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Exposure Draft of Definition of Business (Amendments to Ind AS 103) (Comments to be received by April 6, 2019)
March, 04th 2019
                                   ED/ Ind AS103/2018/09




              Exposure Draft


      Definition of a Business
     Amendments to Ind AS 103


      (Last date for Comments: April 6, 2019)




                   Issued by
         Accounting Standards Board
The Institute of Chartered Accountants of India




                             1
                        Exposure Draft
                    Definition of Business
       (Amendments to Ind AS 103, Business Combinations)

Following is the Exposure Draft of the Amendments to Ind AS 103, Business
Combinations, issued by the Accounting Standards Board of the Institute of
Chartered Accountants of India for comments. Objective of the proposed
amendments is to clarify the definition of `Business' to assist the entities to
determine whether a transaction should be accounted for as a business
combination or as an asset acquisition.

The Board invites comments on any aspect of this Exposure Draft. Comments
are most helpful if they contain a clear rationale and, where applicable, provide
suggestions for alternative wording.

Comments can be submitted using one of the following methods, so as to be
received not later than April 6, 2019.


1. Electronically: Click on http://www.icai.org/comments/asb/ to submit
                  comments online. (Preferred method)

2. Email:         Comments can be sent to commentsasb@icai.in

3. Postal:        Secretary, Accounting Standards Board, The Institute of
                  Chartered Accountants of India, ICAI Bhawan, Post Box No.
                  7100, Indraprastha Marg, New Delhi ­ 110 002.



Further clarifications on any aspect of this Exposure Draft may be sought by e-
mail to asb@icai.in.




                                              2
Amendments to Ind AS 103, Business Combinations

Paragraph 3, the definition of the term `business' in Appendix A and paragraphs
B7­B9, B11 and B12 are amended. Paragraphs 64P, B7A­B7C, B8A and
B12A­B12D, and headings above paragraphs B7A, B8 and B12, are added.
Paragraph B10 is deleted. New text is underlined and deleted text is struck
through.

Identifying a business combination
3     An entity shall determine whether a transaction or other event is a
      business combination by applying the definition in this Ind AS, 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. Paragraphs B5­B12B12D provide guidance on
      identifying a business combination and the definition of a business.

Effective date and transition

      Effective date

      ...


64P Definition of a Business (Amendments to Ind AS 103), added paragraphs
    B7A­B7C, B8A and B12A­B12D, amended the definition of the term
    `business' in Appendix A, amended paragraphs 3, B7­B9, B11 and B12
    and deleted paragraph B10. An entity shall apply these amendments to
    business combinations for which the acquisition date is on or after the
    beginning of the first annual reporting period beginning on or after 1
    April, 2020 and to asset acquisitions that occur on or after the beginning
    of that period.

Appendix A

Defined terms
...

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
                dividends or interest) or generate other income from ordinary
                activitiesa return in the form of dividends, lower costs or other
                economic benefits directly to investors or other owners,
                members or participants.








                                               3
Definition of a business (application of paragraph 3)
B7    A business consists of inputs and processes applied to those inputs that
      have the ability to create contribute to the creations of outputs. Although
      businesses usually have outputs, outputs are not required for an
      integrated set to qualify as a business. The three elements of a business
      are defined as follows (see paragraphs B8-B12D for guidance on the
      elements of a business:

      (a) Input: Any economic resource that creates outputs, or has the ability
          to create, contribute to the creations of outputs when one or more
          processes are applied to it. Examples include non-current assets
          (including intangible assets or rights to use non-current assets),
          intellectual property, the ability to obtain access to necessary
          materials or rights and employees.

      (b) Process: Any system, standard, protocol, convention or rule that,
          when applied to an input or inputs, creates outputs or has the ability
          to create contribute to the creations of outputs. Examples include
          strategic management processes, operational processes and resource
          management processes. These processes typically are documented,
          but the intellectual capacity of an organised workforce having the
          necessary skills and experience following rules and conventions may
          provide the necessary processes that are capable of being applied to
          inputs to create outputs. (Accounting, billing, payroll and other
          administrative systems typically are not processes used to create
          outputs.)

      (c) Output: The result of inputs and processes applied to those inputs
          that provide or have the ability to provide a return in the form of
          dividends, lower costs or other economic benefits directly to
          investors or other owners, members or participants goods or services
          to customers, generating investment income (such as dividends or
          interest) or generate other income from ordinary activities.

      Optional test to identify concentration of fair value

B7A   Paragraph B7B sets out an optional test (the concentration test) to permit
      a simplified assessment of whether an acquired set of activities and
      assets is not a business. An entity may elect to apply, or not apply, the
      test. An entity may make such an election separately for each transaction
      or other event. The concentration test has the following consequences:

      (a)   if the concentration test is met, the set of activities and assets is
            determined not to be a business and no further assessment is
            needed.


                                              4
      (b)   if the concentration test is not met, or if the entity elects not to
            apply the test, the entity shall then perform the assessment set out
            in paragraphs B8­B12D.

B7B   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. For the concentration test:

      (a)   gross assets acquired shall exclude cash and cash equivalents,
            deferred tax assets, and goodwill resulting from the effects of
            deferred tax liabilities.
      (b)   the fair value of the gross assets acquired shall include any
            consideration transferred (plus the fair value of any non-
            controlling interest and the fair value of any previously held
            interest) in excess of the fair value of net identifiable assets
            acquired. The fair value of the gross assets acquired may normally
            be determined as the total obtained by adding the fair value of the
            consideration transferred (plus the fair value of any non-
            controlling interest and the fair value of any previously held
            interest) to the fair value of the liabilities assumed (other than
            deferred tax liabilities), and then excluding the items identified in
            subparagraph (a). However, if the fair value of the gross assets
            acquired is more than that total, a more precise calculation may
            sometimes be needed.
      (c)   a single identifiable asset shall include any asset or group of assets
            that would be recognised and measured as a single identifiable
            asset in a business combination.
      (d)   if a tangible asset is attached to, and cannot be physically removed
            and used separately from, another tangible asset (or from an
            underlying asset subject to a lease, as defined in Ind AS 116,
            Leases), without incurring significant cost, or significant
            diminution in utility or fair value to either asset (for example, land
            and buildings), those assets shall be considered a single
            identifiable asset.
      (e)   when assessing whether assets are similar, an entity shall consider
            the nature of each single identifiable asset and the risks associated
            with managing and creating outputs from the assets (that is, the
            risk characteristics).
      (f)   the following shall not be considered similar assets:

            (i)   a tangible asset and an intangible asset;
            (ii)  tangible assets in different classes (for example, inventory,
                  manufacturing equipment and automobiles) unless they are
                  considered a single identifiable asset in accordance with the
                  criterion in subparagraph (d);
            (iii) identifiable intangible assets in different classes (for
                  example, brand names, licences and intangible assets under
                  development);
            (iv) a financial asset and a non-financial asset;
                                              5
            (v)  financial assets in different classes (for example, accounts
                 receivable and investments in equity instruments); and
            (vi) identifiable assets that are within the same class of asset but
                 have significantly different risk characteristics.

B7C   The requirements in paragraph B7B do not modify the guidance on
      similar assets in Ind AS 38, Intangible Assets; nor do they modify the
      meaning of the term `class' in Ind AS 16, Property, Plant and
      Equipment, Ind AS 38, and Ind AS 107, Financial Instruments:
      Disclosures.

      Elements of a Business
B8    Although businesses usually have outputs, outputs are not required for
      an integrated set of activities and assets to qualify as a business. To be
      capable of being conducted and managed for the purposes defined
      purpose identified in the definition of a business, an integrated set of
      activities and assets requires two essential elements--inputs and
      processes applied to those inputs, which together are or will be used to
      create outputs. However, a A business need not include all of the inputs
      or processes that the seller used in operating that business if market
      participants are capable of acquiring the business and continuing to
      produce outputs, for example, by integrating the business with their own
      inputs and processes. However, to be considered a business, an
      integrated set of activities and assets must include, at a minimum, an
      input and a substantive process that together significantly contribute to
      the ability to create output. Paragraphs B12-B12D specify how to access
      whether a process is substantive.

B8A   If an acquired set of activities and assets has outputs, continuation of
      revenue does not on its own indicate that both an input and a substantive
      process have been acquired.

B9    The nature of the elements of a business varies by industry and by the
      structure of an entity's operations (activities), including the entity's
      stage of development. Established businesses often have many different
      types of inputs, processes and outputs, whereas new businesses often
      have few inputs and processes and sometimes only a single output
      (product). Nearly all businesses also have liabilities, but a business need
      not have liabilities. Furthermore, an acquired set of activities and assets
      that is not a business might have liabilities.

B10   [Refer Appendix 1]An integrated set of activities and assets in the
      development stage might not have outputs. If not, the acquirer should
      consider other factors to determine whether the set is a business. Those
      factors include, but are not limited to, whether the set:

      (a)   has begun planned principal activities;

                                             6
       (b)   has employees, intellectual property and other inputs and processes
             that could be applied to those inputs;

       (c)   is pursuing a plan to produce outputs; and

   will be able to obtain access to customers that will purchase the outputs.

       Not all of those factors need to be present for a particular integrated set
       of activities and assets in the development stage to qualify as a business.

B11    Determining whether a particular set of activities and assets and
       activities is a business should shall be based on whether the integrated
       set is capable of being conducted and managed as a business by a
       market participant. Thus, in evaluating whether a particular set is a
       business, it is not relevant whether a seller operated the set as a business
       or whether the acquirer intends to operate the set as a business.

       Assessing whether an acquired process is substantive
B12    In the absence of evidence to the contrary, a particular set of assets and
       activities in which goodwill is present shall be presumed to be a
       business. However, a business need not have goodwill. Paragraphs
       B12A­B12D explain how to assess whether an acquired process is
       substantive if the acquired set of activities and assets does not have
       outputs (paragraph B12B) and if it does have outputs (paragraph B12C).

B12A An example of an acquired set of activities and assets that does not have
     outputs at the acquisition date is an early-stage entity that has not started
     generating revenue. Moreover, if an acquired set of activities and assets
     was generating revenue at the acquisition date, it is considered to have
     outputs at that date, even if subsequently it will no longer generate
     revenue from external customers, for example because it will be






B12B If a set of activities and assets does not have outputs at the acquisition
     date, an acquired process (or group of processes) shall be considered
     substantive only if:
     (a) it is critical to the ability to develop or convert an acquired input or
           inputs into outputs; and
     (b) the inputs acquired include both an organised workforce that has
           the necessary skills, knowledge, or experience to perform that
           process (or group of processes) and other inputs that the organised
           workforce could develop or convert into outputs. Those other
           inputs could include:
           (i) intellectual property that could be used to develop a good or
                 service;
           (ii) other economic resources that could be developed to create
                 outputs; or

                                               7
             (iii) rights to obtain access to necessary materials or rights that
                   enable the creation of future outputs.

       Examples of the inputs mentioned in subparagraphs (b)(i)­(iii) include
       technology, in-process research and development projects, real estate
       and mineral interests.

B12C If a set of activities and assets has outputs at the acquisition date, an
     acquired process (or group of processes) shall be considered substantive
     if, when applied to an acquired input or inputs, it:

       (a)   is critical to the ability to continue producing outputs, and the
             inputs acquired include an organised workforce with the necessary
             skills, knowledge, or experience to perform that process (or group
             of processes); or
       (b)   significantly contributes to the ability to continue producing
             outputs and:
             (i) is considered unique or scarce; or
             (ii) cannot be replaced without significant cost, effort, or delay in
                    the ability to continue producing outputs.

B12D The following additional discussion supports both paragraphs B12B and
     B12C:

       (a)   an acquired contract is an input and not a substantive process.
             Nevertheless, an acquired contract, for example, a contract for
             outsourced property management or outsourced asset management,
             may give access to an organised workforce. An entity shall assess
             whether an organised workforce accessed through such a contract
             performs a substantive process that the entity controls, and thus
             has acquired. Factors to be considered in making that assessment
             include the duration of the contract and its renewal terms.
       (b) difficulties in replacing an acquired organised workforce may
             indicate that the acquired organised workforce performs a process
             that is critical to the ability to create outputs.
       (a)(c) a process (or group of processes) is not critical if, for example, it
             is ancillary or minor within the context of all the processes
             required to create outputs

Appendix 1

Comparison with IFRS 3, Business Combinations
...

6.    Paragraph B10 appears as `deleted' in IFRS 3. In order to maintain
      consistency with paragraph numbers of IFRS 3, the paragraph number is
      retained in Ind AS 103.

                                               8

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