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Invitation to Comment – Definition of a Business and Accounting for Previously Held Interests (proposed amendments to IFRS 3 and IFRS 11)
Oct 31, 2016

Crowe Horwath Comment Letter IFRS3 311016

Appendix 1 - Responses to Questions inInvitation to comment - Definition of a Business and Accounting for Previously Held Interests (proposed amendments to IFRS 3 and IFRS 11)

Question

Response

The Board is proposing to amend IFRS 3 to clarify the guidance on the definition of a business. Do you agree with these proposed amendments to IFRS 3?

In particular, do you agree with the Board's conclusion that if substantial all the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, that the set of activities and assets is not a business?

Why or why not? If not what alternative would you propose, if any, and why?

In our opinion a concentration of fair value in a single identifiable asset or group of similar identifiable assets is evidence that the set of activities and assets may not be a business but this test alone should not be determinative. This test should be considered in conjunction with the other indicators set out in paragraph B12.

We consider that the application of such a strict rule could cause issues in accounting for business combinations in certain industries where there can be a concentration of assets, for example in the hotel industry or in businesses involved in property letting or development.

If the IASB intend to retain this as a determinative test we suggest that the wording is amended to clarify that an excess of purchase consideration over the fair value of the net assets acquired is evidence that there is not a concentration of fair value in a single identifiable asset or group of similar identifiable assets.

In addition to the above we find a number of the examples to be confused as to the reason for the conclusions reached, in particular examples H and I where despite there appearing to be a concentration of assets the transfer of employees is treated as the determining factor. In such an industry we are unclear why a significant value is placed on the workforce and why the accounting appears to reach a different conclusion for such similar businesses.

IFRS 3 is meant to be a principles based standard and we would challenge whether the introduction of such a rules based amendment improves financial reporting. The IASB should be encouraging preparers to assess acquisitions against a wide range of criteria and to then disclose the judgement reached.

In our opinion the amendment would be improved by the Board providing guidance on treatment of acquisitions that are not deemed to be a business, and in particular how the excess of purchase consideration over fair value should be treated. In our view this can give rise to divergence in practice and guidance should be issued.

The Board and the FASB reached substantially converged tentative conclusions on how to clarify and amend the definition of a business. However the wording of the Board's proposals is not fully aligned with FASB's proposals.

Do you have any comments regarding the differences in the proposals, including any differences in practice that could emerge as a result of the different wording.

We have not studied the differences in detail however we would comment that in our experience differences in wording tend to result in divergence in practice. We note that the question comments that the tentative conclusions are only 'substantially converged' and we would therefore encourage the Boards to be clear about the areas of difference to ensure transparency to users, preparers and auditors about how the Boards intend the conclusions to be interpreted.

To address diversity of practice regarding acquisitions of interest in businesses that are joint operations, the Board is proposing to add paragraph 42A to IFRS 3 and amend paragraph B33C of IFRS 11 to clarify that:

  1. On obtaining control, an entity should remeasure previously held interests in the assets and liabilities of the joint operation in the manner described in paragraph 42 of IFRS 3; and
  2. On obtaining joint control, an entity should not remeasure previously held interests in the assets and liabilities of the joint operation.

Do you agree with these proposed amendments to IFRS 3 and IFRS 11? If not, what alternative would you propose, if any, and why?

We agree with the proposed amendments.   

The Board is proposing the amendments to IFRS 3 and IFRS 11 to clarify the guidance on the definition of a business and the accounting for previously held interests be applied prospectively with early application permitted.

Do you agree with these proposed transition requirements? Why or or why not?

We agree with the proposed transition requirements.