09/11/2016 - EFRAG's Final Comment Letter on the IASB's Exposure Draft ED/2016/1 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. 

EFRAG appreciates the difficulties in drafting a screening test that is easy to apply, addresses concerns that the existing definition of a business captures some asset acquisitions and reaches the appropriate conclusion in every possible set of facts and circumstances. However, we are concerned that, as currently drafted, the screening test may, in some instances, result in inappropriate conclusions.

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. However, we have some concerns about the presence of goodwill as an indicator, the guidance on acquired contracts and the role of an organised workforce.

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 and we provide detailed comments on the proposed illustrative examples.

Further, EFRAG encourages the IASB and the FASB to reach converged solutions on their respective proposed amendments.

Finally, while welcoming the IASB’s efforts to provide clarity, EFRAG also observes that the tension arising from the distinction between business combinations and asset acquisitions originates to a significant degree from differences in the accounting. EFRAG therefore recommends that in due course the IASB should analyse whether or not these accounting differences are justified by differences in the economic substance of the two classes of transaction.

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.

In relation to the transition requirements, EFRAG agrees that the proposals should be applied prospectively.

EFRAG's final comment letter can be accessed here.