EFRAG consults on IFRS 3 amendments

The European Financial Reporting Advisory Group (EFRAG) has issued a draft endorsement advice letter relating to the endorsement for use in the EU of Definition of a Business (Amendments to IFRS 3 Business Combinations).

The amendments, which were published in October 2018, are aimed at resolving the difficulties that arise when an entity determines whether an acquisition should be accounted for as a business combination or as an asset acquisition.

The previous definition of a business had focussed on returns in the form of various economic benefits, such as dividends and lower costs. The updated version emphasises that the output of a business is to provide goods and services, adding greater clarity and improving financial reporting. It also adds guidance and illustrative examples ‘to help entities assess whether a substantive process has been acquired’.

The amendments become effective for annual periods beginning on or after 1 January 2020, with earlier application permitted.

EFRAG's overall preliminary assessment is that the amendments satisfy the criteria for endorsement for use in the EU and, it therefore recommends their endorsement.

In its draft letter, EFRAG stated: ‘EFRAG has concluded that the amendments meet the qualitative characteristics of relevance, reliability, comparability and understandability required to support economic decisions and the assessment of stewardship, and raise no issues regarding prudent accounting.

‘EFRAG has also assessed that the amendments do not create any distortion in their interaction with other IFRS Standards and that all necessary disclosures are required.’

EFRAG is seeking comments on all aspects of its analyses supporting its preliminary conclusions.

Comments are requested by 4 March 2019.

EFRAG draft endorsement advice is here

Report by Pat Sweet

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