Insights into PFRS 3: Definition of a Business

This Accounting Alert is issued to provide a summary of the amendments issued by the International Accounting Standards Board (IASB) on IFRS 3, Business Combinations, which clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition.

Introduction

Following a Post-implementation Review (PIR) of IFRS 3, the IASB noted that many stakeholders had concerns about how to interpret and apply the definition of a business. These concerns arose for several reasons, including the difficulty to assess whether the processes acquired are sufficient to constitute one of the elements required for an acquired set of activities and assets to be a business and the difficulty in assessing how to apply the definition of a business if the acquired set of activities and assets does not generate revenue.

Summary

In summary, the amendments:

  • clarify the minimum attributes that the acquired set of activities and assets must have to be considered a business
  • remove the assessment of whether market participants are able to replace missing inputs or process and continue to produce outputs
  • narrow the definition of a business and the definition of outputs
  • add an optional concentration test that allows a simplified assessment of whether an acquired set of activities and assets is not a business

A New Definition

The amendments replace the wording in the definition of a business as 'an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities'. 

Five Steps to Determining a Business

The below steps and considerations are described in the amended Standard to determine if the acquired set of activities and assets is a business:

Step 1 - Consider whether to apply the concentration test

Step 2 - Consider what assets have been acquired

Step 3 - Consider how the fair value of gross assets acquired is concentrated

Step 4 - Consider whether the acquired set of activities and assets has outputs

Step 5 - Consider if the acquired process is substantive 

Please refer to the attached Insights into PFRS 3 article for further details into:

  • What is the optional concentration test?
  • Calculation of the concentration test
  • What are the minimum requirements to meet the definition of a business?
  • Is the acquired process substantive?
  • Transition details
  • Examples in practice

See attached copy of this article for further details.