IASB consults on narrow-scope changes to IFRS 3

The International Accounting Standards Board (IASB) is consulting on plans for three narrow-scope amendments to IFRS 3 Business Combinations, which would update the standard but without significantly changing its requirements

The amendments would update a reference to the conceptual framework for financial reporting, so that it refers to the version which was issued in March 2018. 

IFRS 3 specifies how a company should account for the assets and liabilities it acquires when it obtains control of a business. It refers companies to IASB’s conceptual framework to determine what constitutes an asset or a liability.

However, IFRS 3 refers to an old version of the conceptual framework, published in 1989. IASB proposes to update IFRS 3 so it refers instead to the latest version.

Updating the reference without making any other changes to IFRS 3 could change the accounting requirements for business combinations because the liability definition in the 2018 conceptual framework is broader than that in previous versions.

The differences are such that updating the reference without making any other changes to IFRS 3 could increase the population of assets and liabilities qualifying for recognition in a business combination. Some of those assets or liabilities might not qualify for recognition applying other applicable IFRS standards after the acquisition date.

So, the acquirer would first recognise those assets or liabilities at the time of the business combination and then derecognise them immediately afterwards. The resulting ‘day 2’ loss or gain would not depict an economic loss or gain, so would not faithfully represent any aspect of the acquirer’s financial performance.

Without the changes proposed, companies would need to record provisions and contingent liabilities when they acquire a business they would not record in other circumstances. To avoid this, IASB also proposes that for provisions and contingent liabilities, companies refer to IAS 37 Provisions, Contingent Liabilities and Contingent Assets instead of the conceptual framework to determine what constitutes a liability.

IASB is proposing to retain this change until it decides whether and how to amend IAS 37 to align it with the 2018 conceptual framework.

The third proposal in the exposure draft is to make the IFRS 3 requirements for contingent assets more explicit.

The consultation is open until 27 September.

Reference to the Conceptual Framework Proposed amendments to IFRS 3

Pat Sweet

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