Business combinations under common control

Date recorded:

Business Combination under Common Control – Cover note – Agenda paper 23

The Board continued its discussions on the business combinations under common control (BCUCC) project. The Staff presented the following papers in this session:

  • Review of related projects (AP 23A)
  • Scope of the project (AP 23B)
  • Methods of accounting (AP 23C)

Next steps

The Staff will discuss the following topics in the first half of 2018: (a) accounting methods for transactions within the scope of the project; and (b) how the predecessor method should be applied. The Staff expect to issue a discussion paper as the next consultative document.

Business Combination under Common Control – Review of Related Projects (Agenda Paper 23A) and Scope of the Project (Agenda Paper 23B)


In AP 23A, the Staff provide an overview of the outstanding issues related to the scope of the BCUCC project that they have identified in other projects of the Board and the IFRS Interpretation Committee (IC). The Staff considered whether these issues should be included within the scope of the BCUCC project in AP 23B.

Staff analysis

One of the issues raised with the IC that remains unresolved relates to the transfer of businesses under common control involving the formation of a Newco. Typically, a controlling party (Parent) would form Newco and transfer its existing businesses thereto in preparation for selling the Newco subgroup externally, e.g. in an initial public offering (IPO). In considering how Newco should account for the transfer of those businesses, the key question is whether the transaction is a BCUCC, which hinges on whether Parent’s control over Newco is transitory.

IFRS 3 describes a BCUCC as a transaction under which ‘all the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory.

Given the external sale of the Newco subgroup shortly after its formation, there are differing views as to whether Parent’s control over Newco is transitory and consequently whether the BCUCC scope exclusion applies to Newco’s acquisition of the transferred businesses.

The same question arises in the following situations:

  • (a) the acquisition by Newco of existing businesses from Parent is conditional upon a successful IPO of Newco; and
  • (b) Parent acquires a business from an external party and immediately thereafter, transfers the newly acquired business to an existing subsidiary.

Given that these transactions are widespread and there is evidence of diversity in practice, the Staff recommended that the Board include these transactions within the scope of the BCUCC project.

Staff recommendation

The Staff recommended that the scope of the BCUCC project include transactions involving transfers of businesses or entities where all the combining entities are ultimately controlled by the same controlling party (or parties), and:

  • (a) the transactions are preceded by an external acquisition and/or followed by an external sale of one or more of the combining entities; or
  • (b) the transactions are conditional on a future sale such as in an IPO.


The Board approved the Staff’s recommendations, subject to their setting a timeframe within which the common control transaction and the related preceding acquisition or subsequent disposal must occur for the transaction to fall within the project scope.

A couple of members observed that IPOs are not the only transactions on which the question of transitory control arises or that may be conditional. Accordingly, other disposal transactions in similar circumstances, e.g. distribution to shareholders, should also be included within the scope of the project.

Another Board member cautioned against potential scope creep and asked the Staff to clarify whether transfers of assets that are not in a legal entity would be within the scope of the project. This is because the Board had decided in a previous meeting to include transfers of entities under common control that are not a business as defined within the project scope (which is inconsistent with the project title as noted by an EEG member and hence the request for clarification). She reminded the Staff, again, to set out in the DP typical transactions that are not addressed in this project because they are already addressed by extant literature in order to clarify the Board’s position on those transactions and to reduce diversity in practice.

Business Combination under Common Control - Methods of accounting – Agenda Paper 23C


In this paper, the Staff list the initial factors that they will consider in selecting an appropriate accounting model for BCUCC. The Board was asked to make any decisions in this session.

Staff analysis

The Staff will use either the acquisition method or predecessor accounting as the starting point for developing a model for accounting for BCUCC. Each method has its pros and cons and one method may be more suitable than the other for particular types of BCUCC transactions.

The objective of the project is to develop an accounting model for BCUCC that would provide the most useful information for the primary users of the reporting entity’s financial statements, at a cost that can be justified by the benefits of that information. The focus of the project is on external parties (i.e. investors, lenders, creditors and non-controlling interests), rather than parties that have access to information without relying on the reporting entity’s financial statements. As regards the reporting entity, the focus is on the combining entities and not on the ultimate controlling party or the transferring party.

The Staff have preliminarily identified the following factors that could influence the decision about which method should be applied to a particular BCUCC transaction:

  • Decision making process: Who negotiated the transaction – the combining entities or the controlling party?
  • Purpose of the transaction: Does the transaction mainly benefit the combining entities or the controlling party?
  • Consideration transferred: Is the consideration determined using the same assumptions that market participants would use? What is the form of consideration, e.g. shares, cash, assets, debt? Can the fair value of the consideration be supported by independent evidence?
  • Commercial substance: Does the transaction have commercial substance for the combining entities?

Next step

The Staff will seek feedback on these factors from the Emerging Economies Group (EEG) and the Accounting Standards Advisory Forum (ASAF) in early December and will provide the Board with an oral update during the meeting.


In deciding what is the best approach for accounting for BCUCCs, the EEG, ASAF and the Board generally agreed that this should be driven by the information needs of users and that the assessment should be done at the reporting entity’s level, i.e. the entity acquiring the business or entity under common control, bearing costs-benefits in mind.

From the reporting entity’s perspective, a BCUCC is no different from a business combination not under common control – the entity has acquired a business. As IFRS 3 already states that the acquisition method best serves the information needs of users by detailing the fair value of the consideration given up and the fair value of the net assets acquired, the Board and the EEG generally believe that the acquisition method should be applied to a BCUCC especially if the users are external to the group. However, if the users are internal group members, then cost considerations might suggest that the predecessor method may be more appropriate.

In light of the above, the Board and the EEG generally did not see much relevance in the factors proposed by the Staff in considering which approach is the most appropriate. Given the nature of a BCUCC, the decision-making process for the transaction is not relevant. A Board member also observed that they will need to define the ‘commercial substance’ factor widely because within a BCUCC context, there are many valid reasons why the transaction would not affect the cash flows of the combining entities and yet the transaction has commercial substance.

Furthermore, the Board, EEG and ASAF generally agreed that one method should be used to account for BCUCCs and no choice should be given.

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