October 22, 2018
The International Accounting Standards Board (Board) has today issued narrow-scope amendments to IFRS 3 Business Combinations to improve the definition of a business. The amendments will help companies determine whether an acquisition made is of a business or a group of assets.
The amended definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others. In addition to amending the wording of the definition, the Board has provided supplementary guidance.
Distinguishing between a business and a group of assets is important because an acquirer recognises goodwill only when acquiring a business.
The amendments arose from a post-implementation review (PIR) of IFRS 3, an assessment carried out to determine whether an IFRS Standard works as intended. Following feedback from the PIR, the Board is also working on another project linked to IFRS 3 in which it is exploring possible improvements to the accounting for goodwill.
Companies are required to apply the amended definition of a business to acquisitions that occur on or after 1 January 2020. Earlier application is permitted.
Definition of a Business (Amendments to IFRS 3) is available here (requires eIFRS premium subscription).
Notes to editors:
Previous definition of a business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.
New definition of a business: 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.
IFRS 3 was the result of a joint project between the IASB and the US Financial Accounting Standards Board (FASB). The FASB amended its definition of a business last year. The IASB’s clarification to its definition brings the two Boards’ respective Standards closer.