The amendments are designed to help companies decide whether an acquisition consists of a business or a group of assets.  

The amended definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others. In other words, the emphasis on ‘returns in the form of dividends, lower costs or other economic benefits’ has been removed and rewritten to add clarity for financial reporters.

In addition to amending the wording of the definition, the IASB has also issued supplementary guidance.

Distinguishing between a business and a group of assets is important because an acquirer recognises goodwill only when acquiring a business.

The amendments arose from a post-implementation review (PIR) of IFRS 3, an assessment carried out to determine whether an International Financial Reporting Standard (IFRS) works as intended.

Following feedback from the PIR, the IASB is also working on another project linked to IFRS 3 in which it is exploring possible improvements to the accounting for goodwill.

IFRS 3 was originally developed jointly between the IASB and the US Financial Accounting Standards Board (FASB).

The FASB amended its definition of a business in 2017, so a year later, the IASB’s clarification to its definition brings the US and IFRS approach more into alignment.

Companies are required to apply the amended definition of a business to acquisitions that occur on or after 1 January 2020. Earlier application is permitted.

IASB Definition of a Business (Amendments to IFRS 3) issued 22 October 2018.

Report by Sara White