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IFRS 3 – Business combinations under common control (new)

Date recorded:

The Committee received a request for guidance on business combinations under common control. More specifically, the submission considered by the Committee provided a fact pattern that illustrated a type of a common control transaction in which an entity transfers a business into a new entity ("Newco").

The submission requested clarification on (a) the accounting at the time of the transfer of the business to Newco; (b) whether an imminent IPO that might occur after the formation of Newco is considered relevant in analysing the transaction under IFRS 3 and (c) whether a business that is not a legal entity could be considered the acquirer in a reverse acquisition under IFRS 3.

The submitter, in outlining alternative accounting treatments (issue (a) above) outlined consideration to the acquisition method (i.e., apply IFRS 3 guidance by analogy), pooling of interest and reverse capitalisation accounting (i.e., reverse acquisition accounting without recognition of goodwill). The staff's outreach with national standard-setters found that the pooling of interest method is most commonly used to account for business combinations under common control, but many jurisdictions prefer the acquisition method as they believe it results in more relevant and reliable information, and the staff sought the Committee's view about bringing this issue onto its agenda.

Many Committee members highlighted this particular submission as a further example of practical concerns regarding application of a business combination under common control, in which it was noted that IFRS 3 (paragraphs 2(c) and B1) explicitly excludes business combinations under common control from its scope. In this context, many Committee members expressed concern with expressing any interpretation on this submission which may trump the IASB's scope exclusion, or likewise, overstep the IASB's intended project to look at these transactions at a later date (the IASB has planned to address the accounting for business combinations under common control at a later stage but this project was paused in 2009 given other project demands). Other Committee members noted that in the absence of specific guidance to account for business combinations under common control, entities could select an appropriate accounting policy using the hierarchy described in paragraphs 10 to 12 of IAS 8 Changes in Accounting Estimates and Errors, including that of IFRS 3 if acceptable under the Conceptual Framework for Financial Reporting.

The Committee noted that this issue is widespread and that diversity in practice exists based on outreach performed. However, the Committee also observed that the issue regarding the accounting for these transactions is too broad to be addressed by an interpretation and that the IASB has planned to address similar transactions in a separate project.

Consequently, the Committee decided not to add this issue to its agenda. Multiple Committee members requested that the agenda decision highlight that the IASB should consider the business combinations under common control project to be a priority given significant questions arising in practice, but as Committee members are not necessarily aware of other competing priorities of the IASB, it was decided that no emphasis would be placed on one particular project at this stage.

For issue (b), the staff presented analysis indicating that the transaction should be accounted for considering the facts that have occurred as of the date of transfer and not the facts that have not yet happened (e.g., an imminent IPO). In the specific circumstances provided, the staff noted that control is not "transitory" as outlined in paragraph B1 of IFRS 3, but acknowledged the implications of a business combination under common control which has not yet been addressed by the IASB.

Consistent with decision reached for issue (a), above, the Committee decided not to add this issue to its agenda based on the scope of the issue in the context of the IASB project on business combinations under common control.

For issue (c), the staff outlined analysis which concluded that an acquirer in a reverse acquisition does not need to be a "legal entity" as long as the "business" is a "reporting entity" based on guidance in paragraphs 7, and B19 of IFRS 3, as well as paragraph 8 of The Framework for the Preparation and Presentation of Financial Statements (replaced by the first edition of the Conceptual Framework for Financial Reporting).

The Committee observed that this issue is not widespread or known to have particular practical relevance based on outreach performed, and consequently, the Committee decided not to add this issue to its agenda.

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