Background

In its June 2023 meeting, the IFRS IC discussed 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).

14 comment letters were received and the respondents provided comments on different perspectives of the agenda decision.

Staff analysis

Seven respondents agreed with the IFRS IC’s decision not to add the matter to its standard-setting agenda. Some respondents said that merger transactions are prevalent and most of them agreed with the IFRS IC’s observation about entities not generally applying the acquisition method to account for the merger transaction. However, some of those respondents suggested that the agenda decision should explain how an entity applies IFRS Accounting Standards when considering the matter described in the submission. The feedback on the tentative agenda decision supports the IFRS IC’s conclusion that the matter does not have widespread effect. Consistent with the IFRS IC’s decisions on previous issues that did not meet the ‘widespread and material’ criterion, the staff is of the view that the IFRS IC should not include explanatory material in this agenda decision.

Moreover, some respondents said that there is diversity in how entities apply the carrying amount method and generally suggested clarifying how entities apply the carrying amount method and/or referring the matter to the IASB. A few respondents suggested that the IASB consider this matter as part of the IASB’s Business Combinations under Common Control (BCUCC) project. The staff considered addressing how entities should apply the carrying amount method to the merger transaction would go beyond the question asked and therefore recommended not to do so. Moreover, the staff explained the IASB did consider how an entity applies the carrying amount method as part of its BCUCC project. However, the IASB decided to discontinue the BCUCC project at its November 2023 meeting. Consequently, the staff is of the view that the IFRS IC would not be able to address this matter efficiently within the confines of existing IFRS Accounting Standards and the Conceptual Framework.

At the same time, the staff acknowledged that the current drafting of the agenda decision may incorrectly imply that the IFRC IC also observed no diversity in how entities apply the carrying amount method, while the IFRS IC’s observations were limited to whether entities apply the acquisition method. The agenda decision will be updated to avoid misinterpretation.

Staff recommendation

The staff recommended finalising the agenda decision with some changes compared to the wording of the tentative agenda decision.

IFRS IC discussion

IFRS IC members generally agreed with finalising the agenda decision.

One IFRS IC member commented that given the IFRS IC does not provide technical advice on the issue submitted, adding a statement would be helpful to make it clear that no explanatory material is given on this issue. The staff had concerns about the suggestion because the IFRS IC did not do this for previously published agenda decisions when no technical analysis is given. The staff therefore considered this addition as not necessary.

Another IFRS IC member commented that such a fact pattern could occur frequently in unlisted entities and was not convinced that it is uncommon. The staff responded that the outreach and comment letters indicated that the matter is not widespread which did not mean that it is not frequent. However, entities rarely apply IFRS 3 acquisition accounting and therefore no diversity is noted. They acknowledged that someone might consider the acquisition method to be appropriate, but they have no evidence that it is widespread. One IFRS IC member commented that this matter is an important issue and there is diversity on how entities apply the carrying amount method.

IFRS IC conclusion

The IFRS IC, by a vote of 12 out of 13, decided to finalise the agenda decision.