The Interpretations Committee received a request to clarify the application of IFRS 3 Business Combinations by:
- joint operators for the acquisition of interests in joint operations as defined in IFRS 11; and
- venturers for the acquisition of interests in jointly controlled operations or assets as specified in IAS 31 Interests in Joint Ventures.
in circumstances where the activity of the joint operation or the activity of the jointly controlled operations or assets constitutes a business, as defined in IFRS 3.
At the January 2012 meeting the Committee decided to recommend to the Board that the Committee should develop guidance on behalf of the Board for the accounting for the acquisition of an interest in a joint operation in circumstances in which the activity of the joint operation constitutes a business as defined in IFRS 3.
At this meeting, the Committee agreed that such guidance should make general reference to the relevant principles of business combination accounting and related disclosure requirements in IFRS 3 and other IFRSs and include minimal application guidance. The Committee also decided to propose that issues on which the Committee noted diversity in practice should be specifically identified in the proposed amendment, ie:
- measuring identifiable assets and liabilities at fair value with few exceptions;
- recognising acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with the exception that the costs to issue debt or equity securities are recognised in accordance with IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments;
- recognising deferred tax assets and deferred tax liabilities arising from the initial recognition of assets and liabilities except for deferred tax liabilities arising from the initial recognition of goodwill; and
- recognising the residual as goodwill.
The Committee also discussed whether the proposed guidance should be applied by the joint operator on the formation of a joint operation. However, the Committee did not reach a consensus on this issue and decided that the recommendation to the Board would not address this because it was not the question that was submitted to the Committee.
The staff will present the Committee’s recommendation at a future Board meeting and at that meeting the staff will ask the Board whether the Board agrees with the Committee’s proposed amendment which provides guidance for the acquisition of an interest in a joint operation in circumstances in which the activity of the joint operation constitutes a business as defined in IFRS 3.
IAS 7 Statement of Cash Flows—Review of requests in relation to IAS 7
The IASB asked the Interpretations Committee to review requests that it had received in relation to IAS 7 with a view to determining whether it could look collectively at issues that the Committee had recently discussed regarding the classification of cash flows under IAS 7. The requests reviewed were:
- cash payments for deferred and contingent consideration arising from a business combination within the scope of IFRS 3 Business Combinations (November 2011);
- cash flows for an operator in a service concession arrangement within the scope of IFRIC 12 Service Concession Arrangements (November 2011);
- cash flow statement—classification of value added tax (Agenda decision, November 2004);
- classification of expenditure on unrecognised assets (Annual Improvements, April 2009);
- guidance on cash equivalents as defined by IAS 7 (Agenda decision, May and July 2009);
- classification of interest paid that is capitalised (Annual Improvements, 2010-2012 cycle);
- classification in the statement of cash flows of the flows arising from the settlement of contingent consideration in a business combination (Agenda decision, January 2012); and
- classification of cash flows relating to construction services under service concession arrangements (Annual Improvements, 2011-2013 cycle).
- cash flows in IAS 7 should be classified in accordance with the nature of the activity to which they relate, following the definitions of operating, investing and financing activities in paragraph 6 of IAS 7; and
- cash flows in IAS 7 should be classified consistently with the classification of the related or underlying item in the statement of financial position. This approach could also lead, in some circumstances to splitting transactions into their different operating, investing and financing components.
The Committee observed that the primary principle behind the classification of cash flows in IAS 7 is that cash flows should be classified in accordance with the nature of the activity in a manner that is most appropriate to the business of the entity in accordance with the definitions of operating, investing and financing activities in paragraph 6 of IAS 7. The Committee noted that it will use this as a guiding principle when analysing future requests on the classification of cash flows. The Committee also recommended that the Board should clarify the primary principle behind the classification of cash flows in IAS 7.
At a future meeting the staff will present to the Committee an analysis that will consider some other fact patterns that would illustrate the application of the identified principle behind the classification of the cash flows. The staff will report the Committee’s observations to the Board at a future meeting.