IFRS 3: Is the road to convergence really paved with good intentions?
IFRS 3: Is the road to convergence really paved with good intentions?

IFRS 3: Is the road to convergence really paved with good intentions?

Economist Milton Friedman stated,

one of the great mistakes is to judge policies and programs by their intentions rather than their results.”

Some accountants in practice may very well draw a parallel between this quote and the convergence project between the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB). Initial successful projects, such as business combinations, yielded a blended and nearly identical set of accounting standards [SFAS 141(r) and IFRS 3(revised)].  The FASB and IASB continued their efforts to seek input, deliberate, and clarify accounting standards.  In the years that followed, other projects were not as successful and produced disjoined guidance. In turn, many practitioners wondered if the goal of consistent financial reporting was all but lost. Yet there are still some signs that reaffirm the goals of the historic convergence project, specifically with the most recent amendments to ASC 805 and IFRS 3.

An abbreviated history

Picture this: two accounting standard organizations from different parts of town. One organization, the FASB, governed mostly by a prescriptive and practical rules-based application of accounting. The other, the IASB, mostly focused on a subjective and principles-based application of accounting. Spurred by the demands of investors and regulators, these two organizations embarked on a journey in 2006 with a goal to consistently recognize, measure, and report transactions in financial statements around the world. After many projects and considerable discussions, both parties struggled to find the path to fully integrate the more significant areas of accounting standards. The differences seemed just too much to overcome.

However, faced with pressures and the intentions to produce a solitary set of accounting standards, the FASB and IASB began to collaborate and forge a path to convergence in some areas. Each organization also agreed to continue to separately develop and issue interpretations to standards in instances where consensus could not be reached. As time passes, practitioners, investors, and regulators remain concerned of the results of more recent projects as well as the continued inconsistency when interpreting and comparing the financial results of companies around the world.

A work in progress; An ode to business combinations

In 2004, the FASB and IASB issued amendments to business combinations standards with SFAS 141 and IFRS 3, respectively.  These standards did not represent a collaborative effort, as both organizations were not in tandem with the thematic application of this area of accounting.  Fast forward to 2007 and 2008, when the FASB and IASB issued revised guidance for business combinations with SFAS 141(r) and IFRS 3 (revised), respectively. These revisions were the result of a concerted effort between both Boards to collaborate and demonstrate that two sets of standards could indeed produce similar reporting worldwide. Most practitioners considered the business combinations project to be successful, as it aligned major tenants of this area of the guidance and paved the way for increased consistency in recognition and reporting of these transactions.

The results of these efforts, while admirable, still left many practitioners confused as to which transactions met the definition of a business, thus causing in consistently applying the business combination guidance. In an effort to provide clarity and simplify certain aspects of the standard, the FASB issued amendments to ASC 805 in January 2007 (ASU 2017-01). The IASB had a decision to make; retain the existing guidance in IFRS 3 or modify guidance to maintain alignment with the FASB.

The IASB reaffirmed its commitment to the historic joint project on business combinations, considered the modifications to ASC 805 and issued amendments to IFRS 3 in October 2018. The overall goals of the amendments to IFRS 3 were to emphasize the need to evaluate transactions from a market participant’s perspective and to simplify the process of determining whether a transaction was subject to the business combinations guidance. The IASB revised the definition of a business and clarified the key features of a substantive process, including the insertion of specific examples. These amendments are effective for reporting periods beginning after January 1, 2020. Despite a small delay between the issuance of amendments to ASC 805 and IFRS 3, the tell tales remain pointed in the right direction! 

Yes, there are a number of differences that remain within the revised business combinations guidance issued and updated by the FASB and IASB.  While the following illustration is not comprehensive, is there really a case that these two standards are all that different?  Let’s evaluate some of the differences:

  • Concentration test



Allows companies to perform an optional test to determine whether a significant amount of value resides in one or a group of similar assets.

The equivalent test, referred to as the screen test, is required.


  • Outsourced workforce



Allows companies to consider the activities of an outsourced workforce when determining whether an acquired set possesses a substantive process when no outputs are present.

Retains that, with the lack of outputs present, the business activities can only be analyzed to the extent that an organized workforce exists.


  • Presence of goodwill



Continues to remain silent as to whether the presence of goodwill may be an indicator of a substantive process.

When determining whether a substantive process exists, analyze whether there is excess consideration over the fair value of net assets acquired (i.e. goodwill).


As highlighted above, the differences between the FASB and IASB remain minor at best. Further, there are indications that the major themes of the revised standards should result in more consistent recognition and measurement of business combinations under U.S. GAAP and IFRS.

Take a step back. There a significant outcome that transcends the business combinations guidance. The FASB and IASB (temporarily) set aside differences to return to the foundational elements of the convergence project. The result may very well be the start of a (very) long road toward seemingly converged standards. Only time will tell!


Remember, we have great courses to (1) help you brush up on ASC 805, Business Combinations, (2) provide you with practical applications of ASC 805, and (3) give you more in-depth guidance on advanced issues and disclosures! You may also wish to refer to GAAPology for the latest blog on ASC 805!

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