IFRS 3 amendments – Clarifying what is a business

IFRS 3 amendments – Clarifying what is a business

Amendments provide more guidance on the definition of a business, but complexities remain

Jonathan Dingli

Partner, Corporate Accounting Advisory Services

KPMG in Malta

Business combinations | Pit stop crew waiting for their car

With a broad business definition, determining whether a transaction results in an asset or a business acquisition has long been a challenging but important area of judgement.

The IASB has issued amendments to IFRS 3 Business Combinations that seek to clarify this matter.


“The clarification and narrowing of the current, vague definition of a business is welcome. Some of the new tests, however, are quite complex."

Mike Metcalf

KPMG’s global IFRS business combinations leader

Optional concentration test

The amendments include an election to use a concentration test. This is a simplified assessment that results in an asset acquisition if substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of similar identifiable assets.

Assessment focuses on substantive process

If a preparer chooses not to apply the concentration test, or the test is failed, then the assessment focuses on the existence of a substantive process.

Narrower definition, potential complexity

The effect of these changes is that the new definition of a business is narrower – this could result in fewer business combinations being recognised. 

The amendments may require a complex assessment to decide whether a transaction is a business combination or an asset acquisition. We outline the steps an entity takes for this assessment in the diagram below.

IFRS 3 amendments | Flowchart diagram

Click to enlarge diagram (JPG, 242 KB)

Effective date

The amendment applies to businesses acquired in annual reporting periods beginning on or after 1 January 2020. Earlier application is permitted.

Visit our IFRS – Business Combinations page for more information on the IASB’s consolidation suite of standards.

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