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Conceptual Framework

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Conceptual Framework Issue 169 / May 2020 IFRS Developments Amendments to IFRS 3 -Reference to the Conceptual Framework What you need to know Background • The IASB issued amendments to In May 2020, the International Accounting Standards Board (IASB or Board) issued IFRS 3 to update the reference Amendments to IFRS 3 Business Combinations - Reference to the Conceptual to the 2018 Conceptual Framework. The amendments are intended to replace a reference to the Framework. Framework for the Preparation and Presentation of Financial Statements, issued in 1989 (Framework), with a reference to the Conceptual Framework for Financial • Further, the amendments add an exception to the recognition Reporting issued in March 2018 (2018 Conceptual Framework) without priniciple for liabilities and significantly changing its requirements. contingent liabilities within the scope of IAS 37 or IFRIC 21. The Board also added an exception to the recognition principle of IFRS 3 to avoid the issue of potential ‘day 2’ gains or losses arising for liabilities and contingent • The amendments also clarify liabilities that would be within the scope of IAS 37 Provisions, Contingent Liabilities exisiting guidance for and Contingent Assets or IFRIC 21 Levies, if incurred separately. contingent assets. At the same time, the Board decided to clarify existing guidance in IFRS 3 for • The amendments are effective contingent assets that would not be affected by replacing the reference to for annual reporting periods the Framework. beginning on or after 1 January 2022 and apply prospectively. The amendments are effective for annual reporting periods beginning on or after Earlier application is permitted. 1 January 2022 and apply prospectively. Earlier application is permitted if, at the same time or earlier, an entity also applies all of the amendments contained in the Amendments to References to the Conceptual Framework in IFRS Standards (March 2018), which was issued at the same time as the 2018 Conceptual Framework. Recognition exception for liabilities and contingent liabilities within the scope of IAS 37 or IFRIC 21 The recognition principle in IFRS 3 specifies that the assets and liabilities recognised in a business combination must meet the respective definitions of assets and liabilities in the Framework, although, after the acquisition date, an acquirer accounts for most types of assets and liabilities recognised in a business combination in accordance with other IFRS standards applicable to those items. When the Board issued the 2018 Conceptual Framework, it also updated most of the existing Framework references to the 2018 Conceptual Framework in IFRS standards. However, it did not update the reference in IFRS 3, because it was concerned that doing so without changing any other requirements in IFRS 3 could have unintended consequences. In particular, the changes to the definitions of assets and liabilities in the 2018 Conceptual Framework could increase the population of assets and liabilities recognised in a business combination. This could give rise to ‘day 2’ gains or losses, when some of these assets or liabilities might not qualify for recognition under other applicable IFRS standards that are applied subsequent to the acquistion date. The Board analysed the possible unintended consequences and concluded that the problem of ‘day 2’ gains or losses may only be significant in practice for liabilities accounted for after the acquisition date by applying IAS 37 or IFRIC 21. To avoid this problem, the Board decided to add an exception to the recognition principle in IFRS 3. By applying the definition of a liability in the 2018 Conceptual Framework, an acquirer might recognise a liability at the acquisition date that would not be recognised subsequently under IFRIC 21. A ‘day 2’ gain would be recognised immediately after the acquisition date. This is due to the requirements of IFRIC 21 where an entity recognises a liability for a levy only when it conducts the activity that triggers payment of the levy. Whereas when applying the 2018 Conceptual Framework, an entity recognises a liability when it conducts an earlier activity, if: a. Conducting that earlier activity means it may have to pay a levy that it would not otherwise have had to pay And b. It has no practical ability to avoid the later activity that will trigger payment of the levy This recognised ‘day 2’ gain would not be an economic gain, so would not faithfully represent any aspect of the entity’s financial performance. Further, IFRIC 21 is an interpretation of IAS 37. Therefore, the problem of ‘day 2’ gains could also arise for other obligations within the scope of IAS 37 that are conditional on a future activity of the entity. To avoid this problem, IFRS 3 was amended to include an exception from the requirements of paragraph 11 of IFRS 3 for liabilities and contingent liabilities that would be within the scope of IAS 37 or IFRIC 21, if these are incurred separately, rather than assumed in a business combination. The exception requires entities to apply the criteria in IAS 37 or IFRIC 21, respectively, to determine whether a present obligation exists at the acquisition date. The exception refers to both IFRIC 21 and IAS 37 as IFRIC 21 also applies to levies whose timing and amount are certain and so are outside the scope of IAS 37. 2 Amendments to IFRS 3 - Reference to the Conceptual Framework EY | Assurance | Tax | Transactions | Advisory About EY Clarification of the guidance for contingent assets EY is a global leader in assurance, tax, transaction and advisory services. The insights IFRS 3 prohibits the recognition of contingent assets acquired in a business and quality services we deliver help build trust combination. This prohibition was not, however, explicitly stated in IFRS 3, although and confidence in the capital markets and in it could be inferred from the IFRS 3 recognition principle, and is discussed in economies the world over. We develop paragraph BC276 of the Basis for Conclusion (the Basis) to the standard. outstanding leaders who team to deliver on our promises to all of our stakeholders. In so The Board, therefore, decided to add a new paragraph to IFRS 3 to clarify that doing, we play a critical role in building a better working world for our people, for our contingent assets do not qualify for recognition at the acquisition date. This new clients and for our communities. paragraph was added under the ‘Exceptions to the recognition principle’ section of the standard, as the Board thought that it would be clearer if the requirements EY refers to the global organization and may for recognising contingent liabilities and contingent assets were in the same place. refer to one or more of the member firms of The Basis has also been amended to explain the Board’s rationale. Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Transition and effective date Limited, a UK company limited by guarantee, does not provide services to clients. For more The amendments to IFRS 3 are required to be applied to business combinations for information about our organization, please which the acquisition date is on or after the beginning of the first annual reporting visit ey.com. period beginning on or after 1 January 2022. Earlier application is permitted if, at the same time or earlier, an entity also applies all of the amendments contained About EY’s International Financial Reporting Standards Group in the Amendments to References to the Conceptual Framework in IFRS Standards A global set of accounting standards provides (March 2018), which was issued at the same time as the 2018 Conceptual the global economy with one measure to Framework. assess and compare the performance of companies. For companies applying or transitioning to International Financial Reporting Standards (IFRS), authoritative and How we see it timely guidance is essential as the standards continue to change. The impact stretches We agree with the amendments to IFRS 3 and we believe that they will help to beyond accounting and reporting to the key promote consistency in financial reporting. business decisions you make. We have developed extensive global resources — people The amendments will avoid potential confusion from having more than one and knowledge — to support our clients version of the Conceptual Framework in use and address some of the issues applying IFRS and to help our client teams. that such alignment may have caused. Because we understand that you need a tailored service as much as consistent methodologies, we work to give you the benefit of our deep subject matter knowledge, our broad sector experience and the latest insights from our work worldwide. This publication contains copyright material of the IFRS® Foundation in respect of which all rights are reserved. Reproduced by EY with the permission of the IFRS Foundation. No permission granted to third parties to reproduce or distribute. For full access to IFRS Standards and the work of the IFRS Foundation please visit http://eifrs.ifrs.org/ © 2020 EYGM Limited. All Rights Reserved. EYG No. 003151-20Gbl ED None In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com .
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