Discussion paper: Business combinations under common control

Business combinations under common control (BCUCC) have long been a contentious issue in the IFRS-world, as there was no guidance provided by the International Accounting Standards Board (IASB), and common control transactions are scoped out of almost all the International Financial Reporting Standards (IFRSs). Such restructurings tend to be common, especially in developing countries. The IASB has been pushed to discuss this matter for a long time, their initial view was that IFRS 3 Business Combinations (IFRS 3) must always be applied, which met with push back from the IFRS community at large. The IASB has finally released a new discussion paper on the matter. Here is a high-level summary of their proposed accounting solutions(please refer to the full discussion paper for further clarification).

The discussion paper refers to the receiving company (the ‘acquirer’ and parent companies above that company within a group) and the transferred company (the ‘acquiree’). Acquirees are referred to not only as the entities acquired, but also groups of assets and liabilities constituting a business.

What is a business combination under common control?

A business combination in which all of the combining companies/businesses are ultimately controlled by the same party before and after the combination is considered a business combination under common control (BCUCC).

These types of business combinations are specifically scoped out of IFRS 3 Business Combinations which has resulted in a lack of consistency in how various entities deal with the accounting treatment in the books of the receiving entity.

The scope of the discussion paper includes reporting by the receiving entity for all transfers of a BCUCC even where the transfer:

• is preceded by an acquisition from an external party; and/or
• is conditional on a sale of the combining companies to an external party, such as an initial public offering.

The focus is on the accounting treatment for the receiving entity because the accounting treatment for the other entities involved in such combinations is already prescribed by other IFRS standards.

The board has preliminarily decided the following:

The acquisition method must be used if:

• the combination affects non-controlling shareholders of the receiving company AND the shares are traded in a public market.
• the combination affects non-controlling shareholders of the receiving company, the shares ARE NOT traded in a public market, however, the non-controlling shareholders objected to using the book-value method.

The book-value method:

• MUST be used if the combination does not affect non-controlling shareholders of the receiving company.
• MUST be used if the combination affects non-controlling shareholders of the receiving company, the shares are not traded in the public market and all non-controlling shareholders are related parties to the receiving entity.
• CAN be used if the combination affects non-controlling shareholders of the receiving company, the shares are not traded in the public market and the non-controlling shareholders have not objected to using the book-value method.

Applying the acquisition method should be in accordance with IFRS 3 Business Combinations (IFRS 3), however, the fact that the controlling party may have dictated the amount of consideration is something that requires further attention because the transaction may not be ‘at arm’s length’ as a result.

If there is an overpayment the amount will be initially included in goodwill and tested annually for impairment as is currently prescribed by IFRS 3.

Where there is an underpayment the receiving entity must recognise any gain on bargain purchase as a contribution to equity and not through profit/loss.

When applying a book-value method, various practices were applied by entities reporting under IFRS; these will now be limited to a single approach. According to the discussion paper:

• The receiving company should measure the assets and liabilities received using the transferred company’s, the acquiree’s, book values.
• The board will not prescribe measurement of consideration paid by issuing shares as this is generally in line with IFRS standards and is usually affected by national requirements and regulations.
• The receiving company should measure the consideration paid by transferring assets at the book-values of those assets in its records at the combination date.
• The consideration paid by assuming liabilities should be measured in accordance with the applicable IFRS at the combination date.
• The entity will recognise within equity any difference between the consideration paid and the book-value of the assets and liabilities received. The board will not prescribe in which component of equity the difference should be presented.

The receiving company will need to combine the acquiree’s assets, liabilities, income and expenses prospectively from the combination date. Pre-combination information will therefore not be restated.

Disclosure by the receiving entity when applying the acquisition method should be required to comply with the current IFRS 3 standard and should include the improvements resulting from the Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment.

The board should provide application guidance on applying these disclosure requirements together with the requirements of IAS 24 Related Party Disclosures. 

Disclosure by the receiving company when applying the book-value method will include some of the disclosures required by the current IFRS 3 standard, but not all.

The receiving entity should further disclose the amount recognised in equity for any difference between consideration paid and the book-value of the assets and liabilities received, and it should be made clear into which component of equity this difference is recognised.

If you do not agree with the Board’s preliminary views, what approach do you suggest and why? The DP contains questions for each step of their thought processes, if you are a preparer, auditor or anyone else involved in the reporting and accounting of business combinations under common control, we encourage you to go through the DP in detail and respond.

Comments need to be submitted by 1 September 2021

For more detail refer to the full Discussion Paper which is available on IFRS.org