Business combinations under common control

Date recorded:

Overview of the feedback (Agenda Paper 23)

The Board published its Discussion Paper (DP) Business Combinations under Common Control (BCUCC) in November 2020, with a comment letter deadline of 1 September 2021. The purpose of this meeting was to provide the Board with an overview of feedback on the DP and detailed summaries of feedback on selected topics from the DP.

The Board was not asked to make decisions in this session.

Feedback on scope (Agenda Paper 23A)

Almost all respondents agree that the project should cover the receiving entity’s reporting for all transfers of businesses under common control. That is, they do not say any transaction should be removed from the project’s scope or disagree with covering the receiving entity’s reporting.

Most respondents suggest also covering:

  • The receiving entity’s reporting in its separate financial statements for an investment in a subsidiary received in a common control transaction
  • The reporting by other entities—most commonly the transferring entity;
  • Other common control transactions (such as transfers of investments in associates between entities under common control).

Some respondents suggest covering these matters by expanding the scope of the BCUCC project whilst others suggest covering these matters in a separate project(s) to avoid delaying the BCUCC project.

Board discussion

Several Board members expressed a view that care must be taken not to expand the scope of this project too far as this may impede on the timeliness and ultimate success of the assignment. One Board member added that the first step should be to identify the core issues and only then look at whether there should be any additional extensions or exceptions to consider. One Board member expressed a view that the project should concentrate on BCUCC only as opposed to also covering any other form of common control transaction as this could lead to the scope becoming too broad.

A number of Board members also noted that there seemed to be some confusion amongst respondents around certain definitions, such as ‘group reorganisation’, ‘control’ and ‘transfer of a business’, and noted that it would be important to clearly define such terminology at the outset.

Feedback on selecting the measurement method—the principle (Agenda Paper 23B)

Whether to apply one method

Most respondents agree with the preliminary view that neither the acquisition method nor a book-value method should be applied to all BCUCCs. Some respondents (including most respondents from China) disagree and say a book-value method should be applied to all BCUCCs. A few respondents report mixed views within their organisation/jurisdiction or do not express a clear view.

BCUCCs that affect non-controlling shareholders of the receiving entity (NCS)

Many respondents agree with the preliminary view that, in principle, the acquisition method should be applied if a BCUCC affects NCS, subject to the cost-benefit trade-off and other practical considerations (the NCS principle). Additionally, some respondents agree with the NCS principle overall but suggest modifying it such that a receiving entity would apply a book-value method if affected NCS are insignificant.

Many respondents disagree, of which:

  • Some say a book-value method should be applied to all BCUCCs
  • Some say the receiving entity should apply either the acquisition method or a book-value method to BCUCCs that affect NCS (or to all BCUCCs) depending on the substance of the BCUCC
  • Some say the receiving entity should have a choice between applying the acquisition method or a book-value method to BCUCCs that affect NCS (or to all BCUCCs).

BCUCCs that do not affect NCS

Many respondents agree with the preliminary view that a book-value method should apply to BCUCCs that do not affect NCS, including combinations between wholly-owned entities. However, many disagree, of which:

  • Most say the acquisition method should apply in specific circumstances (most commonly if the receiving entity has publicly traded debt) but otherwise agree with the preliminary view
  • A few say the receiving entity should have a choice between applying the acquisition method or a book-value method to BCUCCs that do not affect NCS (or to all BCUCCs)
  • A few say the receiving entity should apply either the acquisition method or a book-value method to BCUCCs that do not affect NCS (or to all BCUCCs) depending on the substance of the BCUCC

Board discussion

Some Board members commented that it was clear that there is wide support for the use of two methods which is consistent with the findings from the consultation period. One Board member noted that this demonstrates overall support for the Board to pursue this project to establish some clear principles, adding that the challenge will be determining how much flexibility should be factored in.

A number of Board members noted that many respondents wish to have a choice in which method to use. These members agreed that this was unlikely to be a viable option given that there is currently a free choice available to preparers and the overall feedback received from users was that this approach is not working as it is leading to disparity in reporting. One Board member expressed concern that these views were based on respondents’ desire to continue their current practices or to achieve a certain accounting outcome.

One Board member expressed a view that the DP does not address the true economic substance of these transactions as they are almost always directed by the ultimate controlling party as opposed to the receiving entity itself which has no option to refuse the transaction.

Several Board members commented on the view given by some respondents that the acquisition method should be used by receiving entities which hold traded debt and requested that this be explored further to understand what is driving this and what further information is needed by bond holders, particularly given that the initial feedback received from credit agencies was that they did not have a preference between the two methods.

With regards to the proposals by some respondents that additional relief should be provided if NCS is insignificant, one Board member disagreed, adding that the Board had thought very hard about the exemption included in the DP and therefore this should not be revisited unless there is new information which becomes apparent.

Feedback on selecting the measurement method—other considerations (Agenda Paper 23C)

Many respondents agree with the optional exemption which permits the receiving entity to use a book-value method unless NCS object. Additionally, some respondents generally agree with the optional exemption but suggest modifying it to disregard objecting NCS if those NCS are insignificant. Some other respondents disagree with the optional exemption.

Many respondents agree and many others disagree with the related-party exception which requires the receiving entity to use a book-value method if all NCS are its related parties. Most who disagree say, similar to NCS, some related parties (for example associates) rely on financial statements to meet their information needs.

Most respondents agree that the optional exemption and related-party exception should not apply to publicly traded entities—that is, a receiving entity should apply the acquisition method if its shares are traded in a public market and the BCUCC affects NCS. Some respondents disagree, most of which say that whether an entity has publicly traded shares should not affect the method selected.

Board discussion

One Board member noted overall agreement with the optional exemption however suggested that some of the proposed modifications were worth considering, for instance, the suggestion that objecting NCS could be disregarded if deemed to be insignificant as otherwise one or two ‘hold-outs’ could object to something that a clear majority supported.

One Board member expressed disappointment that some respondents disagree with the concept that NCS should be able to influence accounting policies, adding that this was a misunderstanding as management can decide however acceptance by NCS is a pre-requisite that needs to be met.

Another Board member commented that although the feedback is useful, none of the reasons given by respondents who disagree with the optional exemption were compelling or warranted further investigation.

Feedback on selecting the measurement method—user feedback (Agenda Paper 23D)

Almost all users—except users from China—agree with the preliminary view that neither the acquisition method nor a book-value method should be applied to all BCUCCs. Almost all users from China disagree and say a book-value method should be applied to all BCUCCs.

All users—except users from China—agree the acquisition method should be applied to a BCUCC which affects non-controlling shareholders of the receiving entity (NCS) with shares traded in a public market—that is, the outcome of applying the NCS principle. Almost all users from China say a book-value method should be applied to the same scenario.

Almost all users agree a book-value method should be applied to a BCUCC by a wholly-owned receiving entity in preparation for an initial public offering (IPO)—that is, the outcome of applying the preliminary view that a book-value method should be applied to other BCUCCs, including combinations between wholly-owned entities.

Most users agree a book-value method should be applied to a BCUCC by a wholly-owned receiving entity which has bank debt or bonds traded in a public market—that is, the outcome of applying the preliminary view that a book-value method should be applied to other BCUCCs, including combinations between wholly-owned entities. Some users say the acquisition method should be applied in this scenario because, similar to NCS, bondholders need information provided by the acquisition method.

Board discussion

A number of Board members highlighted that it was clear within this paper that in all jurisdictions other than one (China), there was support for a general framework and agreement that neither the acquisition method nor the book-value method should be applied to all BCUCCs.

Another Board member noted that a few respondents had commented that they would prefer to apply the acquisition method but did not give any further feedback explaining why this might be therefore asked whether they could be contacted again to enable the Board understand their reasoning in further detail.

One Board member flagged that the paper sets out that any difference between book values and fair values could impact a debt analyst’s decision by impacting key ratios such as gearing, flagging that gearing is now rarely focussed on and there are other ratios used with far greater prominence.

Review of academic literature (Agenda Paper 23E)

This paper provides an overview of academic papers we identified that are relevant to reporting BCUCC.

Board discussion

One Board member asked why there were so few studies in this area given that IFRS 3 generated a vast amount of literature, then added that this was likely due to a lack of available data.

Another Board member flagged that, whilst agreeing that leverage ratios are used much less frequently these days, one of the academic papers featured in this paper suggested that some managers still considered leverage ratios to hold some importance, albeit less than cash flow ratios.

Next Steps

The staff will provide detailed feedback summaries on the Board’s preliminary views on the following topics at future meeting:

  • How to apply the acquisition method
  • How to apply a book-value method
  • Disclosure requirements

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