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EFRAG final comment letter on the IASB's discussion paper on business combinations under common control

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

13 Oct 2021

The European Financial Reporting Advisory Group (EFRAG) has issued its final comment letter on the International Accounting Standards Board's (IASB's) discussion paper DP/2020/2 'Business Combinations under Common Control'.

EFRAG welcomes the discussion paper and the IASB's efforts to explore possible reporting requirements for business combinations under common control (BCUCC) that would reduce diversity in practice, improve comparability and consistency of reporting and provide more relevant information for users of financial statements.

EFRAG considers that the scope of the project should be extended to include how to measure investments in subsidiaries in the separate financial statements. EFRAG observes that all other transactions under common control are important and need to be discussed in a future comprehensive project. EFRAG also makes further suggestions on defining the scope in order to ensure the appropriate application of the IASB’s proposals.

With regards to the selection of a measurement method, EFRAG agrees that a single measurement approach is not appropriate for all BCUCC transactions. EFRAG considers that establishing an appropriate dividing line between applying the acquisition method and a book-value method to BCUCC is crucial for achieving the project’s objectives.  It considers that the economic substance should be the key element for selecting the measurement method for BCUCC transactions.  Due to practical considerations, EFRAG acknowledges that the IASB’s proposed decision tree may offer a proxy to operationalise the decision about which measurement method to apply. However, EFRAG encourages the IASB to elaborate further, clarify and provide guidance on the notion of ‘affecting non-controlling shareholders’ (NCS) and explore the possibility of having a rebuttable presumption when applying this concept to select the relevant measurement method.  EFRAG also recommends that the IASB clarify and provide guidance on identifying the receiving company.

EFRAG considers that applying the acquisition method to BCUCC which affect the non-controlling shareholders of the publicly traded receiving company would produce more relevant information and that the book value method should be applied in all other BCUCC where the controlling party's ownership interest remains unchanged. 

EFRAG considers that additional guidance is needed to make the optional exemption from the acquisition method for privately-held entities workable in practice and considers that the related party exception should be optional rather than required. 

EFRAG’s consultation and outreach resulted in mixed views regarding recognition as a contribution to equity of the excess fair value of the identifiable net assets over the consideration paid when applying the acquisition method to BCUCC transactions. Consequently, EFRAG suggests that the IASB further explores the possible approaches in order to provide relevant information to users of financial statements.  Where consideration is in excess of the fair value of the identifiable acquired assets and liabilities (using the acquisition method) EFRAG suggests that this excess should be recognised as goodwill consistent with IFRS 3.

When applying a book-value method, EFRAG proposes two accounting policy options to allow the use of the carrying amounts in the consolidated financial statements of the transferred company’s controlling party and to provide pre-combination information retrospectively. 

With regards to disclosures, EFRAG considers that the proposed disclosure requirements for BCUCC accounted for under both the acquisition method and the book-value method would provide relevant information about the BCUCC transactions.

Finally, in its comment letter, EFRAG makes a number of recommendations to improve the IASB’s proposals.

The press release and the comment letter are available on the EFRAG website. 

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