It's not always easy to determine if an acquired set of activities and assets results in a business or only in an asset acquisition. A high level of judgment is required for this, and it's particularly important because this determination significantly affects how, from an accounting standpoint, the transaction is treated at its initial recognition and subsequent measurement.
The International Accounting Standards Board (IASB), after carrying out a post-implementation review, learned that stakeholders were concerned about the correct interpretation and application of the definition of a "business". In response, the IASB amended the definition and clarified the requirements.
These amendments are applicable prospectively for annual reporting periods beginning on or after 1 January 2020. Early adoption is permitted.
What's new in the requirements?
Under the amendments, preparers can now elect to use a fair value concentration test. This is a simplified assessment that can determine an asset acquisition, and has to be chosen on a transaction-by-transaction basis. If, substantially, all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the test is passed and the transaction results in an asset acquisition.
If either the preparer chooses not to apply the concentration test, or if the test is failed, then the preparer needs to follow the steps as set out in the diagram below:
For the IASB, the most critical distinction between a business and a non-business is the existence of a process. Thus, a business must include, at a minimum, an input and a process that together have the "ability to contribute to the creation of outputs". This means that the transaction needs to contain inputs and at least one substantive process. The amendments of IFRS 3 include guidance on how can one assess whether a process is substantive or not.
In addition, the IASB has removed the statement that said that that a business does not need to include all of its own necessary inputs and processes if these missing elements could be replaced by market participants. It has also narrowed the definition of "outputs".
These changes lead up to a definition of "business" that is narrower, with less room for (mis)interpretation—as a consequence, however, perhaps fewer business combinations will be recognised.
What do you need to do?
Nothing... for now. But as soon as you start applying the amendments, your accounting policies should be updated accordingly. I think these amendments are another little step in the right direction towards helping financial report preparers comply with the sometimes quite complex requirements of the IFRSs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
