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Sunday 19 February 2017

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Definition of a Business and Accounting for Previously Held Interests (Proposed amendments to IFRS 3 and IFRS 11)


Definition of a Business and Accounting for Previously Held Interests (Proposed amendments to IFRS 3 and IFRS 11)


The International Accounting Standards Board (the Board) proposes to amend IFRS 3 Business Combinations and IFRS 11 Joint Arrangements. The amendments propose to clarify:

  1. the definition of a business; and
  2. the accounting for previously held interests 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.

Definition of a Business:

 

In 2014 and 2015, the Board carried out a Post-implementation Review (PIR) of IFRS 3. That review identified that stakeholders find it difficult to apply the definition of a business in IFRS 3.

Defining a business is important. This is because the financial reporting requirements for the acquisition of a business are different from the requirements for the purchase of a group of assets that does not constitute a business. The proposed amendments are intended to provide entities with clearer application guidance to help distinguish between a business and a group of assets when applying IFRS 3.

Because IFRS 3 is the result of a joint project between the Board and the US Financial Accounting Standards Board (FASB), the business combinations requirements in IFRS Standards and US Generally Accepted Accounting Principles (US GAAP) are substantially converged. The FASB received similar feedback regarding difficulties in applying the definition of a business in a PIR of the corresponding US Standard. Consequently, the FASB and the Board have worked to respond to this feedback and the proposed amendments to IFRS 3 and the Proposed Accounting Standards Update Clarifying the Definition of a Business, issued by the FASB in November 2015, are based on substantially converged tentative conclusions.

Further details on this project can be found here.

Accounting for previously held interests:

 

The Board was informed that there is diversity in practice in accounting for previously held interests in the assets and liabilities of a joint operation in two types of transactions: those in which an entity obtains control of a business that is a joint operation and those in which it obtains joint control of a business that is a joint operation. The proposed amendments to IFRS 3 and IFRS 11 are intended to clarify the accounting for each of these types of transactions.

Further details on this project can be found here.

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