Rizal Technological University

College of Business, Entrepreneurship, and Accountancy

Department of Accountancy

Amendments to IFRS 3:

Presented by:
Espineda, Miguel Antonio A.
Ablang, Jolina C.
Dipasupil, Ma. Angelica P.
Ilaga, Pia Michaella N.

CBET-01-902A
Table of Contents
The need to define a business: Identifying a business combination ........................................ 4
Milestones in amending the Definition of a Business ............................................................. 4
Additional Areas of focus in the IFRS 3 Post-Implementation Review ..................................................... 4
IASB and US FASB ...................................................................................................................................... 4
Post-Implementation Review Objectives.................................................................................................. 5
Post-Implementation Review Process ...................................................................................................... 5
Post-Implementation Review Scope ......................................................................................................... 5
Summary of the PIR Findings .................................................................................................................... 5
Proposed amendments to IFRS 3 Definition of a Business ....................................................................... 6
Summary of Amendments: ....................................................................................................................... 6
Effective Date ............................................................................................................................................ 6
Amended Definition of a business ............................................................................................................ 7
Elements of a Business.............................................................................................................................. 7
Clarifying the definition of a business (Expanding the PIR findings) ........................................................ 8
Optional Concentration Test .................................................................................................. 9
Design for Optional Concentration Test ................................................................................................. 10
Finalizing the 2018 Amendments ........................................................................................................... 11
Making the Concentration Test Optional ............................................................................................... 11
Two (2) Consequences of False Positive (summary through table or concept map) ............................. 12
Calculation of the Concentration Test .................................................................................................... 13
How is the fair value of gross assets acquired calculated? ................................................................. 13
Application of Definition of Business ................................................................................... 16
Minimum requirements to be a business ............................................................................................... 16
Expound elements of a business............................................................................................................. 16
Market participant’s perspective ............................................................................................................ 17
Market participant’s ability to replace missing elements....................................................................... 17
The term ‘capable of’ in the definition of a business ............................................................................. 18
Narrowed definition of outputs .............................................................................................................. 18
Assessing Whether an Acquired Process is Substantive ........................................................ 19
Problems Encountered in the previous standard ................................................................................... 19
Does the acquired set of activities and assets have outputs at the acquisition date? ........................... 19
Acquired set of activities and assets does not have outputs: ................................................................ 20

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 Acquired set of activities and assets have outputs................................................................................. 21
Acquisition of contract ............................................................................................................................ 22
Goodwill as indication of substantive ..................................................................................................... 22
References .......................................................................................................................... 25

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Definition of a Business (Amendments to IFRS 3)

The need to define a business: Identifying a business combination

An entity shall determine whether a transaction or other event is a business combination by

applying the definition in this IFRS, which requires that the assets acquired and liabilities
assumed constitute a business. If the assets acquired are not a business, the reporting entity shall
account for the transaction or other event as an asset acquisition.

Milestones in amending the Definition of a Business

Milestones prior to the inclusion of the Definition of a Business in the main agenda:
• October 2011 - IFRS 3 post-implementation review added to the IASB agenda
• July 2013 - IFRS 3 post-implementation review process formally commenced
• January 2014 - Request for Information Post-implementation Review: IFRS 3 Business
Combinations published
February 2015 - IASB formally added the definition of a business to the discussion on the
amendments to IFRS 3 in a joint project with the US Financial Accounting Standards Board
(FASB).
Additional Areas of focus in the IFRS 3 Post-Implementation Review
1. effectiveness and complexity of testing goodwill for impairment
2. subsequent accounting for goodwill (i.e., impairment-only approach versus
amortization and impairment approach)
3. challenges in applying the definition of a business
4. identification and fair value measurement of intangible assets such as customer
relationships and brand names.
IASB and US FASB
• The joint project between the board and US FASB contained the same definition of a
business as the definition in US Generally Accepted Accounting Principles (US GAAP)
• It should be noted that subsequent PIRs of IFRS 3 and the aspect of US GAAP indicated
that the definition of a business was, in practice viewed as capturing broader range of
transactions under US GAAP than under IFRS 3.
• The amendments to IFRS 3 are based on conclusions like those reached by the FASB in
amendments it made to its requirements in 2017, although the two sets of amendments
differ in some respects.

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 • The Board expects that the amendments will lead to more consistency in applying the
definition of a business across entities applying IFRS Standards and entities applying
US GAAP.
June 2015 – IASB issued their Post-implementation Review (PIR) Report and Feedback
Statement of IFRS 3 Business Combination that included the findings and feedback statements
on the definition of a business
Post-Implementation Review Objectives:
1. To review the important issues that had been identified as contentious during the
development of the pronouncement.
2. To consider any unexpected costs or implementation problems that have been
encountered
Post-Implementation Review Process:
1. Initial identification and assessment of the matters to be examined, which were then the
subject of a public consultation form of a Request for Information (RFI)
2. Considering the comments received from RFI along with the information that IASB
gathered through other consultative activities and review of relevant academic studies.
Post-Implementation Review Scope:
1. The definition of a business
2. Fair value measurement in a business combination
3. The separate recognition of intangible assets from goodwill and the accounting for
negative goodwill
4. Impairment of goodwill and indefinite-life intangible assets
5. Accounting for non-controlling interests
6. Accounting for step acquisitions and loss of control
7. Disclosures.
Summary of the PIR Findings:
• Many participants think that the definition of a business is too broad, and that more
guidance is needed to determine whether a transaction is a business combination or an
asset acquisition, especially when the processes acquired are not significant or when the
entity acquired does not generate revenues.
June 2016 – in a combination of two of its current implementation projects, the IASB has
published “Definition of a Business and Accounting for Previously Held Interests (Proposed
amendments to IFRS 3 and IFRS 11) through one exposure draft.

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Proposed amendments to IFRS 3 Definition of a Business
• A business consists of inputs and processes applied to those inputs that have the ability
to contribute to creating outputs, while a business need not include all of the inputs or
processes that the seller used in operating that business and need not have an output.
However, if there is no output, the set is a business only if it includes an organized
workforce with the necessary skills, knowledge, or experience to perform an acquired
substantive process that is critical to the ability to develop or convert another acquired
input into output.
• 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, then the set of activities and
assets is not a business.
• Tangible and intangible assets, different classes of tangible assets, identifiable
intangible assets in different intangible asset classes, financial assets and non-financial
assets, and different classes of financial assets shall not be combined into a single asset
or considered a group of similar assets.
October 2018 – IASB issued “Definition of a Business” making amendments to IFRS 3 Business
Combinations.
Summary of Amendments:
a. Clarify that to be considered a business, an acquired set of activities and assets must
include, at a minimum, an input and a substantive process that together significantly
contribute to the ability to create outputs
b. Remove the assessment of whether market participants are capable of replacing any
missing inputs or processes and continuing to produce outputs
c. Narrow the definitions of a business and of outputs by focusing on goods and services
provided to customers and by removing the reference to an ability to reduce costs
d. Add an optional concentration test that permits a simplified assessment of whether an
acquired set of activities and assets is not a business
Effective Date
An entity shall apply these amendments to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after 1
January 2020 and to asset acquisitions that occur on or after the beginning of that period.

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Amended Definition of a business
Old New
An integrated set of activities and assets that is An integrated set of activities and assets that is
capable of being conducted and managed for capable of being conducted and managed for
the purpose of providing a return in the form the purpose of providing goods or services to
of dividends, lower costs, or other economic customers, generating investment income
benefits directly to investors or other owners, (such as dividends or interest) or generating
members, or participants. other income from ordinary activities.

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.

Elements of a Business
A business consists of inputs and processes applied to those inputs that have the ability to
contribute to the creation of outputs.

Element Definition Examples

Input Any economic resource that creates outputs or has • tangible fixed assets
the ability to contribute to the creation of outputs, • right-of-use assets
when one or more processes are applied to it. • intangible assets
• intellectual property
Process Any system, standard, protocol, convention, or • strategic management
rule that, when applied to an input or inputs, processes
creates outputs or has the ability to contribute to • operational processes
the creation of outputs. • resource management
processes
Output The result of inputs and processes applied to those • revenue
inputs that provide goods or services to customers,
generate investment income (such as dividends or
interest) or generate other income from ordinary
activities.

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Clarifying the definition of a business (Expanding the PIR findings)
Stakeholders indicated that concerns on how to interpret and apply the definition of a business
arose for one or more of the following main reasons:

• IFRS 3 requires a fact-driven assessment that adopts the perspective of market

participants (acquirer and acquiree) and does not consider the business rationale,
strategic considerations and objectives of the acquirer
• Some sets of activities and assets might have been considered a business from the
perspective of particular market participants who could integrate the set in their
processes. However, the same sets of activities and assets might not have been considered
a business from the perspective of other market participants.
• The definition of a business used the wording ‘capable of being conducted and managed
for the purpose of providing’ a return. That wording did not help in determining whether
a transaction includes a business
• It was difficult to assess:
o Whether the processes acquired are sufficient to constitute one of the elements
required for an acquired set of activities and assets to be a business, and whether
any missing processes are so significant that the set is not a business
o How to apply the definition of a business if the acquired set of activities and assets
does not generate revenue
• The definition of a business was broad and IFRS 3 had no guidance identifying when an
acquired set of activities and assets is not a business

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Optional Concentration Test - is a simplified assessment that results in an asset acquisition if
substantially all of their fair value of the gross assets is concentrated in a single identifiable asset
or group of similar identifiable assets.

Test is successful The acquired set of activities and assets is

not a business and no further assessment
is required.

Test is not met or the entity does not carry The entity needs to assess whether or not
out the test the acquired set of assets and activities
meets the definition of a business in a
normal way.

The standard explains that the concentration test is met 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.

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NOTE: If the criteria in the test are met, this is the shortcut way of concluding that the acquisition
is not a business.

Liabilities are not taken into account because nearly all businesses have liabilities, but they do not
need to in order to be a business. Similarly, an acquired set of activities and assets that is not a
business may have liabilities.

Design for Optional Concentration Test

• Participants in the Post-implementation Review (PIR) of IFRS 3 noted that applying the
definition of a business involves significant judgements and that IFRS 3 provided little or
no guidance that identifies situations in which an acquired set of activities and assets is
not a business.
• In the 2018 amendments the Board added a concentration test that is designed to reduce
cost and complexity by avoiding the need for a detailed assessment in some circumstances.
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, the concentration test is met and
the set of activities and assets is considered not to be a business. If the concentration test
is met no further assessment is needed.
• The Board designed concentration test with the aim of making it easy to understand and
in-some straightforward cases that are easy to explain-simple to operate and less costly
than applying the detailed assessment otherwise required. To target the aim, the
concentration test focuses on a single identifiable asset or a single group of similar
identifiable assets.
• The Board did not expect entities to carry out detailed calculations to apply the test,
because detailed calculations would have frustrated the purpose of the test, which is to
permit a simplified assessment.
• The Board wanted the test to have the same outcome in the most circumstances as the
detailed assessment and wanted to minimize the risk that the outcome of applying the
concentration test could deprive users of financial statements of useful information.
• To confirm that the Board did not expect detailed calculations, the fair value of acquired
may normally be determined by reference to the fair value of consideration transferred.
• The Board concluded that whether a set of activities and assets includes a substantive
process does not depend on how the set is financed. Consequently, the concentration test
is based on the gross assets acquired, not on net assets.

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 • The existence of debt (for example, a mortgage loan financing a building) or other
liabilities does not alter the conclusion on whether an acquisition is a business
combination.
Finalizing the 2018 Amendments
• The Board specified that the gross assets considered in concentration test exclude cash
and cash equivalents acquired, deferred tax assets, and goodwill resulting from the effects
of deferred tax liabilities. These exclusions were made because cash acquired, and the tax
base of the assets and liabilities acquired, are independent of whether the acquired set of
activities and assets includes a substantive process.
• The Board made the concentration test optional. This change enables entities to assess
whether they have acquired a substantive process when, for example, such an assessment
would be more efficient than applying the concentration test or would result in a
conclusion that more faithfully represents the economics of a particular transaction.
The 2018 Amendments:
• specify that the election to carry out that test is available transaction by transaction; and
• do not prohibit an entity from carrying out the detailed assessment if the entity has
carried out the concentration test and concluded that the acquired set of activities and
assets is not a business. The Board decided that such a prohibition was unnecessary,
because if an entity intended to disregard the outcome of the concentration test, it could
have elected not to apply it.

• The Board also clarified some aspects of the guidance on a single identifiable asset and on
similar identifiable assets.
• The Board DID NOT:
o make the concentration test an indicator, rather than determinative. Such a change
would have been inconsistent with the objective of reducing the costs of applying
IFRS 3 by providing a test that is designed to be simple in some straightforward
cases that are easy to explain.
o provide further guidance on the term ‘substantially all’ because that term is already
used in several IFRS Standards
Making the Concentration Test Optional
• The Board considered accounting consequences that would occur if, when applied to a
particular transaction, the concentration test does not achieve the same outcome as the
detailed assessment otherwise required.

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 • The concentration test identifies some transactions as an asset acquisition. For all other
transactions, the entity must go on to perform the detailed assessment. The concentration
test never determines that a transaction is a business combination.
• In theory, the concentration test might sometimes identify a transaction as an asset
acquisition when the detailed assessment would identify it as a business combination. The
outcome would be a false positive. The Board designed the concentration test to minimize
the risk that a false positive could deprive users of financial statements of useful
information.
Two (2) Consequences of False Positive (summary through table or concept map)
1. the entity fails to recognize ‘core goodwill’ that is economically present in a business
combination but is not present in an asset acquisition. Nevertheless, if substantially all of
fair value of the gross assets acquired (including core goodwill) is considered in a single
identifiable asset (or a group of similar identifiable assets), the fair value of the core
goodwill cannot be a substantial part of the total fair value of the gross assets acquired.
Thus, information about the value of that core goodwill is unlikely to be material.
Moreover, if the fair value of the processes acquired is not significant, the detailed
assessment would unlikely to conclude that the process are substantive.
2. There are some other differences between the accounting required for a business
combination and the accounting required for an asset acquisition, including differences
relating to deferred tax, contingent consideration, acquisition-related costs, and gains on
bargain purchases. Those differences in accounting requirements are not driven by
differences between the economics of a business combination and the economics of an
asset acquisition. Therefore, the Board did not expect a false positive to result in a loss of
information about the economics of a business combination.
The concentration test might not identify an asset acquisition that would be identified by the
detailed assessment. That outcome would be a false negative. An entity is required to carry out
the detailed assessment in such a case and is expected to reach the same conclusion as if it had
not applied the concentration test. Thus, a false negative has no accounting consequences.

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Calculation of the Concentration Test
Types of Identifiable Asset Examples

Single Identifiable Includes any asset or ● Land

Asset group of assets that ● Customer lists
would be recognized and ● Trademarks
measured as a single ● Outstanding contracts
identifiable asset in a ● Product rights
business combination. ● Equipment

Group of Similar Assets are grouped when Examples of combinations not considered
Identifiable Assets they have a similar nature to be similar assets:
and have similar risks
● Tangible assets and intangible assets
associated with
● Tangible assets that are recognized
managing and creating
under different Standards (eg IAS 2
outputs from the assets.
‘Inventories’ and IAS 16 ‘Property,
Plant and Equipment’)
● Different classes of assets under IAS
16 (unless considered a single
identifiable asset)
● Financial assets and non-financial
assets
● Different classes of financial assets
under IFRS 9 ‘Financial Instruments’
● Assets with the same class but which
have significantly different risk
characteristics.

How is the fair value of gross assets acquired calculated?

The fair value of gross assets Or alternatively:
acquired is normally calculated
by:
The fair value of the consideration The fair value of identifiable assets (excluding cash
transferred and deferred tax assets)

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 Fair value of previously held The sum of:
interest
Fair value of non-controlling The fair value of consideration transferred
interest
Fair value of liabilities assumed The fair value of previously held interests
(other than deferred tax
liabilities)
The fair value of non-controlling interests
Gross assets excluded The fair value of net identifiable assets
(explained below) acquired
The fair value of gross assets The fair value of gross assets acquired
acquired

Gross assets exclude cash and cash equivalents, deferred tax assets and goodwill resulting from
the effects of deferred tax liabilities.
If the concentration test fails, or the entity opts not to apply the concentration test, then the entity
needs to consider the minimum requirements to meet the definition of a business and if the
acquired process is substantive.

EXAMPLE: Establishing the fair value of the gross assets acquired

An entity (Entity P) holds a 30% interest in another entity (Entity C). At a subsequent date (the
acquisition date), Entity P acquires a further 45% interest in Entity C and obtains control of it.
Entity C’s assets and liabilities on the acquisition date are the following:
1. a building with a fair value of P600
2. an identifiable intangible asset with a fair value of P350
3. cash and cash equivalents with a fair value of P150
4. deferred tax assets of P200
5. financial liabilities with a fair value of P750
6. deferred tax liabilities of P200 arising from temporary differences associated with the
building and the intangible asset
Entity P pays P225 for the additional 45% interest in Entity C. Entity P determines that at the
acquisition date the fair value of Entity C is P500, that the fair value of the non-controlling interest
in Entity C is P125 (25% x P500) and that the fair value of the previously held interest is P150
(30% x P500).

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ANALYSIS
When performing the optional concentration test, Entity P needs to determine the fair value of
the gross assets acquired.
Using the following calculation, Entity P determines that the fair value of the gross assets acquired
is P1,000, calculated as follows:
● the total (P1,250) obtained by adding:
o the consideration paid (P225), plus the fair value of the non-controlling interest
(P125) plus the fair value of the previously held interest (P150); to
o the fair value of the liabilities assumed (other than deferred tax liabilities) (P750);
less
● the cash and cash equivalents acquired (P150); less
● deferred tax assets acquired (P100) (in practice, it would be necessary to determine the
amount of deferred tax assets to be excluded only if including the deferred tax assets could
lead to the concentration test not being met).

Alternatively, the fair value of the gross assets acquired (P1,000) is also determined by:
● the fair value of the building (P600); plus
● the fair value of the identifiable intangible asset (P350); plus
● the excess (P50) of:
o The sum (P500) of the consideration transferred (P225), plus the fair value of the
non-controlling interest (CU125), plus the fair value of the previously held interest
(P150); over
o The fair value of the net identifiable assets acquired (P450 = P600 + P350 + P150
+ CU100 – P750).

The excess referred to above is determined in a manner similar to the initial measurement of
goodwill as stated in the Standard. Including this amount in determining the fair value of the
gross assets acquired means that the concentration test is based on an amount that is affected by
the value of any substantive processes acquired.
The fair value of the gross assets acquired is determined after making the following exclusions for
items that are independent of whether any substantive process was acquired:
● The fair value of the gross assets acquired does not include the fair value of the cash and
cash equivalents acquired (CU150) and does not include deferred tax assets (CU100) and

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 ● The deferred tax liability is not deducted in determining the fair value of the net assets
acquired (CU450) and does not need to be determined. As a result, the excess (CU50)
calculated above does not include goodwill resulting from the effects of deferred tax
liabilities

Application of Definition of Business

Minimum requirements to be a business

● The existence of a process (or processes) is what distinguishes a business from a set of
activities and assets that is not a business.
● The Board decided that to be considered a business, an acquired set of activities and assets
must include, at a minimum, an input and a substantive process that together significantly
contribute to the ability to create outputs.
● Furthermore, to clarify that a business can exist without including all of the inputs and
processes needed to create outputs, the Board replaced the term ‘ability to create outputs’
with ‘ability to contribute to the creation of outputs’.

Expound elements of a business

● Although businesses usually have outputs, outputs are not required for an integrated set
of activities and assets to qualify as a business. To be capable of being conducted and
managed for the purpose identified in the definition of a business, an integrated set of
activities and assets requires two essential elements—inputs and processes
applied to those inputs. A business need not include all of the inputs or processes that
the seller used in operating that business.
● If an acquired set of activities and assets has outputs, continuation of revenue does not on
its own indicate that both an input and a substantive process have been acquired.
● The nature of the elements of a business varies by industry and by the structure of an
entity’s operations (activities), including the entity’s stage of development.
o Established businesses often have many different types of inputs, processes and
outputs, whereas new businesses often have few inputs and processes and
sometimes only a single output (product).
o Nearly all businesses also have liabilities, but a business need not have liabilities.
Furthermore, an acquired set of activities and assets that is not a business might
have liabilities.

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 ● Determining whether a particular set of activities and assets is a business shall be based
on whether the integrated set is capable of being conducted and managed as a business by
a market participant. Thus, in evaluating whether a particular set is a business, it is not
relevant whether a seller operated the set as a business or whether the acquirer intends to
operate the set as a business.

Market participant’s perspective

● Some participants expressed their concerns with regards to exclusion of the business
rationale, strategic considerations and objectives of the acquirer which would not result in
the most useful information for users of financial statements.
● However, the Board concluded that the assessment should continue to be made from a
market participant’s perspective and to be driven by facts that indicate the current state
and condition of what has been acquired, rather than by considering what the acquirer
might intend to do with the acquired set of activities and assets.
● Basing this determination on facts, rather than on the intentions of the acquirer, helps to
prevent similar transactions being accounted for differently. In the Board’s perspective,
bringing those factors into the determination would have made the determination more
subjective and thus would have increased diversity in practice. Consequently, the Board
did not change this basis of conclusion in this regard.

Market participant’s ability to replace missing elements

● Before the 2018 Amendments, it was stated that a business need not include all of the
inputs or processes that the seller used in operating that business ‘if market participants
are capable of acquiring the business and continuing to produce outputs, for example, by
integrating the business with their own inputs and processes’. Many participants stated
that it can be challenging to assess whether market participants are capable of performing
such an integration, especially if only some market participants are capable of performing
such an integration.
● As a result, the Board decided to base the assessment on what has been acquired in its
current state and condition, rather than on whether market participants would be capable
of replacing any missing inputs or processes, for example by integrating the acquired
activities and assets. Therefore, the Board deleted the reference to such integration.
Instead, the amendments focused on whether acquired inputs and acquired
substantive processes together significantly contribute to the ability to create
outputs.

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The term ‘capable of’ in the definition of a business
● Many participants indicated that ‘capable of being conducted and managed for the
purpose of providing a return’ was too broad in scope to be helpful in distinguishing
businesses from assets. However, the Board concluded that it was not necessary to change
or clarify this phrase.
● The Board considered whether additional guidance was needed regarding the acquisition
of suppliers. In some cases, the acquirer integrates an acquired business with the result
that it no longer generates revenue.
o For example, an entity may acquire a supplier and subsequently consume all the
output from the supplier. The acquired inputs and processes are still ‘capable of’
generating revenue at the acquisition date and so could qualify as a business if the
criteria to be considered as substantive are met. The Board concluded that this
outcome was appropriate because the assessment focuses on what the acquirer
acquired, not on what the acquirer intends to do with what it acquired.
Accordingly, the Board retained the term ‘capable of’ as the basis for assessment.

Narrowed definition of outputs

The Board narrowed the definition of outputs to focus on goods and services provided to
customers, investment returns and other income from ordinary activities and to exclude returns
in the form of lower costs, and other economic benefits provided directly to investors or other
owners, members, or participants. The Board made these changes because:

a. IFRS 15 Revenue from Contracts with Customers focuses on goods or services that are an
output of an entity’s ordinary activities. Nevertheless, because not all businesses have
revenue within the scope of IFRS 15, the revised definition also includes outputs that are
investment income or other income from ordinary activities.
b. The previous definition of outputs referred to lower costs and economic benefits provided
directly to investors. This reference did not help to distinguish between an asset and a
business, because it confused motives for acquiring an asset with the characteristics of the
activities and assets acquired. Many asset acquisitions (for example, the purchase of new
manufacturing equipment) may be made with the motive of lowering costs but may not
involve acquiring a substantive process.

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Assessing Whether an Acquired Process is Substantive

Problems Encountered in the previous standard

Many participants in the PIR of IFRS 3 stated that it is difficult to assess:

a) whether the processes acquired are sufficient to constitute one of the elements required
for an acquired set of activities and assets to be a business;
b) whether any processes missing from that set are so significant that the set is not a business;
and
c) how to apply the definition of a business when the acquired set of assets does not generate
revenue.

Introduction:

B8: To be considered as a business, an integrated set of activities and assets must include, at a
minimum, an input and substantive process that together significantly contribute to the ability to
create outputs.

Does the acquired set of activities and assets have outputs at the acquisition date?

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In accordance with procedures of the determination whether the acquired activities and asset is a
business, the determination of the existence of output comes first before the assessment of
whether an acquired process is substantive.

Output: The result of inputs and processes applied to those inputs that provide goods or services
to customers, generate investment income (such as dividends or interest) or generate other
income from ordinary activities.

A set will have outputs when there is a continuation of revenue before and after the transaction.

B12A: If an acquired set of activities and assets was generating revenue at the acquisition date, it
is considered to have outputs at that date, even if subsequently it will no longer generate revenue
from external customers, for example because it will be integrated by the acquirer.

B8A: If an acquired set of activities and assets has outputs, continuation of revenue does not on
its own indicate that both an input and a substantive process have been acquired.

Acquired set of activities and assets does not have outputs:

B12A: An example of an acquired set of activities and assets that does not have outputs at the
acquisition date is an early-stage entity that has not started generating revenue.

Previous standard: Deleted B10 - The Board deleted that paragraph because the 2018
Amendments provide a more general discussion of acquired sets of activities and assets that do
not have outputs.

B10: An integrated set of activities and assets in the development stage might not have outputs.
If not, the acquirer should consider other factors to determine whether the set is a business. Those
factors include, but are not limited to, whether the set:

a) has begun planned principal activities;

b) has employees, intellectual property and other inputs and processes that could be applied
to those inputs;
c) is pursuing a plan to produce outputs; and will be able to obtain access to customers that
will purchase the outputs.

Not all of those factors need to be present for a particular integrated set of activities and assets in
the development stage to qualify as a business.

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Amendment:

B12B: If a set of activities and assets does not have outputs at the acquisition date, an acquired
process (or group of processes) shall be considered substantive only if:

(a) it is critical to the ability to develop or convert an acquired input or inputs into outputs; and

B12D-(b) difficulties in replacing an acquired organized workforce may indicate that the
acquired organized workforce performs a process that is critical to the ability to create
outputs.

B12D-(c) a process (or group of processes) is not critical if, for example, it is ancillary or
minor within the context of all the processes required to create outputs.

In determining whether it is critical, judgment will be required. To make this judgment, the
likelihood of producing an output if the acquired process was not present should be evaluated.

(b) Includes both:

• the inputs acquired include both an organized workforce that has the necessary skills,
knowledge, or experience to perform that process (or group of processes) and
• other inputs that the organized workforce could develop or convert into outputs. Those
other inputs could include:

(i) intellectual property that could be used to develop a good or service;

(ii) other economic resources that could be developed to create outputs; or

(iii) rights to obtain access to necessary materials or rights that enable the creation
of future outputs.

Examples of the inputs mentioned in subparagraphs (b)(i)–(iii) include

technology, in-process research and development projects, real estate and mineral
interests.

Acquired set of activities and assets have outputs:

B12C: If a set of activities and assets has outputs at the acquisition date, an acquired process (or
group of processes) shall be considered substantive if, when applied to an acquired input or
inputs, it:

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(a) is critical to the ability to continue producing outputs, and the inputs acquired include an
organized workforce with the necessary skills, knowledge, or experience to perform that process
(or group of processes); or

(b) significantly contributes to the ability to continue producing outputs and:

(i) is considered unique or scarce; or

(ii) cannot be replaced without significant cost, effort, or delay in the ability to continue
producing outputs.

Acquisition of contract

An acquired outsourcing agreement may give access to an organized workforce and that an entity
should assess whether an organized workforce accessed through an outsourcing arrangement
performs a substantive process that the entity controls, and thus has acquired.

B12D-(a) an acquired contract is an input and not a substantive process.

An acquired contract, for example, a contract for outsourced property management or outsourced
asset management, may give access to an organized workforce. An entity shall assess whether an
organized workforce accessed through such a contract performs a substantive process that the
entity controls, and thus has acquired. Factors to be considered in making that assessment include
the duration of the contract and its renewal terms.

Goodwill as indication of substantive

B12: In the absence of evidence to the contrary, a particular set of assets and activities in which
goodwill is present shall be presumed to be a business. However, a business need not have
goodwill.

Amendments include a statement that the presence of more than an insignificant amount of
goodwill may be an indicator that an acquired process is substantive. Responses to the 2016
Exposure Draft showed that this proposal created more confusion than clarity.

For example, some respondents were unclear whether this proposal referred to ‘core goodwill’
that is economically present in a business, or to the accounting measurement goodwill that is
determined in accounting for business combinations. Some respondents wondered whether this

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proposal would, in effect, force entities to apply business combination accounting to measure
goodwill in order to assess whether what was acquired was in fact a business.

Example Problems

1. Acquisition of brands

Company T is a global beverage manufacturer. Company T sells the worldwide rights of

its oat milk brand, including all related intellectual property, to Company A. Company A
also acquires (1) existing customer contracts, and (2) an at-market supply contract with
the manufacturer of the oat milk, but it does not acquire any employees.

Has Company A acquired a business or a group of assets?

Answer: Company A acquired assets and not a business. Since the set includes outputs
through the continuation of revenues with customers, Company A would evaluate whether
there is an acquired substantive process. Revenue contracts with customers are excluded
from the analysis. The set does not include an organized workforce and the oat milk
production process was not acquired by Company A; therefore, no substantive processes
were acquired. Although it is likely that economic goodwill exists as a result of revenue
derived from future customers, the goodwill will be reflected in the fair value of the assets
acquired.

2. Acquisition of a license agreement

Pharma Co. is a clinical-stage biopharmaceutical company that has an advanced drug in

Phase 2 of clinical trials. Company A enters into a license agreement with Pharma Co. for
the exclusive global license to the drug’s intellectual property, including R&D,
manufacturing, and commercialization. The drug being licensed is not yet generating
revenues. The set also includes experienced management and scientists as well as a
corporate headquarters building, including a research lab with equipment necessary to
develop the drug. Company A also enters into two limited-time period arrangements at
market rates, including a supply arrangement for product materials and an outsourced
service arrangement (for development and clinical trials).
Is the arrangement the acquisition of a business?
Answer: Yes. The acquired group is a business. The identifiable assets in the set include
the license agreement as well as the headquarters building, research lab, and equipment.
As a result, the set does not meet the screen and the framework must be assessed.

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Although the set does not have outputs, Company A would likely conclude that the
workforce has the necessary skills, knowledge, and experience to continue or expand
existing R&D activities. The experienced management and scientists represent an
organized workforce that when applied to the acquired inputs (IPR&D) significantly
contribute to the ability to create outputs.

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References:

1.2 Definition of a business. (2022, February 28). Price Waterhouse Coopers.

https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combination/b
usiness_combination__28_US/chapter_1_scope_US/12_definition_of_a_b_US.html
Carroll, S. (2019, October 28). IFRS 3 - Definition of a Business. Grant Thornton International
Ltd. Home. https://www.grantthornton.global/en/insights/articles/ifrs-3---definition-
of-a-business/
Definition of a Business. (2018, October). European Financial Reporting Advisory Group; 2018
IFRS Foundation. https://www.efrag.org/Activities/368/IFRS-3-Amendments---
Definition-of-a-Business
IASB addresses definition of a business and accounting for previously held interests. (2016, June
28). Deloitte. https://www.iasplus.com/en/news/2016/06/ifrs-3-ifrs-11
IASB finalises amendments to IFRS 3 regarding the definition of a business. (2018, October 22).
Deloitte. https://www.iasplus.com/en/news/2018/10/ifrs-3-def-bus
IFRS 3 — Definition of a business. (n.d.). Deloitte. Retrieved September 16, 2022, from
https://www.iasplus.com/en/projects/completed/consol/ifrs-3-def-bus
Post-implementation review — IFRS 3. (n.d.). Deloitte. Retrieved September 16, 2022, from
https://www.iasplus.com/en/projects/pir/ifrs-3-pir
Post-implementation Review of IFRS 3 Business Combinations. (2015, June). European
Financial Reporting Advisory Group.
https://www.ifrs.org/content/dam/ifrs/project/pir-ifrs-3/published-documents/pir-
ifrs-3-report-feedback-statement.pdf
Post-implementation review of IFRS 3. (2015, February 20). Deloitte.
https://www.iasplus.com/en/meeting-notes/iasb/2015/february/pir-ifrs-3

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