Substantive process

Learning objectives

• Determine whether an acquired set includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.L1, L2, L3
• Justify, depending on whether or not the set has outputs at the acquisition date, whether a process is substantive (role of an organised workforce and continuation of revenue).L1, L2, L3

Normative references

• IFRS 3 §B8Outputs are not required for an integrated set of activities and assets to qualify as a business, and the set need not include all of the inputs or processes that the seller used; it must, however, include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (assessment of whether a process is substantive in paras. B12 to B12D).
• IFRS 3 §B8AWhen the acquired set has outputs, continuation of revenue does not on its own indicate that both an input and a substantive process have been acquired (paragraph added by the October 2018 amendment, para. 64P).
• IFRS 3 §B12BIf the set does not have outputs at the acquisition date, an acquired process is substantive only if it is critical to the ability to develop or convert an acquired input into outputs and the inputs acquired include both an organised workforce that has the necessary skills, knowledge or experience and other inputs that the workforce could develop or convert into outputs (for example intellectual property, other resources that could be developed, rights to obtain necessary materials or rights).
• IFRS 3 §B12CIf the set has outputs at the acquisition date, an acquired process is substantive if, when applied to an acquired input, either it is critical to the ability to continue producing outputs and the inputs acquired include an organised workforce with the skills to perform it, or it significantly contributes to that ability and is considered unique or scarce, or cannot be replaced without significant cost, effort or delay. The rule on continuation of revenue is in para. B8A.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

4 questions

• Under the definition of a business, what must the acquired set of activities and assets include at a minimum?L1
• Cobalt SA acquires Pistil SA, a biotechnology company in development: laboratories, patents and an organised team of researchers that develops the products. No product is sold yet. Case assumption: the team is critical to the ability to turn the acquired patents into outputs. What does Cobalt conclude about the process?L2
• Delta SA acquires Presto, a printing works: machines and framework contracts with customers that generate recurring revenue; no employee is taken over. Delta's management argues that Presto is a business “because the revenue continues”. Write a short note concluding on this reasoning, distinguishing the facts of the case, the rule and professional judgement.L3
• Rivel SA acquires a production line for optical lenses that already generates sales, without taking on any employees. Judgement retained in the case: the acquired manufacturing process contributes significantly to the ability to continue producing outputs and could not be replaced without significant cost, effort or delay. Is the acquired process substantive?L3