Business combinations under common control

Date recorded:


The Board is examining how companies should account for combinations of businesses under common control (“BCUCC”) which are currently outside the scope of IFRS 3 Business Combinations. The staff are working towards publishing a discussion paper in the first half of 2020.

In June 2018, the Board directed the staff to develop an approach based on the acquisition method set out in IFRS 3 to account for BCUCC and to consider whether and how that method should be modified to provide the most useful information about BUCC transactions that affect non-controlling interest (NCI) in the receiving entity (transactions that affect NCI). In December 2018, the Board discussed whether a current value approach based on the acquisition method should be applied to all transactions that affect NCI or only some transactions that affect NCI.

In March 2019, the Board discussed an overview of the staff’s approach and whether a form of predecessor approach could be applied for transactions between wholly owned entities and a current value approach to at least some transactions that affect NCI. The meeting was educational.

Update on the staff’s approach (Agenda Paper 23A)

The BCUCC project focuses on the information about the transaction provided in the receiving entity’s financial statements. The project does not consider accounting by the controlling party, the transferor or the transferee as those parties are already covered by existing IFRS Standards.

In developing measurement approaches, the staff consider the information needs of different types of primary users, the relative complexity of each approach, their costs and benefits, and the structuring opportunities that could arise.

The staff explore using a current value approach to some but not all transactions that affect NCI, for example, when equity instruments of the receiving entity are traded in a public market.

The staff consider separately transactions between wholly owned entities, included transactions that affect lenders and other creditors in the receiving entity, and transactions undertaken in preparation for a sale of the combining entities (e.g. an IPO). For those, the staff explore a form of predecessor approach.

The paper also summarises the input on the staff’s approach received to date, including the March 2019 Capital Markets Advisory Committee (CMAC) and Emerging Economies Group (EEG) meetings. Most interested parties, but not all, supported the staff’s approach.

The staff ask the Board to approve the staff’s approach.

Update on lenders and other creditors in BCUCC (Agenda Paper 23B)

The staff think that the result of the analysis of an entity’s ability to service and raise debt carried out by debt investors and credit analysts would not depend greatly on whether a current value approach or a form of predecessor approach is applied to account for the BCUCC. This is because credit analysis mainly focuses on two areas which are largely unaffected by the use of either method, namely cash flows and nominal amounts and qualitative characteristics of the entity’s total gross debt, including unrecognised commitments and contingent liabilities.

This conclusion was generally supported at the March 2019 CMAC and EEG meetings.

Lenders and other creditors in BCUCC (Agenda Paper 23C)

This paper was discussed at the March 2019 IASB meeting and is reissued for the April 2019 IASB meeting for information. Our summary of the March paper can be found on (Agenda Paper 23B)

The staff recommend that the Board not pursue a single approach that would apply both to:

  • transactions that affect NCI; and
  • transactions that affect lenders and other creditors in the receiving entity but do not affect NCI.

Board discussion

Board members generally agreed with the direction taken by the staff.

Several comments were made in relation to the staff’s aim to minimise structuring opportunities when developing measurement approaches:

  • The focus should be on minimising accounting arbitrage and opportunities rather than corporate structuring as such. Although the Board should be conscious of such opportunities, the aim is not to discuss the validity of such transactions, but rather to reflect their economic consequences.
  • Because entities currently use a variety of methods to account for BCUCCs, there is already a risk to use a specific method in order to achieve a particular accounting outcome.
  • The staff clarified that the risk of structuring would not arise from not applying the requirements of IFRS 3 to all BCUCCs, but rather from drawing a line between some transactions to which those requirements would be applied, and some transactions that would apply another approach.

The Board also discussed which primary users of the financial statements should be considered when assessing the usefulness of the various measurement approaches. A distinction was drawn between prospective equity investors and existing minority shareholders (which covers both external shareholders in subsidiaries of the receiving entity as well as shareholders who are not part of the controlling party of the receiving entity).  One member noted that the needs of the former in an IPO are taken care of by extensive underwriting and due diligence processes and therefore do not need to be taken into account when preparing primary financial statements.

Several Board members raised the need for additional research on the needs of the users of the financial statements, such as equity investors.

Although most Board members agreed that two different measurement basis should be pursued as part of the project, the Board also noted that the use of a single approach should not be ruled out. Some members also noted that further information was required on what a predecessor method would entail before making a final decision.

Some Board members thought that the starting point should be to apply the acquisition method in IFRS 3. If a different approach is selected, this should be made based on a cost-benefit analysis, i.e. considering whether there are categories of users whose information needs can be satisfied by a simpler, less costly method.

Additional disclosures supplementing a predecessor approach should also be considered, for example, a one-off requirement for fair value disclosures.

If the acquisition method is selected for some or all BUCCs, the Board would also need to consider whether this method needs to be modified in situations where the transaction price is not reflective of fair value. The objective will be to ensure the equity transaction resulting from the BUCC is accounted for. 

One Board member preferred to pursue a single approach for all BCUCCs as a priority. If a decision was made to apply two distinct approaches, there should be a strong conceptual basis to do so, considering the factors highlighted in the Conceptual Framework for selecting a measurement basis.

Board decisions

All Board members agreed that the staff should continue developing measurement approaches for transactions within the scope of the project by considering:

  1. whether and how transactions within the scope of the project can be different from business combinations that are not under common control;
  2. what information would be useful to various primary users of the receiving entity’s financial statements;
  3. whether the benefits of providing particular information would justify the costs of providing that information; and
  4. complexity and structuring opportunities that could arise under various approaches.

The Board tentatively decided that it need not pursue a single measurement approach for all transactions within the scope of the project (13 in favour). 

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