Proposed changes to clarify the definition of a business and accounting for previously held interests

The International Accounting Standards Board (IASB) recently issued Exposure Draft ED/2016/01 Definition of a Business and Accounting for Previously Held Interests (ED 275 in Australia) that proposes to amend AASB 3 Business Combinations and AASB 11 Joint Arrangements to clarify:

  • The definition of a ‘business’, and
  • How to account for a previously held interest when an entity obtains control of a business that is a joint operation, and when it obtains joint control of a business that is a joint operation.

The proposed changes are a result of feedback received by the IASB in its post-implementation review of IFRS 3 Business Combinations (AASB 3). These changes are in line with similar US proposals which would result in IFRS 3 and US GAAP regarding business combinations being substantially converged.

Changes to AASB 3 - Accounting for previously held interests – obtaining control of a joint operation

ED 275 proposes to clarify that, when an entity obtains control of a business that is a joint operation, the entity applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation to fair value.

Changes to AASB 3 - Definition of a ‘business’

ED 275 includes the following proposals to clarify the definition of a ‘business’:

  1. To be considered a business, an acquired 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. This means that it would not be necessary for all of the inputs and processes needed to create outputs to be acquired for the set of activities and assets to be a business
  2. Removing the statement that a set of activities and assets is a business if market participants can replace the missing elements and continue to produce outputs
  3. Revising the definition of ‘outputs’ to focus on goods and services provided to customers, and removing the reference to the ability to reduce costs
  4. The acquisition does not constitute a ‘business’ if, at the transaction date, substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets
  5. Adding guidance to help determine whether a substantive process has been acquired, and
  6. Adding examples to help with the interpretation of what is considered a business.

Changes to AASB 3 - Transition

The IASB is proposing that both these amendments to AASB 3 only apply to a business combination where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after the effective date of the amendments, with early adoption permitted.

Accounting for previously held interest – obtaining joint control of a joint operation

The IFRS Interpretations Committee noted that there is diversity in practice in accounting for previously held interests in the assets and liabilities of a joint operation when an investor obtains joint control of a business that is a joint operation. The issue is whether an entity applies the requirements for a business combination achieved in stages to those previously held interests when the investors obtains joint control.

In ED 275, the IASB proposes that, when an investor obtains joint control of a business that is a joint operation, the entity should not remeasure previously held interests in the assets and liabilities of the joint operation. This is because the fact pattern is analogous to a transaction where an investment in an associate becomes an investment in a joint venture and vice versa. In such cases, AASB 128 Investment in Associates and Joint Ventures, paragraph 24, prevents the investor from remeasuring its retained interests.

Transition

The IASB is proposing that this amendment to AASB 11 only applies to transactions for which joint control is obtained on or after the beginning of the first annual reporting period beginning on or after the effective date of the amendment, with early adoption permitted.