26 June 2014

EFRAG published a letter to IASB and a statement on the Post-implementation Review of IFRS 3 Business Combinations

In January 2014, the IASB published the Request for Information on its Post-implementation Review (PiR) of IFRS 3 Business Combinations and requested comments by 30 May 2014.

To respond to the IASB’s Request for Information, EFRAG representatives, in partnership with some European National Standard Setters and European user organisations, notably the European Federation of Financial Analysts Societies (EFFAS), have held or participated in several outreach activities with preparers and users of financial statements in order to identify implementation difficulties and understand the overall effects of IFRS 3 and related Standards included in the PiR (the Standards).

The feedback received from the various outreach activities and events has been summarised in two separate feedback statements and are included as Appendices to the letter. The letter, together with the accompanying Appendices, reflects the evidence gathered from European constituents on their experiences with the Standards.

In summary, the evidence received indicates that many preparers believe that, from a cost-benefit perspective, the Standards have not worked as intended in respect to all the issues that they set out to address. Although generally acknowledging the conceptual merits of the acquisition accounting model in IFRS, most preparers expressed significant concerns regarding the level of effort required and costs incurred to meet its requirements.

The input gathered demonstrates that users take a holistic perspective when analysing a business combination, and tend to focus primarily on the “entirety” of what had been acquired for the consideration paid, rather than on the individual assets acquired and liabilities assumed. Users notably request more transparency and substance in the disclosures on the rationale for the business combinations, expected synergies, determination of the fair values and structure (including consideration package) of the acquisition deals.

In summary of the feedback statement, the evidence received demonstrates that many preparers believe that, from a cost-benefit perspective, IFRS 3 and related Standards have not worked as intended in respect to all the issues that they set out to address. Although generally acknowledging the conceptual merits of the acquisition accounting model in IFRS, most preparers expressed significant concerns regarding the level of effort required and costs incurred to meet its requirements. The main practical issues identified include: 

·  The definition of a business in IFRS 3 was too broad and lacks guidance on what should not be considered a business

· Determining the fair value of certain assets and liabilities (including contingent consideration, loans and receivables, pre-existing relationships, previously held /retained interests and consideration in an equity-share transaction) was highly complex and subjective

·   Identifying intangible assets was generally highly complex and subjective

·  There were mixed views on the most appropriate accounting treatment for subsequent accounting for goodwill; although overall the impairment test was considered very difficult to perform.

Press release to the letter

Full comment letter

Press release to the feedback statement

Feedback statement

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