Business Combinations under Common Control

Date recorded:

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. In its June 2022 meeting, the IASB commenced deliberations on the preliminary views set out in the DP on selecting the measurement method to apply to a BCUCC, discussing, in particular, whether some or all BCUCCs are similar to or differ from IFRS 3 business combinations (BCs) user information needs.

The purpose of this session was for the IASB to continue discussing the selection of the measurement method to apply to a BCUCC.

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

Overview (Agenda Paper 23A)

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

Following the IASB discussions at the June meeting, the staff have recommended a revised approach to deliberations and would now ask the IASB to tentatively decide how to select the measurement method considering all factors (for example, user information needs and the cost-benefit trade-off) collectively. This contrasts with the previously recommended two-step approach which proposed making a tentative decision conceptually as a first step, before considering practical constraints as a second step.

Next steps

The staff will discuss initial views with Accounting Standards Advisory Forum (ASAF) and the Emerging Economies Group (EEG) at their December 2022 meetings. The staff will present the feedback from these meetings to the IASB at a future meeting along with updated analysis and recommendations on selecting the measurement method.

Initial views—the principle (Agenda Paper 23B)

This paper explained the staff’s initial views on the principle of which measurement method(s) should apply to BCUCCs. In summary, the staff agreed with the IASB’s preliminary views to, in principle, apply the acquisition method to BCUCCs that affect NCS and a book-value method to BCUCCs that do not affect NCS. The staff acknowledged that there are certain disadvantages associated with this approach, such as a lack of comparability between all BCUCC transactions and potentially creating some structuring opportunities to structure BCUCCs with insignificant NCS.

IASB discussion

The majority of IASB members expressed general support for the proposed direction of travel of the project and that NCS should be a decisive factor when determining whether to adopt the acquisition method or the book value method.

One IASB member noted that an additional criterion should be added before determining whether NCS was affected to clarify whether the transaction that has taken place has changed the reporting entity or not in substance. This IASB member gave an example of when a new holding company is inserted above an existing entity in advance of an IPO, explaining how in this scenario, the reporting entity (being the new holding company) has changed, however the combined financial statements of the entity and the holding company are the same before and after the transaction, and therefore, in substance, there has been no change in the reporting entity.   

Some IASB members disagreed with the conclusion that BCUCCs were similar to IFRS 3 BCs, noting that the intention, purpose and structure of BCUCCs can be very different to other BCs, and that the transactions are not carried out at arms-length. A number of IASB members also remarked that comparability should not be a key focus as there would never be complete comparability for all BCUCCs.

One IASB member commented that it should not be assumed that all investors prefer the fair value information provided by the acquisition method as there is significant evidence that this is not the case,  particularly in relation to the valuation of certain intangible assets such as brand and customer relationships. Another IASB member agreed, noting that the information required by the acquisition method can be highly time consuming and costly for preparers, and therefore this method should only be required when there is certainty that it would be valued by users.

One IASB member expressed a view that reporting entities should be given the option of adopting the acquisition method as opposed to forcing the use of the book value method given that this would be fair and relevant as determined for other BCs under IFRS 3. Other IASB members expressed concern that this could lead preparers to carry out BCs with the sole intention of inflating net assets, potentially in order to acquire loan finance. However, one IASB member questioned how this would be any different from a preparer changing its accounting policy to revalue fixed assets previously recorded using the cost model.

The Chair enquired whether there was any indication of the proportion of BCUCCs that affected NCS versus those that did not and observed that it would be very useful to understand this in order to determine whether or not there is an issue with how to account for all BCUCCs or for a very small proportion. The staff responded that this information would be very difficult to establish however the research performed to date indicated that there was a mix of both types of transaction.

Initial views—exceptions (Agenda Paper 23C)

This paper explained the staff’s initial views on whether, in some circumstances, a different method should apply. This included exceptions included in the IASB’s preliminary views in the DP and other possible exceptions. The staff considered that for BCUCCs that do not affect NCS, there should be no exceptions. However, for BCUCCs that affect NCS, the staff proposed two potential packages of exceptions, under which the book value method would be used, for further consideration as follows:

  • Package 1—optional exemption package
  • Package 2—insignificant NCS package

IASB discussion

One IASB member expressed concern over the related party exception proposed in Package 1 whereby a receiving entity would be required to use the book value method if all NCS were related parties, noting that this assumed that all related parties had the same characteristics. However, that might not be the case in reality, for instance a related party could sit within the common control group, but alternatively could be an associate.

Some IASB members commented that further research was required in relation to the proposed exception related to government entities, particularly in countries where this was especially relevant. One IASB member queried why this was being considered for BCUCCs when it was not specifically addressed in IFRS 3.

Several IASB members expressed support, in theory, for Package 2 which provides an exception where NCS was deemed to be insignificant. However, some IASB members questioned how “insignificant” would be determined and noted that this could be a very difficult area to navigate given there are both quantitative and qualitative factors to be considered.

The Chair queried how the definition of “insignificant” would interact with other definitions such as “material” or “genuine”. The staff responded that this term would likely be replaced with something more appropriate at a later stage in the project to try and eliminate any confusion.

Similarity to IFRS 3 Business Combinations (Agenda Paper 23D)

This paper analysed whether some or all BCUCCs are similar to or differ from IFRS 3 BCs. The staff’s initial view was that the nature of all BCUCCs is similar to IFRS 3 BCs because the receiving entity gains control of a business it did not control before.

This paper was not discussed during the meeting.

User information needs (Agenda Paper 23E)

This paper analysed the composition and information needs of users in a BCUCC compared to an IFRS 3 BC. The staff’s initial views were that firstly the project should not address the controlling party’s information needs, and secondly that the common information needs of users is dependent on the composition of users. For a BCUCC that impacts NCS, the acquisition method meets those needs better than the book value method, however for a BCUCC that does not affect NCS, the information provided using either method could meet the common information needs of users.

This paper was not discussed during the meeting.

The cost-benefit trade-off (Agenda Paper 23F)

This paper explained the assumptions made by the staff in forming their initial views which were as follows:

  • The costs of applying the acquisition method to a BCUCC will be comparable to the costs of applying the acquisition method to an IFRS 3 BC
  • The costs of applying a book-value method to a BCUCC will depend on various factors but is expected to be less costly than applying the acquisition method in the main
  • Applying the acquisition method to BCUCCs that affect NCS would generally meet the cost-benefit trade-off better than applying a book-value method
  • Applying a book-value method to BCUCCs that do not affect NCS would generally meet the cost-benefit trade-off better than applying the acquisition method

This paper was not discussed during the meeting.

Structuring opportunities (Agenda Paper 23G)

This paper explained the initial views of the staff in relation to structuring opportunities which were as follows:

  • Some structuring opportunities to qualify for a particular measurement method will exist unless the acquisition method applies to all BCUCCs, as well as to all IFRS 3 BCs
  • The IASB’s preliminary views on which measurement method to apply could create some opportunities to structure transactions to qualify for a particular measurement method
  • How the acquisition method is applied to BCUCCs could create some structuring opportunities, particularly if the acquisition method were applied to BCUCCs between wholly-owned entities
  • How a book-value method is applied to BCUCCs could also create some structuring opportunities

This paper was not discussed during the meeting.

Other considerations (Agenda Paper 23H)

This paper explored other areas related to this topic such as practical challenges faced in applying the acquisition method and how best to maximise comparability between all BCUCCs and IFRS 3 BCs.

This paper was not discussed during the meeting.

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