Cover Paper (Agenda Paper 23)

The IASB published Discussion Paper DP/2020/2 Business Combinations under Common Control (BCUCC) in November 2020, with a comment letter deadline of 1 September 2021. At its earlier meetings held in December 2021, January 2022 and March 2022, the IASB discussed the feedback received on the topics set out in the DP, the plan for deliberating the preliminary view and the overall project scope.

The purpose of this session was for the IASB to discuss feedback received in relation to its preliminary views on selecting the measurement method to apply to a BCUCC.

The IASB was not asked to make any decisions during this session.

Overview (Agenda Paper 23A)

Background

As set out in the DP, the IASB’s preliminary views about selecting the measurement method were:

• Neither the acquisition method nor a book-value method should be applied to all BCUCCs
• In principle, the acquisition method should be applied if a BCUCC affects non-controlling shareholders of the receiving entity (NCS), subject to the cost-benefit trade-off and other practical considerations
• The book-value method should be applied to other BCUCCs, including all combinations between wholly-owned entities

Approach to deliberations on selecting the measurement method

The staff recommended that the IASB approach the deliberations on selecting the measurement method using a two-stage approach. Firstly, to consider and tentatively decide whether conceptually the acquisition method and/or a book-value method should apply to BCUCCs, and secondly, to consider practical reasons, such as cost restraints, and adjust the tentative decision reached in step 1 as necessary. In approaching step 1, the staff suggested that the IASB assesses the similarities to IFRS 3 business combinations (BCs) and user information needs.

Staff’s initial views on step 1

The staff considered that conceptually, i.e. before considering practical constraints, the acquisition method should apply to all BCUCCs. This is because, in their view, all BCUCCs (regardless of whether they affect NCS) are similar to IFRS 3 BCs and therefore applying the acquisition method to all BCUCCs would provide comparable information. However, the staff acknowledged that practical considerations could significantly affect this initial view.

Next steps

At a future meeting, the staff will present updated analysis and an initial recommendation regarding whether conceptually, the acquisition method or book-value method should be applied to some or all BCUCCs. The staff will then analyse the practical considerations, including the cost constraint.

IASB discussion

Several IASB members voiced their support for the staff proposal to address this topic using a two-step approach by first making a tentative decision on a conceptual basis and only then to review the practical considerations. Some IASB members expressed that reaching a conceptual decision was paramount to the success of the project as this would provide an anchoring point from which the practical considerations could be considered. Another IASB member added that this was particularly important for this topic given there was a significant amount of diverse feedback received in relation to practical considerations which must be thoroughly reviewed.

Some IASB members expressed concern that reaching a preliminary decision on a conceptual basis alone might prevent the practical considerations from being fully explored due to a reluctance to subsequently change the preliminary position reached. Other IASB members disagreed, highlighting that a conceptual decision would provide a starting point from which to deliberate the practical considerations, but adding that these discussions could significantly impact the final decision reached and could lead to the preliminary position being overturned.

One IASB member, whilst being supportive of the need for an anchoring point, was reluctant for the IASB to form a “decision” on a conceptual basis alone. Other IASB members expressed views that the terms “anchoring point” and “preliminary decision” were in fact one and the same, noting however that it would be important to ensure the tentative nature of this decision was clearly communicated to stakeholders to avoid any misunderstanding.

Similarity to IFRS 3 BCs (Agenda Paper 23B)

This paper analysed whether some or all BCUCCs are similar to or differ from IFRS 3 BCs. The acquisition method applies to IFRS 3 BCs and the staff recommended that assessing whether some or all BCUCCs are similar to or differ from IFRS 3 BCs will help the IASB tentatively decide whether conceptually the acquisition method or a book-value method should apply to some or all BCUCCs.

IASB discussion

A number of IASB members voiced their overall agreement with the initial staff view presented in this paper that all BCUCCs are similar to IFRS 3 BCs and that this topic should be considered from the perspective of the receiving entity only.

Some IASB members noted concern that the analysis highlighted a number of differences between these types of transactions, for instance, in an IFRS 3 BC, there is often significant negotiation of an appropriate transaction price between the receiving entity and the seller, whereas under BCUCCs the price is usually dictated by the parent. One IASB member questioned how decisions could be made based on the reporting entity alone when the transactions are so heavily influenced by the controlling party.  Another IASB member emphasised that it is the users of the financial statements of the receiving entity that need to be considered and from that perspective the fact that the receiving entity does not have control is not relevant.

Some IASB members expressed that, whilst supporting this view on a conceptual basis, the practical considerations are so fundamental to this type of transaction that it makes it difficult to separate them.

User information needs (Agenda Paper 23C)

This paper analysed the composition and information needs of users in a BCUCC compared to an IFRS 3 BC. The acquisition method is designed to meet the common information needs of users in IFRS 3 BCs and the staff recommended that assessing the composition and information needs of users will help the IASB tentatively decide whether conceptually the acquisition method or a book-value method should apply to some or all BCUCCs.

IASB discussion

Several IASB members expressed general support for the initial staff view that the project should not look to address the information needs of the controlling party and that the common information needs of users that rely on the financial statements depends on whether or not NCS is impacted.

One IASB member expressed concerns that controlling parties should not be dismissed in this analysis as they often rely on the general-purpose financial statements to meet their information needs. Another IASB member opposed this view, noting that the Conceptual Framework sets out that the primary users are those that are unable to compel reporting entities to provide information directly to them.

One IASB member requested further research to explore whether stakeholders would be happy with the use of the book value in the financial statements but with fair value information being disclosed as is currently the practice in certain jurisdictions. Another IASB member added that it would also be useful to understand whether users wanted to see fair value information solely at the time of the transaction or also subsequent to this.