Keywords: Mazars, Thailand, IFRS, IASB, Improvements, Business Combinations, Joint arrangements, Borrowing Costs, Income taxes
09 February 2018
Amendments to IFRS 3 and IFRS 11
We should note at the outset that the amendments to IFRS 3 and IFRS 11 result from a somewhat unusual process. A draft amendment to IFRS 3 and IFRS 11 was published by the IASB on 29 June 2016 (ED/2016/1), separately from the annual improvements process. This draft amendment addressed not just the accounting treatment of acquisitions of interests in a joint operation (IFRS 11) but also sought to clarify the definition of a business within the meaning of IFRS 3, a critical notion when determining whether a transaction should be treated as a business combination or the acquisition of assets.
The clarification of the definition of a business is now the subject of a separate amendment which is expected to be finalised in the second quarter of 2018, whilst the accounting treatment of the acquisition of interests in a joint operation was incorporated into the final version of the 2015–2017 Cycle of improvements to IFRSs.
The clarifications provided by the newly-published amendments to IFRS 3 and IFRS 11 will be limited in their effects, since joint operations are relatively few in number.
As a reminder, IFRS 11 distinguishes two types of joint arrangements:
- Joint ventures
In the (usual) case where the parties only have rights to the net assets of the arrangement, they measure their investment using the equity method.
- Joint operations
In the (in practice rare) case where the parties have rights to the assets, and obligations for the liabilities, relating to the arrangement, they recognise a share of the assets and liabilities (and of the revenue and expenses) using a method close to proportional consolidation. In practice, and provided that the rights and obligations in the assets and liabilities of the joint arrangement are equivalent, this accounting treatment is applied both by joint operators and by parties to a joint arrangement that do not share control.
The IASB wished to clarify the accounting treatment of the acquisition of an interest in a joint operation, because entities were not treating these transactions in a consistent way. The amendments clarify that:
o When an investor obtains exclusive control of an arrangement, it shall remeasure its previously held interest in the joint operation’s assets and liabilities at the acquisition-date fair value and recognise the resulting gain or loss in profit or loss.
This accounting treatment, based on the logic of step acquisitions, is the same whether the entity was a joint operator or simply a party (i.e. a partner without joint control).
o When the additional acquisition enables an investor to obtain joint control, it should not remeasure previously held interests in the assets and liabilities of the joint operation.
The underlying rationale is that such a transaction does not affect the consolidation scope, and that this approach is consistent with that applied to the transactions, regarded as similar by the Board, that result in a passage from significant interest to joint control (or vice versa).
These amendments shall be applied prospectively to the acquisition of interests in a joint operation occurring in financial periods beginning on or after 1 January 2019. Early application is possible.
Clarification of IAS 23
Readers will recall that IAS 23 distinguishes specific borrowing (incurred to acquire a specific qualifying asset) from general borrowing. An entity must include the cost (net of any investment income) of specific borrowing in the cost of the qualifying assets concerned before applying the capitalisation rate (i.e. the average borrowing cost, excluding specific borrowing) to the portion not specifically financed.
The amendment to IAS 23 clarifies that the concept of specific borrowing assumes that the qualifying asset is being prepared for use or sale.
In other words, a specific loan is re-designated as ‘general’ when substantially all the activities necessary to prepare the asset for its intended use or sale are complete.
This amendment shall be applied prospectively to borrowing costs borne during financial periods beginning on or after 1 January 2019. Early application is possible.
Clarification of IAS 12
The amendment to IAS 12 clarifies that the income tax consequences of the distribution of dividends on financial instruments classified in equity must be accounted for in profit or loss, regardless of their origin, at the date the dividend liability is recognised.
- Amendments to IFRS 3 and IFRS 11: in an acquisition of an additional interest in a joint operation, the acquirer shall only remeasure its previously held interest in the assets and liabilities of the joint operation at fair value in profit or loss where it obtains exclusive control of the arrangement.
- IAS 23 amendment: specific borrowing is reclassified as general when the qualifying asset it financed is ready for use or sale.
IAS 12 amendment: the tax consequences of the distribution of dividends on financial instruments classified in equity must be accounted for in profit or loss.