Consolidated report on the European outreach events on the discussion paper 'Business Combinations Under Common Control'
Jul 05, 2012
The European Financial Reporting Advisory Group (EFRAG) has posted to its website a feedback statement reflecting input received from four European events on the discussion paper 'Business Combinations Under Common Control', held earlier this year in London, Milan, Vienna and Warsaw.
The outreach events gave practitioners and others an opportunity to voice their opinions on topics considered in the discussion paper on business combinations under common control (published in October 2011), before the final discussion paper was published.
The discussion paper included a comprehensive analysis of the issues related to the relevant IFRS literature. The paper detailed three different ways of looking at the problem, and the feedback statement highlights participants' perceptions of the strengths and weaknesses of each view.
View 1: IFRS 3 can always be applied by analogy. Three different variants have been identified within this view depending on the extent to which the recognition and measurement principles in IFRS 3 are deemed to be applicable.
View 2: Applying an analogy to IFRS 3 may not be appropriate because there could be difficulty in identifying an acquirer or the accounting outcome may not represent a faithful representation of the BCUCC transaction where the ultimate parent entity directs the selection of the accounting acquirer. Therefore, two accounting treatments could be applied under these unique circumstances: ‘fresh start’ accounting and a predecessor basis of accounting. The selection of an accounting treatment is dependent upon who the users are and what their information needs entail. That is ‘fresh start accounting’ could apply where users deem that the assessment of the prospects of future net cash inflows is best reflected through fair value measurement. A predecessor basis of accounting could be applied when the information needs of users are best served through a historical trend analysis of the income and cash flow statements and the statement of financial position.
View 3: The analogy to IFRS 3 may apply in specific circumstances like a change to previous economic decisions taken in relation to the users of the consolidated financial statements of the transferee. Such an approach is consistent with the objective of financial reporting which is to provide “information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.”
The input received during the outreach events and the comment letters on the discussion papers will form the basis for EFRAG’s re-deliberation of the issues. EFRAG will then decide about what further steps need to be taken before putting forward views to the IASB.