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Business combinations under common control

Date recorded:

Update on when each measurement approach would apply (Agenda Paper 23A)

At the September 2019 meeting, the Board tentatively decided that a current value approach based on the acquisition method set out in IFRS 3 would be applied to transactions that affect non-controlling shareholders (NCI) of the receiving entity subject to an exception and an exemption for entities whose equity instruments are not traded in a public market. All other transactions would be reported applying a predecessor approach. This paper explores whether and how the exemption and the exception from applying a current value approach for privately held entities could be extended to entities whose equity instruments are traded in a public market.

Some stakeholders, notably stakeholders from China, suggested that a predecessor approach should be applied to all business combinations under common control and argued that such an approach would provide the most useful information about those transactions to NCI of the receiving entity. Accordingly, the staff considered whether the exemption from applying the acquisition method should be extended to public entities to accommodate any cases when NCI in a public entity do not object to the entity applying a predecessor approach.

On the basis of the staff’s analysis, they do not think that the Board should modify the proposed model to extend the exemption and the exception from applying the acquisition method to public entities. However, the staff think that the Discussion Paper (if one is to be prepared) could discuss this alternative and seek feedback from stakeholders, including feedback on the practical aspects of how such an exemption could work for public entities if stakeholders are supportive of it.

Board discussion

There was general support for the direction proposed by the staff. Given the number of questions and issues the project raises, getting additional information and input from stakeholders would be desirable. Accordingly, many Board members thought that the next step would be a DP.

Predecessor approach—consideration and presentation in equity (Agenda Paper 23B)

This paper discusses how, applying a predecessor approach consideration transferred in a BCUCC should be measured and how any difference between consideration and the carrying amounts of assets and liabilities transferred in a BCUCC should be presented.

Staff recommendation and questions for the Board

The staff recommend that a receiving entity in a BCUCC reported applying a predecessor approach should:

  • a) measure consideration paid in assets at the fair value of those assets at the date of combination;
  • b) measure consideration paid by incurring liabilities to or assuming liabilities from the transferor at the carrying amounts of those liabilities determined using applicable IFRS Standards on the initial recognition of those liabilities at the date of combination;
  • c) recognise transaction costs as an expense in the statement of profit or loss in the period in which they are incurred except as stated in (d) below;
  • d) recognise the costs to issue debt or equity instruments in accordance with IAS 32 and IFRS 9; and
  • e) recognise as a change within equity any difference between the consideration paid and the carrying amounts of assets and liabilities received in the business combination under common control.

The staff recommend that the Board should not prescribe:

  • a) how the receiving entity should measure consideration paid in own shares; and
  • b) in which component, or components, of its equity the receiving entity should recognise any difference between the consideration paid and the carrying amounts of assets and liabilities received in the BCUCC.

The staff asked the Board to vote on the following questions:

  1. Does the Board agree with the staff recommendation to require a receiving entity in a business combination under common control reported applying a predecessor approach to:
    • a) measure consideration paid in assets at the fair value of those assets at the date of combination;
    • b) measure consideration paid by incurring liabilities to or assuming liabilities from the transferor at the carrying amounts of those liabilities determined using applicable IFRS Standards on the initial recognition of those liabilities at the date of combination; and
    • c) recognise transaction costs as an expense in the statement of profit or loss in the period in which they are incurred and recognise the costs to issue debt or equity instruments in accordance with IAS 32 and IFRS 9?
  2. Does the Board agree with the staff recommendation not to prescribe how a receiving entity in a business combination under common control reported applying a predecessor approach should measure consideration paid in own shares?
  3. Does the Board agree with the staff recommendation to require a receiving entity in a business combination under common control reported applying a predecessor approach to recognise as a change within equity any difference between the consideration paid and the carrying amounts of assets and liabilities received but not prescribe in which component, or components, of the receiving entity’s equity that difference should be presented?

Board discussion and voting

The discussion focused primarily on the measurement of consideration paid in assets other than cash.

There were differing views regarding which measurement base for consideration paid in assets other than cash would provide the most relevant information to users. Concerns were raised regarding fair value measurement, as this may result in an asymmetrical outcome if the net assets acquired are recognised at their carrying value. Additional concerns relating to whether benefits outweighed the costs associated with determining fair value meant that some Board members would not support such a measurement base. It was clear that, even when Board members agreed on the final outcome, the reasoning for their opinions differed.

There was general support for the recommendation that the measurement of own shares paid as consideration under a predecessor approach should not be prescribed by the Board.

Similarly, there was general support for not prescribing where in equity the difference between the consideration paid and the carrying amounts of assets and liabilities received should be recognised.

When asked to vote, the Board voted as follows:

  • For question 1(a), as originally worded, four voted in favour with one absent.
  • If question 1(a) was modified to require measurement of consideration paid in assets other than cash at carrying value, 10 voted in favour with one absent.
  • For question 1(b), 13 voted in favour, with one absent.
  • For question 1(c), 13 voted in favour, with one absent.
  • For questions 2 and 3, 12 voted in favour, with one absent.

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