11 Any other business

22 October 2026
Agenda Paper 11
OFFICIAL - PUBLIC

Executive Summary

Project Type: N/A
Project Scope: N/A

Purpose of the paper

The purpose of this paper is to inform the Board of:

• Francesco Nagari’s speech to the ABI Corporate Reporting Symposium.
• The Canadian Accounting Standards Board (AcSB) presented to ASAF on IFRS 3 Business Combinations: Exploring the effectiveness and usefulness of IFRS 3.

Summary of the Issue

Francesco Nagari’s speech to the ABI Corporate Reporting Symposium
On 8 October 2026 the ABI had its Corporate Reporting Symposium. Francesco Nagari’s speech covers his views on the forthcoming IASB PIR of IFRS 17. He considers locked-in discount rates within the General Measurement Model, the presentation of insurance performance in the income statement and mutualisation and annual cohorts.

AcSB’s presentation to ASAF: IFRS 3 Business Combinations: Exploring the effectiveness and usefulness of IFRS 3
On 2 October 2026 the AcSB presented its research findings on potential conflicts between achieving the objective of IFRS 3 at the acquisition date and the usefulness of financial information in the post-combination period. The objective of IFRS 3 is to provide users of financial statements with relevant, reliable and comparable information about a business combination.

Decisions for the Board

No decisions required.

Recommendation

The Board is recommended to review the documents.

Appendices

• Appendix A: IFRS 17 — Three “What Ifs?” speech, ABI Corporate Reporting Symposium, Francesco Nagari
• Appendix B: AcSB presentation to ASAF: IFRS 3 Business Combinations: Exploring the effectiveness and usefulness of IFRS 3

Appendix A: IFRS 17 — Three “What Ifs?”

ABI Corporate Reporting Symposium
8 October 2026
Francesco Nagari

Disclaimer: The views and opinions expressed in this speech are my own personal views. They do not necessarily reflect the views of Standard Life plc and should not be regarded as representing or binding Standard Life plc.

Opening

Good morning, everyone.

It is a real pleasure to welcome you to the ABI Corporate Reporting Symposium.

Before I begin, I would like to thank the Association of British Insurers for bringing us together and hosting today’s event, and EY for their sponsorship and support of the Symposium.

I have been thinking about what might be useful to say at the start of a day devoted to the future of corporate reporting. And I kept coming back to one particular subject — perhaps inevitably, given how much of my professional life has been spent with it — IFRS 17.

I have experienced IFRS 17 from two rather different vantage points: previously, as a global IFRS insurance leader, closely involved in the technical debate as the Standard was being developed and implemented; and now, as Group Financial Control and Reporting Director at Standard Life, responsible for making the Standard work in practice.

Those two perspectives have left me with considerable respect for what the IASB achieved.

IFRS 17 replaced a patchwork of inherited accounting models with a coherent framework built around current measurement, explicit risk and the deferral of unearned profit. Its ambition was substantial, and many of its benefits are real.

But having lived with the Standard through its development, implementation and now several reporting cycles, I find myself increasingly interested in a slightly different question.

Not: was IFRS 17 the right answer?

And certainly not: what did the IASB get wrong?

Instead:

> What if some of the perfectly reasonable decisions made along the way had been different?

Because every accounting standard — particularly one as complex as IFRS 17 — is ultimately the product of choices.

Choices between conceptual purity and practicality. Between comparability and reflecting different business models. Between economic responsiveness and stability in reported performance. And between the information we would ideally like to provide and the complexity required to produce it.

When those choices were made, the IASB had to work with the evidence available at the time.

Today, we have something the Board could not possibly have had then: the evidence of actually applying IFRS 17.

So, in the spirit of the future Post-implementation Review, I want to offer three personal “what ifs”.

For each, I will consider three things: the IASB’s rationale, the counterfactual, and the question I think the PIR should ask.

My three “what ifs” concern:

• First, locked-in discount rates within the General Measurement Model.
• Second, the presentation of insurance performance in the income statement.
• And third, mutualisation and annual cohorts.

What if one: the IASB had used current rates more broadly in the CSM?

Let me start with an important precision.

IFRS 17 does not lock the measurement of the insurance liability as a whole. Fulfilment cash flows use current estimates and current discount rates.

But under the General Measurement Model, the contractual service margin is anchored to the economics at initial recognition. Interest is accreted using the rate determined then, and changes in estimates of future cash flows that adjust the CSM are measured using that locked-in rate.

The IASB’s rationale was understandable.

The CSM represents unearned profit, not a current estimate of a cash flow. The Board wanted the insurance service result to reflect the economics of the contract when it was written, while changes arising from financial variables were identified separately as insurance finance income or expense.

So there was a strong conceptual logic: service belongs in the service result; finance belongs in the finance result.

But what if the IASB had gone further and adopted a genuinely current CSM under the General Measurement Model?

The CSM could then have represented a current measure of remaining unearned profit rather than one partly anchored in historic financial assumptions.

That might have reduced some of the difficult-to-explain differences between movements in fulfilment cash flows measured at current rates and corresponding CSM adjustments measured at locked-in rates.

It might also have reduced some historic-rate tracking — although a fully current CSM would undoubtedly have introduced complexity of its own.

And there would have been a conceptual price.

Future insurance service results would themselves become sensitive to current interest rates. The boundary between insurance service and insurance finance would become less distinct.

So I am not suggesting that the alternative was obviously better.

I am suggesting that we now have evidence with which to reassess the trade-off.

My first PIR question is therefore:

Does post-implementation evidence show that the locked-in-rate approach produces a distinction between insurance service and insurance finance that users understand and find decision-useful — and are those benefits proportionate to the operational complexity required to produce it?

If the answer is yes, the original judgement stands.

But if users routinely remove or normalise these effects, while insurers continue to maintain significant complexity to calculate them, that is evidence worth examining.

And that takes me to my second “what if”, because it raises a broader question about whether the income statement itself was designed around the information users most need.

What if two: the IASB had retained a margin-based income statement?

Let me be very clear about my counterfactual.

I am not suggesting that the IASB should have retained premiums as revenue.

My question is different.

> What if IFRS 17 had adopted a margin-based presentation of the income statement and had never required insurers to calculate insurance revenue and insurance service expenses at all?

During the development of IFRS 17, the IASB considered a summarised-margin presentation in which the income statement would focus on the components of insurance performance rather than presenting gross revenue and expenses.

But there was significant concern that such an approach would remove information about the scale of an insurer’s activities from the face of the income statement.

The Board ultimately chose a revenue presentation designed to be consistent with the principles applied to revenue in other industries.

Insurance revenue therefore depicts the provision of insurance services rather than premium cash flows. And investment components are excluded because economically they are closer to deposits than revenue.

Again, the conceptual logic is powerful.

It gives insurance a revenue number constructed on principles comparable with other industries and avoids presenting customer deposits as turnover.

But suppose the IASB had taken the other route.

Suppose the income statement had been designed explicitly as a source-of-earnings statement.

Instead of constructing insurance revenue and insurance service expenses, the P&L could have shown much more directly where the insurer’s earnings actually came from.

For the in-force portfolio, we might have seen separately the contribution from experience variances — where actual claims, expenses and other experience differed from expectations.

We might have seen the contribution from the release of the contractual service margin — recognising previously unearned profit as service is provided.

We might have seen the contribution from the release or movement in the risk adjustment — positive or negative.

And we might have seen separately the earnings effect from the run-off of the liability for incurred claims.

We would, of course, still need to understand insurance finance income and expense and the contribution from new business.

But the organising principle of the P&L would have been fundamentally different.

Rather than asking, “What is the insurer’s revenue?”, we would have asked:

> What generated the insurer’s earnings this period?

I find that counterfactual particularly interesting because IFRS 17 already contains much of the machinery required to answer that question.

We calculate the CSM.

We calculate the risk adjustment.

We identify experience variances.

We remeasure fulfilment cash flows.

We track incurred claims.

And yet we then undertake another substantial exercise to construct insurance revenue and insurance service expenses — numbers which do not correspond directly to premium cash flows and which can require considerable explanation to users.

A margin-based presentation might therefore have created a more direct bridge between the measurement model and the income statement.

It might also have made the P&L more naturally suited to source-of-earnings analysis: what came from the release of expected profit, what came from risk release, what came from actual experience, and what came from the development and settlement of claims already incurred.

There would, of course, have been a cost.

We would have lost a gross measure of insurance activity on the face of the income statement. Comparability with the revenue presentation used in other industries would have been weaker. And users interested in business volumes would have needed to obtain that information elsewhere.

But perhaps that is precisely the question worth revisiting.

For insurance, is the most decision-useful presentation necessarily one that resembles the revenue-and-expense architecture of other industries?

Or is insurance sufficiently different that a transparent analysis of the sources of earnings would tell investors more?

So my second PIR question is:

Has the construction of insurance revenue and insurance service expenses delivered sufficient decision-useful information to justify the complexity of producing those measures — or would users be better served by a more direct margin-based presentation showing the sources of insurance earnings?

And I think the PIR should look very carefully at what investors actually do.

Do they analyse insurance revenue?

Or do they ultimately reconstruct the economics through CSM release, experience variances, risk adjustment movements, claims development and alternative performance measures?

If the latter is consistently true, that would be important evidence.

My final “what if” is different, because here we do not simply have a theoretical alternative.

We have a real-world counterfactual.

What if three: mutualisation had been permitted across annual cohorts?

IFRS 17 requires portfolios to be divided into groups according to profitability, and a group cannot contain contracts issued more than one year apart.

The rationale was principally about transparency.

Without annual cohorts, profitable older contracts could potentially absorb deteriorating profitability in newer business. Losses could be recognised too late, and changes in profitability between generations of contracts could disappear through averaging.

The IASB did recognise mutualisation.

IFRS 17 captures contractual effects where cash flows to one group affect cash flows to policyholders in another group.

But the Board ultimately concluded that creating a broader exception from annual cohorts would risk continuous re-averaging of the CSM and would be difficult to define robustly.

Again, there was a clear principle behind the decision.

But here things become particularly interesting.

We do not merely have a theoretical counterfactual.

We have a real one.

The European Union ultimately endorsed IFRS 17 with an optional exemption from annual cohorts for specified intergenerationally mutualised and cash-flow-matched contracts.

So we now have experience of IFRS 17 both with and without the IASB’s annual-cohort requirement in particular circumstances.

What if the IASB itself had allowed broader grouping where there was genuine contractual mutualisation across generations?

That might have better reflected the economics of some participating funds.

It might have avoided allocations between annual cohorts that preparers regard as artificial.

And it might have reduced considerable operational complexity.

But the IASB’s concerns remain real.

How do we define genuine mutualisation?

Could profitable legacy business conceal deteriorating new business?

Could losses be recognised too late?

And would different interpretations reduce comparability between insurers?

The important point is that these are no longer purely theoretical questions.

So my third PIR question is:

What does actual experience in jurisdictions applying annual cohorts, compared with experience under the EU exemption, tell us about loss recognition, CSM allocation, profitability trends, cost and user understanding?

The EU decision should not predetermine the IASB’s answer.

But it has created something unusually valuable in accounting standard-setting: a natural experiment.

The PIR should use it.

Closing

Those are my three “what ifs”.

And they lead me to one broader thought.

A mature accounting standard should not be judged by whether every original decision can still be defended conceptually.

Most of these decisions can.

The more demanding question is whether experience has changed the balance between conceptual purity, decision-usefulness, comparability and operational complexity.

Locked-in rates protect the distinction between service and finance — but we should test whether users value that distinction in practice.

Insurance revenue creates a conceptually consistent measure of service — but we should test whether constructing insurance revenue and insurance service expenses tells users more than a direct analysis of the sources of insurance earnings would have done.

Annual cohorts protect against excessive averaging — but we should test whether they achieve that objective meaningfully where contracts genuinely mutualise across generations.

The Post-implementation Review should not become a second attempt to write IFRS 17.

And every operational inconvenience cannot become an argument for amendment.

Stability has value.

The industry has invested enormously in implementing IFRS 17, and that investment itself should make us cautious about unnecessary change.

But stability should not become immobility.

When the IASB made these decisions, it had theory, field testing, consultation and judgement.

Today we have something more.

We have evidence.

Real financial statements.

Real investor behaviour.

Real implementation costs.

And real experience of explaining these numbers.

So perhaps the question for the PIR is not:

“Were the original decisions reasonable?”

I think we already know that they were.

The better question is:

> Knowing what we know now, would we make exactly the same decisions again?

And where the answer is no — where the evidence is pervasive, the consequences significant and a better solution can be identified without unravelling the Standard — I think a mature standard-setting system should be confident enough to respond.

That, for me, is the opportunity presented by the Post-implementation Review:

not to reopen IFRS 17 wholesale, but to test its most important judgements honestly against the evidence we now have.

Thank you.

Appendix B: AcSB Presentation — IFRS 3 Business Combinations

Exploring the effectiveness and usefulness of IFRS 3
September 2026
ASAF

Agenda

• Background and Purpose
• Interaction with IAS 38 Intangible Assets and Broader User Insights on IFRS 3
• Interaction with Other Standards
• Earn-outs and Contingent Consideration
• Asset Acquisitions vs Business Combinations
• Reflections and Questions

Background and Purpose

• The objective of IFRS 3 Business Combinations is to provide users of financial statements with relevant, reliable and comparable information about a business combination and its effects
• The AcSB’s research explores potential conflicts between achieving the objective of IFRS 3 at the acquisition date, and the usefulness of financial information in the post-combination period. This includes considering whether IFRS 3 and its interaction with IAS 38 Intangibles and other Standards provide information that faithfully represents the economics of business combinations and meets users' information needs over time
• This research further evaluates whether the distinction between business combinations and asset acquisitions is well understood and results in meaningful differences in accounting outcomes, as well as whether the accounting for earn-out arrangements provides decision useful information in the post-acquisition period

Research Questions

• Does IFRS 3 achieve its intended objective of providing useful information about business combinations at the acquisition date?
• How does the application of IFRS 3 affect the usefulness and reliability of financial information in the post-combination period?
• Are the accounting distinctions between business combinations and asset acquisitions well understood by users, and do they result in information that is decision useful in assessing these transactions?

Interaction with IAS 38 Intangible Assets and Broader User Insights on IFRS 3

Overview of Research Activities

Our research drew on multiple sources to build a foundational understanding of issues related to Intangible Assets and their interaction with IFRS 3 Business Combinations. This work included:

• Review of academic literature examining the recognition, measurement and comparability challenges associated with intangible assets, both acquired in business combinations or generated internally, and the resulting information asymmetry between organic and acquisitive growth strategies
• Desktop research
• Identifying conflicts arising from differences in definitions, recognition criteria, and measurement bases between IFRS 3 and other standards
• Analyzing a sample of business combinations involving publicly traded Canadian companies of various sizes, across multiple sectors, focusing on the significance of intangible assets and goodwill
• Discussions with the AcSB’s User Advisory Committee (UAC) that considered how information about intangible assets acquired in a business combination supports users’ investment decisions

Academic Literature Review Findings

Interaction with IAS 38

• Importance of Intangibles:
• Intangible assets are crucial in modern economics, especially for technology and service-oriented companies
• Current Accounting:
• Intangible assets acquired in a business combination are capitalized even when equivalent internally generated assets would not qualify, creating comparability challenges between entities that grow organically and those that expand through acquisitions
• Valuing intangible assets often requires complex valuation techniques using unobservable assumptions, which may lead to variability in valuation outcomes
• Current disclosures related to intangibles are often limited and lack detail*
• Investor Preferences: Users favour enhanced disclosures about acquired intangible assets rather than broader recognition of intangibles or expanded use of fair value measurements. Additional disclosures could include:
• Valuation methods and key inputs used to estimate fair value
• Performance metrics (i.e. revenue from patents, customer retention rates)
• Disaggregation of intangible-related expenditures from other operating expenses to provide greater transparency into the ongoing costs of maintaining capitalized intangible assets

*Includes intangible assets, both acquired or internally generated, as well as intangible-related expenditures that do not qualify for capitalization and are not separately presented in the income statement

Desktop Research Findings

Intangible Assets and Goodwill in Canadian Business Combinations

Conducted an analysis of business combinations involving publicly traded Canadian companies of varying sizes, across multiple sectors, focusing on the significance of acquired intangible assets and goodwill*

• Examined how acquired intangibles and goodwill contribute to the overall asset base of acquired businesses, and identified sector-specific trends in the types of intangibles recognized in acquisitions
• Assessed the extent to which unrecognized intangibles may be subsumed within goodwill, providing context for ongoing discussions about the adequacy of disclosures and the need for improved information regarding acquired intangibles
• These findings were considered alongside feedback and calls for enhanced transparency in financial reporting

*The sample comprises entities with fiscal years ending in 2022, 2023, and 2024. Data were obtained from the purchase price allocation (PPA) note in the financial statements for the respective fiscal years. The acquisitions span a range of transaction sizes, from larger to smaller, and reflect activity across multiple industries; however, industry representation within the sample is not uniform. Accordingly, the research findings are not intended to provide precision at the industry level, but rather to highlight general directional sector trends and observations across the overall sample.

• 86%: Of total consideration paid attributed to intangible assets and goodwill
• 44%: Average intangible assets as % of consideration
• 42%: Average goodwill as % of consideration
• 25: Canadian public company acquisitions analyzed

The sample indicates that the value of acquired entities is increasingly driven by intangible assets and knowledge-based factors rather than tangible assets.

*The appendix provides additional detailed findings from this desktop research

User Perspectives

How We Engaged Canadian Users

Direct input was sought from the AcSB’s User Advisory Committee (UAC) on how acquisition accounting affects their analysis*

For each sub-topic, we examined Canadian case studies and invited UAC members to share their perspectives through targeted discussion questions

User perspectives were generally consistent with the investor preferences identified through the academic literature review. The following slides highlight incremental user insights obtained

*The UAC brings together analysts and other users of financial statements to advise the AcSB

Observations: Acquisition-Date Accounting

What users told us they find useful (Acquisition-Date)

• IFRS 3 provides a clear framework for understanding transaction fundamentals, including:
• the purchase price;
• goodwill recognized; and
• high-level identification of acquired assets and liabilities.
• Goodwill is viewed as a useful reference point for assessing management’s historic capital deployment

Key concerns

• Detailed purchase price allocations are of limited analytical value to users:
• Valuing individual assets, particularly “soft” intangibles such as customer relationships, often requires complex valuation techniques and unobservable assumptions, resulting in variable valuation outcomes
• Users place little reliance on these detailed allocations in their analysis
• Day 1 accounting allocations are not central to performance assessment:
• The purchase price allocation does not provide insight into whether the acquisition will ultimately deliver expected returns

Observations: Post-Combination Accounting

What users consider most decision-useful

• Post-acquisition performance information is significantly more important than Day 1 measures
• Users focus on:
• the acquired business’s contribution to margins and cash flows; and
• whether the acquisition achieves management’s expected returns

Users want information that helps assess whether acquisitions create value over time, rather than how assets were allocated at inception

Key concerns and observations

• Goodwill impairment is seen as a lagging indicator:
• While goodwill balances are monitored over time, impairment recognition is often delayed relative to underlying economic declines
• As a result, the recognition of impairments provides limited insight into deteriorating performance
• Common adjustment to users’ analytical models:
• Amortization of acquired intangible assets is a common adjustment made by users because it is often not viewed as representative of the ongoing costs of generating or maintaining intangible assets. Users noted that many internally generated intangible assets do not qualify for recognition under IAS 38, resulting in related costs being expensed as incurred, while acquired intangible assets are subsequently amortized. Some users therefore view the amortization expense as double counting the continuing economic cost.
• Users also commonly adjust for the effects of other acquisition accounting requirements, including inventory fair value step ups, acquired revenue contracts and certain acquisition date fair value adjustments, when these effects are viewed as reducing comparability or obscuring underlying operating performance. The following section explores these interactions with IFRS 3 in more detail.

Broad support expressed for enhanced post-acquisition performance disclosures, which would provide clearer evidence of whether acquisitions deliver anticipated benefits

Interaction with Other Standards

The measurement requirements in IFRS 3 at the acquisition date do not always align with those applied in subsequent period

The following slides examine the interaction of IFRS 3 with these Standards in greater detail:

• IFRS 9 Financial Instruments
• IFRS 15 Revenue from Contracts with Customers
• IFRS 16 Leases
• IAS 2 Inventory
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets

*Additional areas of conflict between IFRS 3 and other Standards in the post-combination period are summarized in the appendix

IFRS 9 Financial Instruments

Expected Credit Losses on Acquired Financial Assets

• At acquisition date (IFRS 3):
• Acquired financial assets (e.g., loan portfolios, receivables) are measured at fair value
• Fair value reflects market participant expectations of credit losses
• After acquisition (IFRS 9):
• Financial assets are subject to the expected credit loss (ECL) model
• Entities recognize ECL immediately (“day 1”), even when no further deterioration has occurred

Sources of the Conflict

• Overlapping measurement of credit risk
• Potential double counting of credit losses
• Embedded in acquisition-date fair value, followed by additional ECL recognition post-acquisition
• Different measurement objectives
• IFRS 3 $\rightarrow$ market-based fair value (market-participant perspective)
• IFRS 9 $\rightarrow$ forward-looking impairment model (entity-specific model)

IFRS 9: Post-Combination Accounting Effect

Example

Entity A acquires Entity B, including a loan portfolio of $1,000 (Book value)

At acquisition date (IFRS 3) - Loans measured at fair value: $950

After acquisition (IFRS 9) - Entity recognizes ECL allowance of $100 - Net carrying amount: $850

Financial Reporting Implications

• IFRS 3's fair value measurement and IFRS 9's ECL measurement are based on different objectives and assumptions, creating potentially counterintuitive measurement tensions
• Economic credit risk reflected twice once in fair value reduction (IFRS 3), and then through ECL allowance recognition (IFRS 9)

*The FASB resolved this conflict through ASU 2025-08 by applying a “gross-up” approach, recognizing expected credit losses at the acquisition date as part of the asset’s carrying amount rather than as a day 1 expense thereby avoiding double counting. (Effectively eliminating the day 1 credit loss expense - no immediate earnings impact)

IFRS 16 Leases

Acquired Leases

Acquiree is the lessee (IFRS 3 exception¹) - The lease liability is remeasured at the present value of the remaining lease payments, as though a new lease had been entered into on the acquisition date - The right of use (ROU) asset is the same amount adjusted for off-market terms (i.e., lease liability ± adjustments for off-market terms) - IFRS 3 requires that these adjustments be recognized in the ROU asset to avoid embedding favourable or unfavourable lease terms within goodwill, which would otherwise obscure this information for users

Lessor operating leases² - The acquirer recognizes no separate asset or liability for favourable or unfavourable lease terms - The effect of off-market lease terms is embedded in the acquisition-date fair value of the underlying leased asset

Sources of the Conflict

• Transparency: Difficulty identifying the value of favourable or unfavourable lease terms
• Comparability: Limited visibility into the economics of acquired leases across transactions
• Earnings predictability: Subsequent earnings may not clearly reflect the economics of off-market lease terms

IFRS 16: Post-Combination Accounting Effect

Example

The acquirer obtains a building in a business combination subject to an existing lease, assuming the lessor position, with contractual rents above current market rates.

Under IFRS 3 (Acquisition date): - The building's acquisition-date fair value reflects those favorable lease terms - No separate "favorable lease intangible" is recognized

After acquisition: - Rental income continues to be recognized under IFRS 16 based on the lease contract - Depreciation (or fair value changes if accounted for as investment property at fair value) follows the accounting model applied to the underlying asset

The economics are captured, but not through a separate lease-related asset or liability. The acquisition-date fair value adjustments embedded in the leased asset may produce earnings patterns that do not align with the related operating lease term

IFRS 15 Revenue from Contracts with Customers

Acquired Performance Obligations

At the acquisition date: - Measured at the acquisition-date fair value, not at the IFRS 15 transaction price - This creates a measurement mismatch with the acquiree's pre-deal accounting

Post combination revenue recognition: - Acquisition-date contract fair values reduces post-acquisition revenue compared to what the acquiree would have shown in its standalone financial statements

Sources of the Conflict

• Forecasting difficulty: The fair value “reset” of contract balances can make revenue and gross margins less predictable
• Trend analysis: Acquisition-date accounting can distort revenue trends, complicating period-over-period analysis
• Underlying economics: Reported revenue reflects acquisition-date accounting adjustments rather than changes in underlying customer activity

IFRS 15: Post-Combination Accounting Effects

Example

• Customer prepays $100m for future services
• Contract liability under IFRS 15 = $100m

At acquisition date - IFRS 3 measures the remaining performance obligation at fair value - Fair value of contract liability = $70m

After acquisition - Revenue recognized under IFRS 15 is based on the $70m contract liability - Future reported revenue = $70m, not $100m

Same customer contract. Same services. Different reported revenue.
The difference arises because IFRS 3 resets the measurement basis from an IFRS 15 contract liability to a fair value obligation at the acquisition date³

IAS 2 Inventory

Measurement of Inventory Acquired in a Business Combination

• At acquisition date (IFRS 3):
• Acquired inventory is measured at fair value, not at the acquiree’s carrying cost
• Fair value may already reflect some or all of the acquirer’s expected profit margin
• After acquisition (IAS 2):
• Inventory is carried at the lower of cost and net realizable value
• On sale, the fair-value “cost” flows to cost of sales, so little or no margin is recognized

Sources of the Conflict

• Different measurement objectives:
• IFRS 3 $\rightarrow$ fair value at the acquisition date (exit-price, market-participant perspective)
• IAS 2 $\rightarrow$ historical cost, subject to the lower of cost and net realizable value
• Suppressed margins on post-combination sales:
• Selling fair-valued inventory shortly after acquisition produces reduced or zero gross profit
• Is not indicative of the gross margins expected on future inventory sales
• Distorts comparability with the acquirer’s organically produced inventory

IAS 2: Post-Combination Accounting Effect

Example

Entity A acquires Entity B, including inventory that cost Entity B $600 (Book value)

At acquisition date (IFRS 3) - Inventory measured at fair value: $1,000

After acquisition (IAS 2) - Inventory carried at fair value of $1,000 (its new cost under IAS 2) - Entity A sells it for $1,050 - Gross profit recognized: only $50, versus $450 the acquiree would have shown

Financial Reporting Implications: - The acquiree’s earned margin is captured in the acquisition-date fair value, not in post-combination revenue - Reported gross margins are often depressed following a business combination, which can obscure underlying operating performance

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Measurement of Provisions and Contingent Liabilities Acquired in a Business Combination

• At acquisition date (IFRS 3):
• Provisions and certain contingent liabilities assumed in a business combination are recognized and measured based on acquisition-date fair value concepts
• Recognition may occur even when the outflow of economic benefits would not be considered probable under IAS 37
• After acquisition (IAS 37):
• Acquired obligations are subsequently measured using IAS 37 requirements, including updated estimates of expected cash outflows and timing of settlement

Sources of the Conflict

• Different recognition thresholds: IFRS 3 may recognize obligations that would not otherwise meet IAS 37 recognition requirements
• Different measurement objectives: IFRS 3 focuses on acquisition-date fair value, while IAS 37 focuses on the current best estimate of the expenditure required to settle the obligation
• Post-acquisition volatility: Subsequent reassessments may affect earnings even when the underlying obligation relates to events that occurred before the acquisition
• Transparency and comparability: Users may find it difficult to distinguish changes arising from revised estimates versus changes in the economics of the acquired business

IAS 37: Post-Combination Accounting Effect

Example

Entity A acquires Entity B, including an environmental remediation obligation

At acquisition date (IFRS 3) - Fair value of obligation: $150

After acquisition (IAS 37) - Updated remediation studies indicate expected clean-up costs of $190 - Liability increased to $190 - Loss recognized in earnings: $40

Financial Reporting Implications: - Subsequent revisions to acquired obligations can affect earnings trends after the acquisition date - Without additional disclosures, users may find it difficult to determine whether changes reflect acquisition-date estimation uncertainty or changes in underlying operating performance

Financial Statement User Perspectives

Key themes emerging from user discussions on the interaction of IFRS 3 with other Standards:

• Distorted trends — these measurements can affect post-acquisition revenue, margins and earnings trends in ways that may not reflect economic performance
• Comparability suffers — post-acquisition results may not be comparable with the acquired business's history, or with entities that have grown organically
• Analytical capacity — sophisticated users may adjust for these effects; not all users have the same access to information, time or resources to make these adjustments⁴
• Reliance on MPMs — users may become dependent on management-defined performance measures instead of the primary financial statements
• What would help — Users primarily emphasized the need for additional disclosures explaining the source, magnitude, duration, and economic effects of acquisition accounting adjustments. However, for certain interactions, particularly IAS 2 acquired inventory, IFRS 15 revenue contracts and IFRS 9 acquired financial assets, some users also expressed support for IFRS 3 measurement approaches that reduce artificial post acquisition distortions

Earn-outs & Contingent Consideration

What is an Earn-out?

Definition. An earn-out (contingent consideration) is additional consideration that buyers agree to pay the seller if specified post-closing performance targets, typically, revenue, EBITDA, or operational milestones, are met during a defined period after closing

Why they exist

• Bridge a buyer / seller valuation gap
• Retain key sellers / management post-close
• Transfer risk on future performance to the seller

How they're accounted for under IFRS 3

• Recognized at the acquisition-date fair value as part of consideration transferred (impacts goodwill)
• Classified as financial liability or equity based on how the consideration is settled
• If liability: remeasured to fair value each period through P&L
• If equity: not remeasured

How Common are Earn-outs in Canada?

Earnouts are common in Canadian private M&A — particularly mining, life sciences and technology, but pay out fully less than 60% of the time, creating complex post-close accounting

Why Goodwill is Not Revised When an Earn-out is Not Met?

The mechanics

1. At acquisition date, contingent consideration is included in consideration transferred at fair value
2. Which directly impacts the residual goodwill recognized at the acquisition date
3. After the measurement period: - IFRS 3 explicitly prohibits adjusting goodwill for subsequent changes in the fair value of contingent consideration - Liability-classified contingent consideration is remeasured to fair value each reporting date with changes recognized in P&L - Equity-classified contingent consideration is not subsequently remeasured

The disconnect: Goodwill is influenced by an estimate of the earnout. Subsequent changes in that estimate impact P&L and not goodwill. A missed earnout creates a P&L recovery and not a goodwill write-down, even though the rationale for the original goodwill amount has changed

Financial Statement User Perspectives

Key themes emerging from user discussions on the accounting for earn-out arrangements:

• Earnings effects — subsequent remeasurement can materially affect earnings, thereby distorting current-period operating performance
• Not sustainable performance — these gains and losses are often treated as acquisition-related items rather than indicators of sustainable performance
• Counterintuitive outcomes — a reduction in expected earn-out payments may produce a gain even though the business is performing below expectations
• Context is essential — users need to know whether gains or losses arise from fundamentals, changed assumptions or the mechanics of the accounting
• What would help — Users indicated that the priority is not necessarily eliminating counterintuitive outcomes, but rather providing better disclosure of performance targets, assumptions, valuation drivers, timing and reasons for remeasurements

Asset Acquisitions vs Business Combinations

Overview

• IFRS 3 distinguishes between two types of acquisitions: asset acquisitions and business combinations
• This classification is important because it determines how the transaction is recognized, measured, and disclosed in the financial statements

Asset Acquisition

• An asset acquisition occurs when an entity purchases individual assets or groups of assets, and possibly certain liabilities, that do not together constitute a business
• In these transactions, the acquired set does not include the processes necessary to generate outputs independently
• Asset acquisitions apply a cost allocation approach, allocating the purchase price to assets acquired and liabilities assumed on a relative fair value basis

Business Combination

• A business combination occurs when an entity acquires an integrated set of activities and assets that are capable of producing outputs
• This typically includes not only assets, but also the processes and systems needed to operate the business
• A business combination must be accounted for using the acquisition method, which primarily requires recognition of identifiable assets and liabilities at fair value and recognition of goodwill or bargain purchase gain

Financial Statement Impact Overview

*Differences Driven by Lack of Guidance: These arise because asset acquisitions lack comprehensive, principle-based guidance. Potentially leading to diversity in practice, structuring opportunities, and reduced usefulness. #Business combinations require detailed purchase price allocation disclosures and often include pro-forma financial information

Financial Statement User Perspectives

Key themes emerging from user discussions on the accounting for business combinations vs asset acquisitions:

• Economics first — users focus on the transaction’s economics: what was acquired, the rationale, the price paid, and whether subsequent performance meets expectations.
• Definitions differ — accounting definitions distinguish business combinations from asset acquisitions, while securities-law definitions may also draw different boundaries; users often find these distinctions difficult to navigate
• Classification unclear — users suggested that the concentration test can create outcomes that are difficult for users to reconcile with the underlying economics, particularly when similar acquisitions result in materially different disclosures
• Measurement preference — some users viewed relative fair value allocation as less useful than measuring acquired assets at fair value in asset acquisitions
• Disclosure gap — no single standard provides comprehensive disclosure requirements for asset acquisitions, creating an information gap when asset acquisitions are material

Reflections and Questions

Reflections

• IFRS 3 aims to provide useful information about business combinations, but accounting outcomes from acquisitions can differ from how users assess value creation
• Interactions between IFRS 3 and other standards may create outcomes that do not always align with how users evaluate acquisitions. Users frequently adjust reported information to understand recurring performance, cash flow generation, and whether management's acquisition objectives are being achieved. These recurring adjustments raise questions about whether aspects of the current recognition and measurement model continue to provide the most decision useful information over time
• While enhanced disclosures and presentation may improve transparency and help users understand acquisition-related accounting effects, the findings also raise broader questions about whether certain aspects of the current acquisition accounting model continue to provide the most decision useful information in the post-combination period. In particular, the recurring interactions identified between IFRS 3 and other Standards may suggest a need to consider whether targeted exceptions are the appropriate response, or whether the underlying recognition and measurement principles warrant broader reconsideration
• The measurement model and disclosure requirements for asset acquisitions warrant reconsideration to better meet users’ information needs, particularly by providing greater transparency around classification, improving the relevance of measurement, and addressing the disclosure gap when asset acquisitions are material

Questions

1. Do these findings and observations align with experiences and feedback in your jurisdiction? - If so, which areas are of greatest significance?
2. We have heard from users that some acquisition accounting outcomes do not always align with the way they evaluate acquisition. Does this observation resonate in your jurisdiction? - Are there specific recognition or measurement requirements that merit further consideration? If so, which areas are most significant from a user perspective? - To what extent could enhanced disclosure and presentation requirements address these concerns? - Several of the interactions discussed reflect differences between IFRS 3 and subsequent accounting requirements in other Standards. Do these interactions suggest a need for targeted exceptions, or do they raise broader questions about the underlying acquisition accounting model and its recognition and measurement principles?
3. Do the findings regarding asset acquisitions align with feedback in your jurisdiction? What are the most significant concerns, if any?
4. Do you think the current measurement and disclosure requirements for asset acquisitions provide decision useful information to users? If not, which aspects would benefit most from reconsideration (i.e., classification, measurement, or disclosures) for material asset acquisitions?

Appendix: Optional Reading

Desktop Research: Intangible Assets and Goodwill in Canadian Business Combinations

The sample comprises entities with fiscal years ending in 2022, 2023, and 2024. Data were obtained from the purchase price allocation (PPA) note in the financial statements for the respective fiscal years. The acquisitions span a range of transaction sizes, from larger to smaller, and reflect activity across multiple industries; however, industry representation within the sample is not uniform. Accordingly, the research findings are not intended to provide precision at the industry level, but rather to highlight general directional sector trends and observations across the overall sample.

Initial Research Findings: Other Poor Interactions