Business Combinations under Common Control means the combining of entities or businesses which are ultimately controlled by the same party or parties both before and after the business combination i.e. mergers and acquisitions of companies within the same group. Presently, the accounting standard IFRS 3 Business Combinations sets out reporting requirements for business combinations and requires the use of the acquisition method.
What is the scope?
Business combinations under common control are combinations in which all of the combining entities or businesses are ultimately controlled by the same party, both before and after the combination. Diagram 1 illustrates a simple example of a business combination under common control. Companies A, B and C are controlled by the same party which is Company P. Company C is transferred from Company A to Company B.
The scope of transactions considered in this Discussion Paper is limited to those in which a business is transferred. It does not cover transfers of assets under common control or transfers of companies that do not have a business. As shown in Diagram 1, Company C is a business and its transfer is within the scope of the project. Further, the project is considering the reporting requirements on consolidated financial statements of the receiving company which is Company B in Diagram 1. The project is not considering the reporting requirements of other parties affected by the transactions (Company P, A & C).
Summary of scope of the discussion paper
When to apply the acquisition method and the book-value method
Receiving Company Shares
Whether the shares of the receiving company are publicly traded or privately held would determine which accounting method should be used to account for the business combinations under common control. The Board’s view is that publicly traded receiving companies should be required to apply the acquisition method. When the receiving company shares are privately held, the Board is suggesting special conditions for private companies, namely:
Diagram 4 summarizes the criteria that would determine when a receiving company should use the acquisition method and when it should use a book-value method.
How to apply a book-value method
Assets & liabilities
IFRS Standards do not specify a book-value method. In practice, a variety of book-value methods are used e.g. using the transferred company’s book values or the controlling party’s book values. These book values differ if the transferred company was previously acquired from a third party.
The Board’s view is that the receiving company should measure the assets and liabilities received at their book values reported by the transferred company (Company C) and not the controlling party’s book values.
In addition, the Board should not prescribe how the consideration paid in the receiving company’s own shares should be measured.
When applying a book-value method, any difference between the consideration paid by the receiving company and the book value of the assets and liabilities of the transferred company received in a business combination under common control is typically recognized within the receiving company’s equity.
The Board’s view is that it should not prescribe in which component, or components, of equity the receiving company should present that difference.
How to provide pre-combination information
The Board has allowed a comment period of up to 1 September 2021. Stakeholders are encouraged to provide feedback to the International Accounting Standards Board in the form of comment letters.