Business combinations under common control

Date recorded:

Business Combinations under Common Control – Agenda Paper 23


The Board is examining how companies should account for combinations of businesses under common control, which are currently outside the scope of IFRS 3. A DP is expected in the first half of 2019.

The purpose of this session was to provide an update to the Board on the approaches being developed by the staff for BCUCC transactions.  It is an education session, which means that Board members are not being asked to make any decisions.

Staff analysis

The Board has previously decided to use the acquisition method in IFRS 3 as the starting point in developing proposals for transactions within the scope of the BCUCC project. (See the February 2018 meeting summary).

The staff use a simple scenario of a parent with two subsidiaries. The parent does not own all of the shares in one of the subsidiaries, which means that there is a non-controlling interest in the consolidated financial statements. The subsidiary without the non-controlling interest is “acquired” by the subsidiary in which there is a non-controlling interest so that the group comprises the parent, the subsidiary with the NCI and its subsidiary.

The staff ask two questions. What information about the transaction is useful for the holders of the NCI, and is there anything special about a BCUCC that needs to be reflected in the financial reporting?

Information for the NCI

In this scenario the resources of the NCI are affected because the entity with the NCI has acquired another entity. The staff conclude that the financial reporting should “use the fair values exchanged” and reflect the transaction by measuring the acquired subsidiary’s identifiable net assets and the consideration transferred at fair value.

Anything special about a BCUCC?

The staff assessment is that that a BCUCC transaction could include a transaction with owners acting in their capacity as owners (i.e. a contribution to, or a distribution from, a subsidiary).

The staff look at a range of exchange “values”, comparing the consideration transferred with the fair value acquired. If the fair value of the consideration is higher than the fair value of the business acquired it would be a distribution from the acquirer. If the fair value of the business is higher than the consideration it would be a contribution to the acquirer (and therefore not a bargain purchase). Any difference between the fair value of the net assets and the fair value of the business would be recognised as goodwill. The staff describe this as the full fair vale approach.

They also consider whether the transaction should be bounded by the consideration transferred, in which case the contribution (bargain purchase) would not be recognised. They call this the ceiling approach.

Other transactions

The staff will look at transactions between wholly owned entities with external debt and transfers of a business to a Newco at future sessions. 

Board discussion

One Board member agreed with the thinking of the ‘gap’ as either a contribution or distribution and that the focus should be on the needs of NCI for information.

Several Board members agreed that there was a high risk of measurement uncertainty in these types of transactions. A key difference to IFRS 3 is that in that standard the fair value of the consideration and business are assumed to be the same whereas in a BCUCC transaction this will not always align. The transaction is assumed to be undertaken at arms-length and IFRS 3 also gives primacy to the consideration transferred. In practice it is difficult to measure the value of the business acquired.

One Board member suggested that the same accounting approach should be used for all BCUCC transactions as, in practice, it is too difficult to distinguish between transactions and draw a line. Staff reminded the Board that there is already a line to be drawn between accounting under IFRS 3 using acquisition method and accounting for BCUCC using an alternative method. The question they are asking is where the line should be drawn. Staff also noted that they have found a way to reduce measurement uncertainty and will present this to the Board in the future.

One Board member reflected that in a business combination the consideration normally reflects the value of the business plus synergies from the combination. In this case should synergies be considered separately given that the synergy already exists and will be encouraged by the parent and known to NCI? Staff commented that synergies will be considered further in a future board meeting.

One Board member questioned whether it was a realistic scenario that fair value of the business will be higher than the consideration paid as this is prohibited in certain jurisdictions. However, another Board member said this is not true in all jurisdictions, adding that the valuation should be a careful exercise to ensure that an overpayment is not reflected when in reality the business value includes both the business and synergies.

Another Board member suggested that question 2, on whether there is anything different in BCUCC transactions compared to other transactions, should be considered before question 1 on whether information is useful for NCI. In considering the questions in this order the first objective would be to determine whether the transaction contains a contribution or distribution, as there is a common control relationship, and then question how to account for that.

One Board member asked whether the needs of the NCI are different to those of the controlling party as these are not distinguished in the Conceptual Framework. Staff clarified that there are many primary users and they were only considering NCI as the parent has a different perspective on the transaction to NCI. From a parent’s perspective this would not be an acquisition but a moving of an entity to a different pocket. Furthermore, the parent has access to additional information.

The Board members thought the project was heading in the right direction and that it would be important to streamline the advantages and disadvantages of the full fair value and ceiling methods.

Staff concluded that the key takeaways were:

  • Overall support for the general direction;
  • Measurement uncertainty and how to ensure synergies are taken account of;
  • Order of analysis, consideration of whether there anything special about a BCUCC that needs to be reflected in the financial reporting and then what is useful information for the holders of the NCI; and
  • Consideration of all primary users.

Board decisions

The Board was not asked to make any decisions.

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