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Business combinations under common control

Date recorded:

Approach for transactions that affect non-controlling interest (Agenda Paper 23)

Background

In April and May 2018, the Board discussed current value approaches for business combinations under common control (BCUCC) that affect non-controlling interest (NCI) in the receiving entity. In June 2018, the Board directed the staff to develop an approach based on the acquisition method set out in IFRS 3 Business Combinations and to consider whether and how that method should be modified to provide the most useful information about BCUCC that affect NCI in the receiving entity (transactions that affect NCI).

Applying a current value approach to transactions that affect NCI

The staff considered whether a current value approach should be applied to all transactions that affect NCI or just some transactions that affect NCI. Whilst neither alternative is ideal and both approaches have advantages and disadvantages, which are described in the paper, the staff’s overall observations are:

  • The most useful information—requiring a current value approach for all transactions that affect NCI would result in the most useful information provided to non-controlling shareholders in the receiving entity’s general purpose financial statements in all cases. In contrast, requiring that approach only in some cases would exclude the most useful information in the other scenarios. However, in making the distinction between different NCI scenarios, the Board could choose to take into account whether and when NCI could have access to information other than in the receiving entity’s general purpose financial statements or even be able to influence the transaction in the first place.
  • The cost constraint—requiring a current value approach for all transactions that affect NCI would fail to take into account that the cost constraint would apply differently in different scenarios. This is because although information needs of non-controlling shareholders do not depend on the size or nature of NCI, the outcome of the cost-benefit assessment could arguably be different for different transactions that affect NCI. In contrast, requiring a current value approach for only some transactions that affect NCI would enable the Board to take into account the cost-benefit assessment in a more targeted way.
  • Structuring opportunities—all approaches would give entities opportunities to structure transactions for example, by creating or changing the size or nature of NCI. Depending how the distinction is made, requiring a current value approach for only some transactions that affect NCI could provide fewer structuring opportunities that other approaches.
  • Complexity—any distinction between types of business combinations creates more complexity than requiring the acquisition method for all business combinations. However, the staff do not think that such an approach is viable due to the cost constraint and structuring considerations.

On balance, the staff think that the Board should consider requiring a current value approach for only some transactions that affect NCI. Doing that would also reflect the feedback received at the June 2018 joint Capital Markets Advisory Committee (CMAC) and Global Preparers Forum (GPF) meeting and at the July 2018 Accounting Standards Advisory Forum (ASAF) meeting.

Possible approaches to making a distinction between transactions that affect NCI

The staff then considered that, if a distinction between transactions that affect NCI was made, whether that distinction should be based on qualitative (e.g. public entities or type of non-controlling shareholders), quantitative (e.g. if NCI is greater than 20%) or a combination of qualitative and quantitative factors.

The staff considered the advantages and disadvantages of each approach, which are described in the paper, and concluded that the Board should explore a combination of qualitative and quantitative approaches.

Staff recommendation

On balance the staff think that making a distinction between transactions that affect NCI solely based on whether the receiving entity’s equity instruments are traded in a public market is a viable approach to explore. The staff think that if the Board wanted current value information to be provided to non-controlling shareholders in private entities in some cases, the Board should explore a combination of qualitative and quantitative approaches.

Discussion

Several Board members encouraged the staff to explore an avenue that would be a similar concept to that in IFRS 10 Consolidated Financial Statements whereby an exemption from presenting consolidated financial statements is available if all owners have been informed about, and do no object to, the use of the exemption. This approach would be practicably difficult for public companies but could be used for private NCI scenarios, which would be in line with the recommendation of the staff.

There were some concerns that developing a rules-based approach would provide structural opportunities for entities and hence a principles-based approach may be favourable. However, the staff responded that unless the Board were to require the use of the acquisition method for all business combinations (including BCUCC), there will have to be a dividing line and the only question is where to draw the line. Similarly, unless the acquisition method was required for all business combinations, some complexity and costs will be introduced for preparers and users.

One Board member highlighted that the nature of BCUCC does not change just because the receiving entity is public or private or because the share of NCI is large or small and therefore the accounting treatment should not change based on these factors and instead should present the nature of the transaction. Although it was noted that the information needs may differ depending on the factors.

The information needs of NCI were then discussed. It was mentioned that staff should explore whether there are special information needs for NCI and whether NCI can access that information or not. Whilst in some jurisdictions there is protection for NCI, this project is to provide information and not to protect those NCI.

A board member suggested it was important that more time was spent on articulating why there is such a focus on NCI. It should be said that this is to help NCI (who may not have access to information) understand whether they still want to be an investor given the transaction and making sure that those who need that information and cannot obtain it elsewhere can make those investment decisions.

It was generally agreed that there is no perfect solution. One Board member suggested that a qualitative approach should lead, with possibly a quantitative approach supplementing, and that public entities seemed a good place to start.

NCI were considered to be the users with the most information needs but other users should also be considered, such as potential investors. It was also noted that NCI would likely look at BCUCC differently compared to ordinary business combinations and that the nature of BCUCC could be viewed as restructuring or reorganisations and therefore the information needs may be different. Two key factors considered were whether there was a capital transaction (i.e. a capital contribution or distribution) that was implicit in the terms of the BCUCC and whether the consideration paid was at fair value.

One Board member noted that although employees were different in nature to public NCI, there were also differences within employees and that it should not be assumed that all employees have access to information.

Some Board members asked, if the acquisition method was the best accounting and provided the best information, why it should be different for NCI. Although they suggested that perhaps a cost benefit relief could be made available to entities in certain circumstances. The staff responded that the acquisition method relies on the fact that the transaction occurs at fair value and that BCUCC can result in capital transactions.

One Board member stated that using the predecessor method could be cheaper, would preclude structuring and would provide continuity of accounting across subsidiaries. There was some debate over whether identifying the legal acquirer vs. the accounting acquirer as required in IFRS 3 would prevent certain types of structuring.

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