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© 2018 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. IFRS 3 amendments – Clarifying what is a business 26 October 2018 Amendments provide more guidance on the definition of a business, but complexities remain Highlights − Optional concentration test to get to asset acquisition − Otherwise, the assessment focuses on the existence of a substantive process – see diagram − Effect is that the new definition is narrower but may require a complex assessment − Effective date – January 2020 With a broad business definition, determining whether a transaction results in an asset or a business acquisition has long been a challenging but important area of judgement. The IASB has issued amendments to IFRS 3 Business Combinations that seek to clarify this matter. Optional concentration test The amendments include an election to use a concentration test. This is a simplified assessment that results in an asset acquisition if substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of similar identifiable assets. Assessment focuses on substantive process If a preparer chooses not to apply the concentration test, or the test is failed, then the assessment focuses on the existence of a substantive process. Narrower definition, potential complexity The effect of these changes is that the new definition of a business is narrower – this could result in fewer business combinations being recognised. The amendments may require a complex assessment to decide whether a transaction is a business combination or an asset acquisition. We outline the steps an entity takes for this assessment in the diagram below. Mike Metcalf Partner KPMG in the UK “The clarification and narrowing of the current, vague definition of a business is welcome. Some of the new tests, however, are quite complex.” Mike Metcalf KPMG’s global IFRS business combinations leader

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IFRS 3 amendments – Clarifying what is a business26 October 2018

Amendments provide more guidance on the definition of a business, but complexities remain

Highlights − Optional concentration test to get to asset acquisition

− Otherwise, the assessment focuses on the existence of a substantive process – see diagram

− Effect is that the new definition is narrower but may require a complex assessment

− Effective date – January 2020

With a broad business definition, determining whether a transaction results in an asset or a business acquisition has long been a challenging but important area of judgement.

The IASB has issued amendments to IFRS 3 Business Combinations that seek to clarify this matter.

Optional concentration testThe amendments include an election to use a concentration test. This is a simplified assessment that results in an asset acquisition if substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of similar identifiable assets.

Assessment focuses on substantive processIf a preparer chooses not to apply the concentration test, or the test is failed, then the assessment focuses on the existence of a substantive process.

Narrower definition, potential complexityThe effect of these changes is that the new definition of a business is narrower – this could result in fewer business combinations being recognised.

The amendments may require a complex assessment to decide whether a transaction is a business combination or an asset acquisition. We outline the steps an entity takes for this assessment in the diagram below.

Mike MetcalfPartnerKPMG in the UK

“The clarification and narrowing of the current, vague definition of a business is welcome. Some of the new tests, however, are quite complex.”

Mike MetcalfKPMG’s global IFRS business combinations leader

2 | IFRS 3 amendments – Clarifying what is a business

3 | IFRS 3 amendments – Clarifying what is a business

Find out moreThe amendment applies to businesses acquired in annual reporting periods beginning on or after 1 January 2020. Earlier application is permitted.

Visit our IFRS – Business Combinations page for more information on the IASB’s consolidation suite of standards.

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https://home.kpmg.com/xx/en/home/services/audit/international-financial-reporting-standards/business-combinations.html

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