27/07/2016 - EFRAG's Draft Comment Letter on the IASB's Exposure Draft ED/2016/1 Definition of a Business and Accounting for Previously Held Interests
EFRAG has issued its Draft Comment Letter on the IASB's Exposure Draft Definition of a Business and Accounting for Previously Held Interests.
On 28 June 2016, the IASB issued the Exposure Draft ED/2016/1 Definition of a Business and Accounting for Previously Held Interests (the 'Exposure Draft') with a comment period ending on 31 October 2016.
The purpose of the Exposure Draft is to clarify the application of the definition of a business. The Exposure Draft also proposes guidance on the accounting for previously held interests in the assets and liabilities of a joint operation that meets the definition of a business.
In response to the amendments on the definition of a business, EFRAG welcomes the IASB’s objective of providing clearer application guidance to help determine when a set of assets and activities constitutes a business. Many preparers of financial statements have said that the definition in IFRS 3 Business Combinations is too broad and lacks guidance on what should not be considered a business.
Overall, EFRAG believes that the proposals provide a more comprehensive framework for distinguishing business combinations from asset acquisitions compared to the current guidance in IFRS 3, and should therefore help to reduce the workload for preparers in making this distinction especially in more problematic situations.
We agree that a business must include, at a minimum, an input and a substantive process that together have the ability to contribute to the creation of outputs. We also support the inclusion of a ‘screening test’. We understand this is intended to serve as a practical solution to allow entities to make the distinction relatively quickly in cases that are predominantly asset acquisitions, thereby limiting the need for further analysis. This should result in cost savings for preparers in these cases. However, we suggest some improvements are made to the application of the proposed screening test in relation to more borderline cases. In respect of the proposed guidance on evaluating whether an acquired process is substantive, we agree with having two different sets of criteria depending on whether the set of activities and assets has outputs.
We agree that examples are important in illustrating the application of the principles in the proposed guidance. However, we recommend that the examples focus more on the areas of the guidance that require significant judgement.
Finally, EFRAG encourages the IASB and the FASB to reach converged solutions on their respective proposed amendments.
In response to the amendments on accounting for previously held interests, EFRAG supports the IASB’s proposals to clarify the accounting for previously held interests in the assets and liabilities of a joint operation in the two types of transactions addressed in the Exposure Draft.
EFRAG requests comments by 18 October 2016. You can comment on EFRAG’s draft comment letter by clicking on the ‘Comment publication’ link below.
EFRAG's draft comment letter can be accessed here.