The objective of this IFRS is to improve the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects.
Pharma Co. purchases a legal entity that holds a Phase 3 compound (i.e., a compound in the clinical research phase) developed to treat diabetes, a Phase 3 compound to treat Alzheimer’s disease and the related at-market CRO and CMO contracts for each compound. Included with each project are the historical know-how, formula protocols, designs and procedures expected to be needed to complete the related phase of testing. No employees, other assets or other activities are transferred. Assume both Phase 3 compounds have equal fair value.
IFRS 3 requires a business to include, as a minimum, an input and asubstantiveprocess that together significantly contribute to the ability to create output. Because all asset acquisitions include inputs, the existence of a substantive process is what distinguishes an asset or group of assets from a business. Entities can no longer presume that a set contains a process if the set generates revenues before and after the transaction. Further analysis is required to determine whether the set contains a substantive process.
Implementation of IFRS 3 revealed difficulties in assessing whether the acquired processes are sufficient to constitute one of the elements of a business; whether any missing processes are so significant that an acquired set of … Read more
IFRS 3 continues to adopt a market participant’s perspective to determine whether an acquired set of activities and assets is a business. The amendments: clarify the minimum requirements for a business; remove the assessment of whether market participants are capable of replacing any missing elements; add guidance to help entities assess whether an acquired process is substantive; narrow the definitions of a business and of outputs; and introduce an optional fair value concentration test.
Minimum requirements to be a business
In the IASB’s view, the existence of a process (or processes) is what distinguishes a … Read more
Whilst applying the definition of a business might involve significant judgement, there was little or no guidance to identify situations where an acquired set of activities and assets is not a business. To address those concerns, the IASB introduced an optional fair value concentration test. The purpose of this test is to permit a simplified assessment of whether an acquired set of activities and assets is not a business. Important –Entities may elect whether or not to apply the concentration test on a transaction-by-transaction basis. AND once starting the optional concentration tests an entity can always back off!
The concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in … Read more
An entity has to determine whether a transaction or other event is a business combination, 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.
Guidance on identifying a business combination and the definition of a business are as follows:
The definition of a business: 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 … Read more
IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business combinations are accounted for using the ‘acquisition method’, which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date.
A revised version of IFRS 3 was issued in January 2008 and applies to business combinations occurring in an entity’s first annual period beginning on or after 1 July 2009.
Shockwave Corporation is the largest satellite radio provider in the country. Shockwave commenced operations five years ago when the government granted satellite spectrum licenses to four start-ups seeking to cultivate a then-burgeoning industry. Since that time, precipitated by the accelerating wireless data needs of telecommunication industry technology, the government has stated that it will not be licensing any new spectrum for satellite radio but may approve the sale or transfer of existing spectrum.
Shockwave generates its revenue from monthly subscriptions to consumers sourced via a direct retail sales channel (i.e. direct mail, print and television advertisements, billboards, and retail in-store kiosks).
Shockwave does not manufacture the satellite radio receivers used by consumers but transmits signals that