IFRS 3: Definition of a Business

In October 2018, the IASB issued ‘Definition of a Business’ making amendments to IFRS 3 ‘Business Combinations’.

The amendments are a response to feedback received from the post-implementation review of IFRS 3 (‘the Standard’). They clarify the definition of a business, with the aim of helping entities to determine whether a transaction should be accounted for as an asset acquisition or a business combination.

In summary, the amendments:

• clarify the minimum attributes that the acquired set of activities and assets must have to be considered a business
  
  
• remove the assessment of whether market participants are able to replace missing inputs or processes and continue to produce outputs
  
  
• narrow the definition of a business and the definition of outputs
  
  
• add an optional concentration test that allows a simplified assessment of whether an acquired set of activities and assets is not a business.

Have the amendments changed the definition?

Yes. The changes narrow the definition by:

• focusing on providing goods and services to customers
• removing the emphasis from providing a return to shareholders
• removing the reference to ‘lower costs or other economics benefits’.

The new definition now reads:

‘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.’

Five steps to determining a business

The below steps and considerations are described in the amended Standard to determine if the acquired set of activities and assets is a business:

Step 1 - Consider whether to apply the concentration test

Step 2 - Consider what assets have been acquired

Step 3 - Consider how the fair value of gross assets acquired is concentrated

Step 4 - Consider whether the acquired set of activities and assets has outputs

Step 5 - Consider if the acquired process is substantive

Download the full article 'Insights into IFRS - Definition of a Business' for further details into:

• What is the optional concentration test?
• Calculation of the concentration test
• What are the minimum requirements to meet the definition of a business?
• Is the acquired process substantive?
• Transition details
• Examples in practice.

We hope you find this article helpful in giving you some insight into the new definition of a business. If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or contact your local member firm.