Business combinations under common control

Date recorded:

Approach for transactions that affect non-controlling interest (Agenda Paper 23A)


The IASB is examining how companies should account for combinations of businesses under common control (“BCUCC”), which are currently outside the scope of IFRS 3 Business Combinations. The staff are working towards publishing a discussion paper in the first half of 2020.

In April and May 2018, the Board discussed current value approaches for BCUCC that affect non-controlling interest (NCI) in the receiving entity. In June 2018, the Board directed the staff to develop an approach based on the acquisition method set out in IFRS 3 and to consider whether and how that method should be modified to provide the most useful information about BCUCC that affect NCI in the receiving entity (transactions that affect NCI). In December 2018, the Board discussed the staff’s analysis on whether a current value approach should be applied to all transactions that affect NCI or just some transactions that affect NCI.

In March 2019 and April 2019, the Board discussed transactions that affect lenders and other creditors of the receiving entity and transactions between wholly owned entities undertaken in preparation for a sale, such as an IPO. The Board tentatively decided in April 2019 that a current value approach based on the acquisition method in IFRS 3 would provide the most useful information to non-controlling shareholders of the receiving entity.

In this June 2019 session, the staff introduce a paper Transactions that do not affect non-controlling shareholders and outline the next steps in the project.

Agenda Paper 23A Transactions that do not affect non-controlling interests

The staff consider whether transactions that do not affect non-controlling shareholders of the receiving entity are sufficiently different both from transactions that affect such shareholders and from business combinations that are not under common control to justify having a different accounting treatment, such as a form a predecessor approach.

The paper sets out the staff’s findings from their review of national requirements and guidance from various jurisdictions on BCUCC, together with guidance published by accounting firms. Some jurisdictions restrict the use of a particular method by having conditions that consider, for example, the effect of the transaction on the ownership interests in the underlying items, the commercial or economic substance of the transaction (the effect of the transaction on the reporting entity’s future cash flows) or the form or the amount of the consideration transferred, and whether the amount of the consideration is supported by independent valuation or observable market prices. Some jurisdictions differentiate between an acquisition and a reorganisation, and use some of these criteria to guide that classification.

The paper sets out various scenarios and looks at the impact of residual interests (equity claim) in the transferred entity. The examples include moving sibling subsidiaries, one of which had NCI before the merger. The subsidiaries are, variously, amalgamated into a single entity or made a subsidiary of the other. As a consequence, the NCI has an interest in different set of assets and liabilities.

Staff observations

The staff think that the transactions within the scope of the project that do not result in non-controlling shareholders of the receiving entity acquiring residual interest (equity claim) in transferred entities or businesses, are sufficiently different from transactions that result in non-controlling shareholders acquiring such residual interest and business combinations that are not under common control.

The staff outline that a distinction based on whether non-controlling shareholders of the receiving entity acquire a residual interest in the transferred entities or businesses is a viable approach to explore in determining when to apply a current value approach, and when to apply a form of a predecessor approach.

Staff recommendations

There are no recommendations. The staff are seeking feedback and plan to make recommendations at a future meeting.

Board discussion

The Board discussed the paper for about 50 minutes. Those who spoke thought that an acquisition method is appropriate when NCI of the acquiring (receiving) entity is affected, but some questioned how large the NCI needs to be to justify the acquisition method. If no outside money involved then predecessor makes sense.

One member thought the staff should consider whether a transaction that causes a change in NCI overlaps with the accounting requirements for transaction with owners.

A couple of Board members were concerned that entities might apply the acquisition method in inappropriate circumstances, “creating capital that was not there before.” Hence, some have the view that the acquisition method is inappropriate in some cases. Others thought that the “regulators will protect” from inappropriate accounting.

There was a debate about whether the approach is applying a shareholder or entity perspective. The member was concerned that viewing this from the perspective of the shareholders was inconsistent with IFRS 3 and the Framework.

One member said that the Board should focus on the economic substance of the transaction and investor needs. Another said that one of the main concerns is protecting the NCI shareholders. This might be achieved by the use of a particular accounting method or disclosure, or both.

Board members also wanted clarification on what the staff mean by a ‘predecessor method’. The staff said they planned to do that as one of the next steps.

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