. entities reporting under New Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”) or NZ IFRS Reduced Disclosure Regime).
Once the IASB issues an amending standard based on the Exposure Draft, the New Zealand Accounting Standards Board (“NZASB”) will issue an equivalent amending standard in New Zealand.
The definition of a business
IFRS 3/NZ IFRS 3 Business Combinations (“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”.
The Exposure Draft proposes amending the guidance on the definition of a business to clarify that, 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.
The Exposure Draft also proposes a new two-part test to assess whether a transaction is the acquisition of a business:
- Part 1: An assessment of whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets (if it is, the transaction is not the acquisition of a business and part 2 of the test is not carried out)
- Part 2: Only if substantially all of the fair value of the gross assets acquired is not concentrated in a single asset or group of similar assets, evaluate whether the acquired set of activities and assets includes a substantive process – if it does, the transaction is a business combination, and if it does not, the acquisition is not a business combination.
The Exposure Draft proposes providing the following guidance to determine whether a set of activities and assets includes a substantive process:
- If a set of activities and assets does not, at the acquisition date, have outputs (for example, if it is an early-stage entity that has not started generating revenues), the set is a business only if it includes an organised workforce with the necessary skills, knowledge, or experience to perform an acquired substantive process (or group of processes). In addition, that acquired substantive process (or group of processes) must be critical to the ability to develop or convert another acquired input or inputs into outputs. Inputs that the organised workforce could develop (or be developing), or convert into outputs, include intellectual property that could be used to develop a good or service.
- If a set of activities and assets has outputs at the acquisition date (for example, if it generates revenue before the acquisition), the set is a business if either:
- the acquired set of activities and assets includes a process (or group of processes) that, when applied to an acquired input or inputs, contributes to the ability to continue producing outputs, even without the acquisition of an organised workforce, and that process (or group of processes) is considered unique or scarce, or cannot be replaced without significant cost, effort, or delay in the ability to continue producing outputs; or
- the acquired set of activities and assets includes an organised workforce with the necessary skills, knowledge, or experience to perform an acquired process (or group of processes) that when applied to an acquired input or inputs, is critical to the ability to continue producing outputs.
The process for determining whether a transaction is the acquisition of a business is thus:
The Exposure Draft provides a number of examples to illustrate the guidance provided. Two of these examples relate to the acquisition of investment properties, which has sometimes been a contentious issue under IFRS 3:
How an acquirer should account for previously held interests in a business if acquiring control, or joint control, of that business
The Exposure Draft clarifies that:
- Obtaining control of a business that is a joint operation where 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) is a business combination achieved in stages. This means that the acquirer must re-measure its previously held interests in the joint operation.
- A joint operator or a party that participates in, but does not have joint control of, a joint operation, might increase its interest in a joint operation in which the activity of the joint operation constitutes a business by acquiring an additional interest in the joint operation. In such circumstances, the joint operator may retain joint control, or the party that participates in, but does not have joint control of, the joint operation, may obtain joint control of the joint operation. In such circumstances, previously held interests in the assets and liabilities of the joint operation must not be re-measured.
The Exposure Draft is available here.
Making a submission
Information on making a submission to the NZASB is available here. Submissions must be made by 30 September 2016.
Information on making a submission to the IASB is available here. Submissions must be made 31 October 2016.
For more on the above, please contact your local BDO representative.
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