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Hi sir, for the second part of the question regarding the exposure draft, my answer includes a different point not included in the suggested answer. Can you please advice whether mine is good enough ?
Answer:
The exposure draft clarifies that
– set of assets that currently produces no outputs is only a business if it has an organized workforce capable of converting another acquired input into an output
– a transaction is not a business combination if substantially all of the fair value of the total assets acquired is concentrated in a single asset or a group of similar assets
In the case of Melon, it has yet to produce any outputs and has no workforce.
The fair value of the gross assets acquired will Include the fair value of any acquired input, process, workforce and any other intangible asset which is not identifiable (R&D).
As mentioned above, Melon has no employees and outsources its research activities so it’s highly likely that majority of the fair value is concentrated on the license.
Hence, this will not qualify as a business as per the exposure draft and should therefore be accounted for as an asset acquisition.
Please could you copy and paste question or give me a question number if it’s in the BPP Kit.
Also if possible please tell me which Exposure Draft it is – EDs go in and out of the syllabus all the time.Question:
On 30 June 20X7, Banana acquired all of the shares of Melon, an entity which operates in the biotechnology industry. Melon was only recently formed and its only asset consists of a licence to carry out research activities. Melon has no employees as research activities were outsourced to other companies. The activities are still at a very early stage and it is not clear that any definitive product would result from the activities. A management company provides personnel for Melon to supply supervisory activities and administrative functions. Banana believes that Melon does not constitutea business in accordance with IFRS 3 Business Combinations since it does not have employees nor carries out any of its own processes.
Banana intends to employ its own staff to operate Melon rather than to continue to use the services of the management company. The directors of Banana therefore believe that Melon should be treated as an asset acquisition but are uncertain as to whether the International Accounting Standards Board’s exposure draft Definition of a Business and Accounting for Previously Held Interests ED 2016/1 would revise this conclusion.
Discuss whether the directors are correct to treat Melon as a financial asset acquisition and whether the International Accounting Standards Board’s proposed amendments to the definition of a business would revise your conclusions ?
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