Business combinations under common control

Date recorded:

Follow up on the approaches being developed by the staff (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 Business Combinations. A Discussion Paper (DP) is expected in the first half of 2019.

In April 2018, the Board discussed two approaches being developed by the staff for a specific subset of transactions within the scope of the BCUCC project.

The purpose of this session is to provide an update on the approaches being developed by the staff and to give Board members an opportunity to provide further feedback and to ask questions.  It is an education session, which means that Board members are not being asked to make any decisions.

Staff analysis

The staff previously decided to use a simple scenario on which two approaches are being developed: the Full Fair Value approach and the Ceiling approach (see the April 2018 meeting summary).

The staff accept there are challenges relating to using the fair value of the acquired business under both approaches. To address these challenges the staff have developed a further approach described as the Revised Ceiling.

Under the Revised Ceiling approach, when the fair value of the consideration exceeds the fair value of the identifiable net assets, a provisional amount of goodwill will be recognised. The carrying amount of provisional goodwill is allocated to each of the receiving entity’s CGUs that is expected to benefit from the synergies of the combination. Using the mechanics of IAS 36 Impairment of Assets, the recoverable amounts of the CGUs are measured and compared to their carrying amounts. When the recoverable amount exceeds the carrying amount, the provisional goodwill is confirmed and there is no equity transaction to recognise. If the recoverable amount is less than the carrying amount, the provisional goodwill is adjusted and a distribution from equity is recognised.

In this scenario, the difference between IFRS 3 and the Revised Ceiling approach is that with IFRS 3 an impairment loss would have been recognised when the goodwill was subsequently tested for impairment, whereas under the Revised Ceiling approach a distribution from equity is recognised instead.

No modification to the Ceiling approach that was discussed by the Board in April 2018 is required when the fair value of the consideration transferred is less than the fair value of the acquired identifiable net assets—a contribution to equity is recognized. Under IFRS 3 this would be a gain on bargain purchase.

The staff ask if the Board members have any questions and/or comments on the Revised Ceiling approach?

Board discussion

The measurement objective of the new approach is still the same, i.e. to capture the values that are exchanged as opposed to the transaction price.

The Board discussed that under IFRS 3, the fair value of the consideration is used as the basis for the calculation of goodwill and is assumed to equal the fair value of the underlying business plus any synergies that are specific to that acquirer. It was noted that these transaction-specific synergies contain a high degree of measurement uncertainty.

The difference from a standard business combination and a BCUCC is that there may also be some other equity-related element, such as a contribution or distribution.

Under the previous approaches proposed by the staff goodwill is capped at the fair value of the acquired business, i.e. synergies between the combining parties were not reflected. The revised ceiling approach attempts to capture the synergy-specific goodwill.

A Board member challenged whether it was right to assume that all BCUCC are not at arm’s length and/or a market price is not used. For example in many jurisdictions there is legislation to protect minority shareholders and transactions have to be completed in a way that does not disadvantage them. However it was discussed that these proposals would be applicable globally and therefore not all jurisdictions would have these laws in place and also that BCUCC are directed by the parent and even though a market price may be used, the fact is that it could be different.

A suggestion was made that a starting point could be for management to assess whether the transaction was completed at a market price and if it was, apply IFRS 3 and if not, then look to the alternative BCUCC treatment. It was agreed that the underlying principles of the accounting would be focused on first, then the scope of who and when it applies would be considered at a later date.

Another Board member identified the challenge of how to distinguish between the synergies that existed pre-acquisition and those that arose post-acquisition, given the ultimate ownership has not changed.

The mechanics of the revised ceiling approach were illustrated by the staff and it was noted that consideration would need to be given to the appropriate measurement period and how it compares to other Standards.

A Board member commented that the approach is only as good as the impairment test in IAS 36 and that already contains uncertainty measurement. It was agreed that if the acquirer already had unrecognised goodwill or headroom within its CGUs, this could mask any equity transactions arising from this transaction.

One Board member commented that there did not seem to be enough measurement precision to split out the synergy goodwill from the equity element. As a result that Board member preferred the ceiling approach, as the revised ceiling introduced too much complexity and measurement uncertainty, including that inherent in IAS 36.

Staff concluded that the key takeaways were:

  • The transaction price in a BCUCC might include the fair value of the acquired business on a standalone basis, might include synergies specific to the combination and might contain a distribution. Consideration must be given as to which elements of the transaction are trying to be captured for a BCUCC, for example whether synergies should try to be captured.
  • Once the accounting treatment is progressed, the additional information to be provided through disclosures will need to be considered.
  • There was some preference for the ceiling approach and some preference for the revised ceiling approach, but no support for the full fair value approach.
  • To what degree is it assumed that a transaction under common control is at arm’s length or not.

Board decisions

The Board was not asked to make any decisions.

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