Amendments to the business definition in IFRS 3: Business Combinations

The International Accounting Standards Board (IASB) has made amendments to the definition of a business in IFRS 3 Business Combinations to help companies determine whether an acquisition is a business or a group of assets. The distinction is important because an acquirer may recognise goodwill (or a bargain purchase) when acquiring a business but not a group of assets.

The amendments

  • The previous focus on the output of the business being returns to investors has changed. The new definition emphasises that a business’ output is to provide goods and services to customers or generate other income from ordinary activities. 
  • To be considered a business, ‘an integrated set of activities and assets’ must now include ‘an input and a substantive process that together significantly contribute to the ability to create an output’.  
  • There is new guidance on whether a process is substantive with greater focus on the input of an organised workforce.  
  • Assess what has been acquired in its current state and condition, removing the assessment of whether market participants are capable of replacing missing inputs or processes.
  • An optional simplified assessment (the concentration test) has been introduced. This concludes that an acquisition is not a business if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset (or group of similar identifiable assets).

Companies are required to apply the amended definition of a business to acquisitions that occur on or after 1 January 2020 although earlier application is permitted.

If you require any further information on IFRS 3 or any other international financial reporting standards, please contact Paul Merris.