Background

The IFRS IC received a submission about how an entity applies IAS 27 to account for a merger with its subsidiary (which contains a business) in its separate financial statements and whether the merger should be accounted for as a business combination applying IFRS 3 or whether the parent entity should recognise the subsidiary’s assets and liabilities at their previous carrying amounts (carrying amount method).

Staff analysis

The staff sent an information request to members of IFASS, securities regulators and large accounting firms.  Many respondents said the fact pattern is common, particularly in some countries across Latin America, Africa, Europe and Asia. These respondents said the carrying amount method is the predominant method of accounting. Since the parent entity controlled the subsidiary before the merger, the merger is not a business combination. Two accounting firms said that there may be diversity in accounting. However, they have not observed any entity applying IFRS 3. In addition, from the additional research using an market intelligence tool, the staff found that some entities with similar fact pattern were identified and the carrying amount method applied to all these.

From the above result, the staff had no evidence of diversity in accounting for the fact pattern described in the submission and the different views described in the submission are not widespread.

Staff recommendation

The staff recommended not to add a standard-setting project to the work plan but to publish a tentative agenda decision that explains the IFRS IC’s reasons for not adding a standard-setting project.

IFRS IC discussion

IFRS IC members generally agreed with the staff’s analysis. However, a few IFRS IC members asked whether the IC considered View 1 (i.e. a business combination in the scope of IFRS 3), has no basis to apply. The staff explained that they did not go further to perform a technical analysis given there is no evidence for diversity in practice. One IFRS IC member commented that it is common in pre-IPO/spin-off cases that View 1 may be applied. The large firms’ manuals also indicate that there is diversity in accounting. So instead of stating that there is no diversity or indicating that the “carrying amount method” is pervasive, he suggested stating there is “little” diversity instead.

Regarding the wording in the agenda decision, IFRS IC members commented that “carrying amount method” is not a term used in the standard and suggested to only say “at the previous carrying amount”. Another IFRS IC member suggested to change “generally apply the carrying amount method” to “do not apply IFRS 3” in order to avoid the term “carrying amount method”.

IFRS IC decision

All IFRS IC members agreed with the recommendation not to add a standard-setting project to the work plan but to publish an agenda decision explaining the reasons with the suggested edits.