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IASB issues amendments to IFRS 3 Business Combinations

07 November 2018

Following its post-implementation review of IFRS 3, the International Accounting Standards Board (IASB) has issued amendments to the definition of a business to help companies determine whether an acquisition made is of a business or a group of assets.


New definition of a ‘business’

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.

This emphasises that the output of a business is to provide goods and services to customers. This contrasts with the previous definition which focused on economic benefits to investors and others (ie “…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 amendments also clarify that, to be considered a business, an acquisition must include an input and a substantive process that together significantly contribute to the ability to create outputs. The amendments include a framework to assist when evaluating when an input and substantive process are present – including for early stage companies that have not yet generated outputs.

In addition, the IASB has introduced an optional ‘concentration test’ to permit a simplified assessment of whether or not an acquired set of activities and assets is a business. The test can be applied by choice on a transaction by transaction basis. A transaction will treated as an acquisition of assets (ie not a business) if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or groups of similar identifiable assets.


Who is likely to be affected by the amendments and what will the impact be?

The amendments are expected to result in more acquisitions being accounted for as asset acquisitions across all industries, particularly real estate, pharmaceutical, and natural resources.

There can be significant differences between the accounting for a business combination compared with the acquisition of assets. Differences include the recognition of goodwill, recognition and measurement of contingent consideration, accounting for transaction costs, and accounting for deferred tax.


When are the amendments effective?

Companies are required to apply the amended definition of a business for periods beginning on or after 1 January 2020 to acquisitions that occur on or after that date. Earlier application is permitted although entities within the EU should note that the amendment is not yet EU endorsed.

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