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Business combinations under common control

Date recorded:

Cover paper (Agenda Paper 23)

In previous meetings, the Board made tentative decisions on when a current value approach based on the acquisition method set out in IFRS 3 should be applied to transactions within the scope of the project, and when a predecessor approach should be applied. In this meeting, the staff asked the Board to consider how a predecessor approach should be applied.

Predecessor approach—carrying amounts (Agenda Paper 23A)

Staff analysis

This paper discussed whether, applying a predecessor approach, a receiving entity should recognise and measure assets and liabilities transferred in a business combination under common control: (a) at the carrying amounts included in the financial statements of the transferred entity (“Alternative A”); or (b) at the carrying amounts included in the consolidated financial statements of the transferred entity’s controlling party (“Alternative B”). 

Applying Alternative A would ensure comparability with the historical financial information of the transferring entity or business. This would result in consolidated or combined financial statements of the combined entities or businesses that reflect the perspective of those entities, rather than its controlling party. It would also reflect continuation of those entities or businesses in a new legal form.

Alternative B would result in information based on more recent values than Alternative A because it would be based on fair values of assets and liabilities of the transferred entity at the time it was acquired into the Group from a third party. However, the staff think that Alternative B lacks conceptual rationale because it reflects the perspective of the controlling party and not the perspective of the receiving entity and it would be similar to the concept of ‘push-down accounting’ that is currently not included in IFRS Standards.

Staff recommendation

The staff recommended Alternative A. This approach is consistent with the reporting entity perspective in the Conceptual Framework and would ensure a consistent measurement basis for the assets and liabilities of the transferred entity making it easier for users to perform trend analysis. The staff recommendation is also generally supported by some, but not all, of the findings in the staff’s research and outreach.

Board discussion

Board members expressed mixed views as to whether Alternative A or B is the appropriate way to apply the predecessor approach.

The Vice-Chair reminded the Board that the question only arises if the transferred entity had been previously acquired by the group as otherwise the carrying amount of the transferred entity and the carrying amount in the controlling party’s consolidated financial statements would be the same.

Proponents of Alternative A argued that Alternative B represented neither historical nor current values and there was little benefit in going with an amount in between those two. One Board member said that it would not be logical that on one hand, the Board decided that acquisition accounting is not relevant for those transactions, and on the other hand Alternative B would use figures that result from a previous acquisition accounting. Alternative B was also seen as the more costly alternative, if, for example, the controlling entity was not an IFRS preparer and the financial statements would have to be converted into IFRS.

Proponents of Alternative B said that the focus should be on the primary user of the resulting financial statements, which would be the controlling party (as the Board previously decided that the predecessor approach is only applied when there are no non-controlling shareholders). Alternative B provided the most useful information to that primary user. It was also noted that the staff’s review of business combinations under common control had shown that about half of the entities applied Alternative B. The staff, however, said that many of these instances were in similar jurisdictions and might hence be regulator-driven. One Board member said that the usefulness of the information provided by Alternative B depended on whether the transferring party was the controlling party or another party in the group. Another Board member said that she could accept Alternative B if goodwill was removed from the amounts included in the controlling party’s financial statements.

The staff voted in favour of Alternative A with 11:2 votes (one Board member was absent).

Predecessor approach—pre-combination information (Agenda Paper 23B)

Staff analysis

This paper discussed whether, applying a predecessor approach, entities or businesses should be combined: (a) retrospectively from the beginning of the earliest period presented–– under this alternative, pre-combination information in the primary financial statements is provided for all combining entities or businesses (“Alternative A”); or (b) prospectively from the date of the transaction––under this alternative, pre-combination information in the primary financial statements is provided only for the receiving entity (“Alternative B”).

The staff think that Alternative A is conceptually consistent with the argument that transactions that do not result in non-controlling shareholders acquiring an equity claim in the transferred entities or businesses are not acquisitions. It is also consistent with the idea of ‘looking through’ the combining entities or businesses onto the effect on their owners, or potential owners for example in an IPO.

At the same time, the staff agree with the concerns about Alternative A, in particular:

  • Alternative A does not support retrospective presentation of the transaction in primary financial statements because it would provide a picture of a group that did not exist in the past.
  • Alternative A could also be inconsistent with the local regulatory environment or create audit complications if the pre-combination information for some of the combining entities has not been audited.
  • In some cases, providing pre-combination information that possesses the qualitative characteristics of useful financial information could be impracticable. In particular, there are no provisions in IFRS Standards on how to provide carve out historical financial information

The staff therefore prefer Alternative B as this would be consistent with the requirements of IFRS 3 and IFRS 10 that require the consolidation of an acquired business or subsidiary from the date of acquisition. In addition, it would be less costly for preparers to apply than providing full pre-combination information for all combining entities.

Staff recommendation

The staff recommended Alternative B.

Board discussion

Board members were generally supportive of Alternative B. One Board member said that the analysis in some of the examples in the agenda paper referred to IFRS 3 in identifying who is the acquirer and who is the acquiree. She said that it was not entirely clear to her that when predecessor accounting is applied to business combinations under common control, whether IFRS 3 would not be looked at, or only looked at for certain aspects. She said it should be made clear in the forthcoming Discussion Paper as to what the role of IFRS 3 is when predecessor accounting is applied.

The Vice Chair supported the staff recommendation and said that there would be practical issues in having to go back to the earliest period in which the numbers are presented.

The Board supported Alternative B with 12:1 votes (one Board member was absent).

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