New on IFRS 3 The Optional concentration test

New on IFRS 3 The Optional concentration testNew on IFRS 3 The Optional concentration test – 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! New on IFRS 3 The Optional concentration test

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. The test is based on gross assets, not net assets, as the Board concluded that whether a set of activities and assets includes a substantive process does not depend on how the set is financed. In addition, certain assets are excluded from the gross assets considered in the test. New on IFRS 3 The Optional concentration test

If the test is met, the set of activities and assets is determined not to be a business and no further assessment is needed. If the test is not met, or if an entity elects not to apply the test, a detailed assessment must be performed applying the normal requirements in IFRS 3. As such, the concentration test never determines that a transaction is a business combination. In summary:

New on IFRS 3 The Optional concentration test

Perform the normal detailed assessment? > Identify a business

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. New on IFRS 3 The Optional concentration test

Whether the simplified (optional) concentration tests is applied or a detailed assessment applying the normal requirements in IFRS 3 is applied, in IFRS 3 (simplified in May 2019) the result of the assessment of what was acquired is the acquirer obtained control over a business (business combination or business acquisition) or a (group of similar) identifiable asset(s) (asset acquisition). New on IFRS 3 The Optional concentration test

Major differences between the accounting requirements for a business combination accounted for in accordance with IFRS 3, and an asset acquisition, are set out below:

Accounting treatment acquisition of a business or asset(s)

Business combination

Asset acquisition

Goodwill

Goodwill or bargain purchase gain recognised.

No goodwill or bargain purchase gain recognised (Transaction value is assigned to assets and liabilities).

Initial measurement of assets and liabilities

Assets and liabilities acquired are accounted for at their fair values.

Assets and liabilities (excluding items not valued at costs) are assigned a carrying amount based on relative fair values of the transaction price remaining after deducting the values of assets and liabilities not at cost.

Transaction costs

Transaction costs are expensed.

Transaction costs are capitalised.

Deferred taxes

Deferred tax assets and liabilities arise if tax base is different from the accounting base.

Initial recognition exemption in IAS 12 Income Taxes is applied so no deferred tax assets and liabilities arise if the tax base is different from the accounting base.

Non-controlling interest (NCI)

Non-controlling Interest (NCI) if the business is not majority owned.

No NCI if the acquisition is not of an entity that is to be consolidated in accordance with IFRS 10 Consolidated Financial Statements.

Consideration paid in the form of equity instruments (That meets the definition of an equity instrument)

Consideration paid in the form of equity instruments, in a way that meets the definition of equity from the acquirer’s perspective, is measured at the fair value of the equity instruments at the point control is obtained.

Consideration paid in the form of equity instruments is a share based payment within the scope of IFRS 2 Share-based Payment and the measurement is determined by reference to the fair value of the asset acquired.

Consideration paid in the form of equity instruments (That does not meet the definition of an equity instrument)

Consideration paid in the form of equity instruments that does not meet the definition of equity is determined at the fair value of the shares at point control is obtained and is remeasured to fair value at each reporting date until settled (with changes in fair value being recorded in profit or loss).

Consideration paid, for the acquisition of an asset, in the form of equity instruments is a share-based payment within the scope of IFRS 2 and is not subsequently remeasured.

Contingent consideration

Contingent consideration (including royalty streams) is a financial instrument, and should be accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments.

Contingent consideration (including royalty streams) is not automatically classified as a financial instrument, and might be accounted for as a contingent liability/provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets or, in the case of royalty streams, may be determined to be executory in nature and outside of the scope of IAS 37.

Changes in the fair value of contingent consideration

New on IFRS 3 The Optional concentration test

New on IFRS 3 The Optional concentration test

New on IFRS 3 The Optional concentration test

New on IFRS 3 The Optional concentration test

After initial recognition at the acquisition date fair value, changes in the fair value of contingent consideration is recognised in profit or loss.

IFRS is not clear about the accounting approach to be followed for the movement in the fair value of contingent consideration for an asset acquisition.

Depending on the circumstances, movements in the carrying amount of contingent consideration may be either:

New on IFRS 3 The Optional concentration test

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