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IFRS 3 – Business combinations involving newly formed entities: factors affecting identification of the acquirer

Date recorded:

The Committee received a request for guidance on the circumstances or factors that are relevant when identifying an acquirer in a business combination under IFRS 3 Business Combinations. More specifically, clarification was requested as to whether the existence of a condition (for example, an initial public offering (IPO)) that is imposed to effect the acquisition of subsidiaries by a new entity that has been formed to effect a business combination (and the identity of the party that formed this new entity), is relevant in this identification.

At its July 2011 meeting, the Committee discussed this request for guidance in the context of specific circumstances outlined by the submitter, but acknowledged that this fact pattern appeared rare in practice. Specifically, the Committee considered an environment in which a group spins-off a portion of its business using a new entity (Newco). Newco will acquire these subsidiaries for cash from the parent company (Entity A) only on condition of the occurrence of Newco's initial public offering (IPO). The cash paid by Newco to Entity A to acquire the subsidiaries is raised through the IPO. After the IPO occurs, Entity A loses control of Newco. If the IPO does not take place, Newco will not acquire the subsidiaries.

While the Committee previously considered the specific circumstances to be rare in practice, feedback by constituents to the July tentative agenda decision noted that this issue was widespread and diversity existed in many jurisdictions (although not all jurisdictions). Thus, while the majority of responding constituents did not have a concern with leaving this item off of the Committee's agenda, most had strong reservations regarding the wording in the tentative agenda decision leading to further misinterpretation and change in practice following inconclusive outreach by the Committee. Considering feedback, the Committee decided not to add this issue to its agenda (but would amend its agenda decision to not include specific guidance). The Committee noted that the accounting for the fact pattern involving the creation of newly formed entities is too broad to be addressed through an interpretation or annual improvement. The Committee determined that the specific fact pattern submitted would be better considered within the context of a broader project on accounting for common control transactions, which the IASB is planning to address at a later stage.

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