Business combinations under common control

Date recorded:

Overview of the feedback (Agenda Paper 23)

The IASB published its Discussion Paper (DP) Business Combinations under Common Control (BCUCC) in November 2020, with a comment letter deadline of 1 September 2021. At its December 2021 meeting, the IASB discussed the feedback on project scope and selecting the measurement method.

The purpose of this meeting was to provide the IASB with detailed summaries of feedback on the remaining topics from the DP: how to apply each measurement method (being the acquisition method and the book-value method) and disclosure. 

The IASB was asked whether it agrees with the staffs proposed plan for deliberating the preliminary views in the DP. The IASB was not asked to make any further decisions at this meeting.

Feedback on applying the acquisition method (Agenda Paper 23A)

Most respondents agreed with the preliminary views that a receiving entity should apply the acquisition method as set out in IFRS 3 and, when applying the acquisition method, should recognise:

  • Goodwill if the fair value of the consideration paid exceeds the fair value of the identifiable net assets received
  • A contribution to equity, not a gain in profit or loss, if the fair value of the identifiable net assets received exceeds the fair value of consideration paid

Some respondents disagreed. In particular:

  • Some suggest recognising a distribution from equity if the fair value of the consideration paid exceeds the fair value of the identifiable net assets received because BCUCCs are not arm’s length transactions. Some of these respondents suggest recognising the entire excess as a distribution, some suggest recognising only an ‘overpayment’ component of the excess as a distribution and some did not specify whether the entire excess or only a component should be recognised as a distribution
  • Some suggest recognising a bargain purchase as a gain in profit or loss for consistency with IFRS 3

IASB discussion

A number of IASB members expressed concern over the view of certain respondents that any excess of consideration over net assets received should be split between goodwill and “overpayment” which would be recognised directly within equity, asking whether these respondents had considered how this split might be determined in practice.

Some IASB members questioned how widespread the issue of BCUCC transactions being performed on a non-arm’s length basis really is, as in many jurisdictions there are legal mechanisms in place to protect minority shareholders which require all such transactions to be carried out on an arm’s length basis. Other IASB members noted that these transactions are not always completed on an arm’s length basis and even where there is a legal requirement, in some cases it is extremely difficult to substantiate this.

One IASB member flagged that in the DP, there is no guidance on how the acquirer should be identified in BCUCC transactions and this area should be explored further to identify whether additional guidance is needed or whether the existing IFRS 3 guidance is sufficient, for example in addressing questions such around the role of a controlling party.

Feedback on applying a book-value method (Agenda Paper 23B)

Many respondents agreed with the preliminary view that a receiving entity should measure assets and liabilities received using the transferred entity’s book values. However, many others disagreed and suggest using another group entity’s book values or allowing or requiring the use of different book values (either the transferred entity’s or another group entity’s book values).

Almost all respondents agreed with the preliminary views on:

  • Measuring consideration paid
  • Recognising within equity any difference between consideration paid and the book value of assets and liabilities received and not prescribing the component(s) of equity in which to present such difference
  • Recognising transaction costs as an expense in the period in which these costs are incurred, except for the costs of issuing shares or debt instruments which would be accounted for in accordance with applicable IFRS Accounting Standards

IASB discussion

One IASB member expressed that it is imperative that the IASB is clear in its approach in this area and determines whether this represents a modification to the IFRS 3 acquisition method or alternatively, an entirely different model to reflect the different nature of the transaction. The IASB member advised that it would be preferable to characterise this as a measurement modification to the existing acquisition model as an independent model would be costly to maintain.

Some IASB members noted that it would be useful to clarify who the users of these accounts are, what their information needs are and whether it truly matters to them whether the book values of the transferring entity or controlling party are used. If the answer is no, then cost implications of each should be considered.

A number of IASB members expressed reluctance to allow a choice in which book values to adopt given that this would add a further layer of complexity and would defeat the aim of the project to reduce diversity in practice.

One IASB member added that it was clear from the feedback that not all respondents are happy with using transferring entity book values therefore this needs to be explored further. Another IASB member asked whether it would be possible to identify certain criteria that could be applied in determining which book value should be used, as opposed to giving a choice. Some IASB members highlighted that some stakeholders would prefer to adopt the controlling entity book values but raised concerns around what would happen in this scenario if the parent entity doesn’t apply IFRS standards.

In relation to the topic of measurement of consideration paid, one IASB member expressed concern that this area could lead to scope creep as there are lots of known issues in this area, for example how to value own shares, which should not be addressed as part of this project.

Some stakeholders noted that they would like the option of choosing between book value or fair value when determining consideration paid, however one IASB member noted that the aim is to identify a measurement basis which is consistent with the objective of the project rather than introduce further choice.

Feedback on pre-combination information (Agenda Paper 23C)

Many respondents agreed with the preliminary view to not restate pre-combination information because, in their view, this would be complex and costly and these costs would outweigh any benefits of doing so.

Many respondents, including most accounting firms and regulators, disagreed because:

  • In some jurisdictions, restated pre-combination information is required by capital market regulations in specific situations and, therefore, providing it in the financial statements will not result in significant additional costs
  • Restated pre-combination information could meet user information needs for trend analysis, especially for a BCUCC in which a new entity (with no historical information) is set up to acquire the transferred entity

Respondents who disagreed suggest allowing (or requiring) a receiving entity to restate pre-combination information either in specific circumstances or for all BCUCCs.

Many respondents agreed with the preliminary view to not require a receiving entity to disclose pre-combination information in the notes to the financial statements. However, many respondents suggested requiring a receiving entity to disclose either limited or a complete set of pre-combination information for all or some specific types of BCUCCs.

IASB discussion

Several IASB members articulated that they are against the idea of restating pre-combination information as this would contradict basic IFRS principles.

A number of IASB members highlighted that it is very clear from the feedback that the pre-combination information is deemed to be useful by a majority of respondents. Some IASB members requested more precise information on who the users of these accounts actually are and how useful this information is, particularly given that the financial statements in question are consolidated accounts with no non-controlling interests.

Some IASB members added that care should be taken when addressing the view of certain respondents that restating would be useful in particular situations, for example if there was an IPO, as it wouldn’t be right to force all entities to provide additional information that would only be useful in a limited number of situations. Similarly, some respondents noted that this information is required by regulators in certain jurisdictions and one IASB member expressed caution that the wider population should be considered, rather than focusing on feedback from respondents stating what would be preferable in their particular jurisdiction. Conversely, another IASB member expressed a view that preparers should be at least given the option to disclose this information in order to bring it in scope of the financial audit.

Feedback on disclosure requirements (Agenda Paper 23D)

BCUCCs to which the acquisition method applies

The IASB’s preliminary views were:

  • A receiving entity should be required to comply with disclosure requirements in IFRS 3, including any improvements resulting from the Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment (IFRS 3 DP)
  • The IASB should provide application guidance on how to apply those requirements together with the requirements in IAS 24 when providing information about BCUCCs, particularly information about the terms of BCUCCs

Most respondents agreed with these preliminary views. Some disagreed, many of whom expressed concerns about applying the requirements resulting from the IFRS 3 DP, mainly because:

  • Of the subjectivity, reliability and commercial sensitivity of such disclosures
  • Such disclosures may be impracticable to provide for BCUCCs

BCUCCs to which a book-value method applies

The IASB’s preliminary views were that:

  • Some, but not all, of the disclosure requirements in IFRS 3, including any improvements resulting from the IFRS 3 DP, are appropriate
  • The IASB should not require disclosure of pre-combination information
  • The receiving entity should disclose the amount recognised in equity for any difference between the consideration paid and the book value of the assets and liabilities received and the component(s) of equity that includes this difference

Most respondents agreed with the IASB’s preliminary views. Some disagreed and suggested specific additional information a receiving entity should disclose and/or information it should not be required to disclose.

IASB discussion

In response to the feedback relating to materiality, some IASB members expressed reluctance to explore this area any further given that the basic concept of materiality is already well defined within IFRS Standards and should continue to be applied. Another IASB member added that in order to address user needs in different scenarios, perhaps more thought should be given to creating requirements that would only apply when preparing consolidated financial statements.

One IASB member noted that any departures from the current model given under IFRS 3 would have to be very clearly justified.

Deliberation plan (Agenda Paper 23E)

This paper discussed the plan for deliberating the proposals in the DP. The staff have identified workstreams as follows:

  • Workstream I—project scope
  • Workstream II—selecting the measurement method
  • Workstream III—applying the measurement methods, which includes:
    • applying the acquisition method and related disclosures
    • applying a book-value method and related disclosures
  • Workstream IV—other topics not covered in the DP, for example transition

The staff expect to commence deliberations on the first two workstreams in the first half of 2022 and plan to consult advisory bodies and consultative groups to better understand the comments received on the DP and explore possible alternative approaches on particular topics.

IASB decision

No IASB member objected to the proposed plan. There was no detailed discussion on this topic.

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