Question:
Definition of a business under IFRS 3
Oil and gas company C acquires a single oil exploration area where there are active exploration activities underway, oil has been found and the company is close to declaring reserves but implementation of the development plan has not yet commenced.
This may be a business under IFRS 3 as assets and processes have been acquired and a market participant is capable of producing outputs by integrating these with its own inputs and processes.
Mining company D acquires a development stage mine, including all inputs (i.e. employees, mineral reserve and property, plant and equipment) and processes (i.e. exploration and evaluation processes e.g. active drilling programmes etc.,) that are required to generate output.
This meets the definition of a business under IFRS 3 because it includes inputs and processes even though there are currently no outputs.
Oil and gas company E acquires a group of pipelines (or a fleet of oil or gas tankers) used for transporting gas on behalf of customers and the employees responsible for operational, maintenance and administrative tasks transfer to the buyer.
This meets the definition of a business under IFRS 3 because it includes inputs, processes and outputs.
Mining company F acquires a mine that was abandoned 10 years ago. There are no activities currently occurring at the mine. The company plans to perform new geological and geophysical survey to determine whether sufficient economic reserves are present.
The abandoned mine does not meet the definition of a business because there are no processes associated with the assets purchased.
Oil and gas company G acquires a producing oil field, but the seller's on-site staff will not transfer to the buyer. Instead, oil and gas company G will enter into maintenance and oil field services contracts with different contractors.
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 continuing to produce outputs. If market participants can easily outsource processes to contractors then the oil field would be a business under IFRS 3.