Business Combinations Under Common Control

Executive Summary

This briefing document provides an overview of Business Combinations under Common Control (BCUCCs), the challenges they pose for financial reporting under IFRS Standards, and the IASB’s recent decision to discontinue its project on developing specific requirements for these transactions.

BCUCCs occur when a business is transferred between entities ultimately controlled by the same party before and after the combination. Despite their frequency, IFRS 3 Business Combinations explicitly excludes them from its scope, leading to a lack of specific guidance and significant diversity in accounting practices globally.

The IASB initiated a project to address this gap, publishing a Discussion Paper in 2020 that proposed a dual-measurement approach (acquisition method for transactions affecting non-controlling shareholders, book-value method otherwise). However, due to split stakeholder views, varying user information needs across jurisdictions, and an assessment that the costs of developing and implementing new standards would outweigh the benefits, the IASB decided in November 2023 to discontinue the project. This means that current diverse practices, relying on IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and various book-value methods or IFRS 3 by analogy, will persist.

Definition and Characteristics of BCUCCs

A BCUCC is defined as “a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory.”

Examples of BCUCCs include:

• Combinations between subsidiaries of the same parent.
• The acquisition of a business from an entity in the same group.
• Some transactions that involve inserting a new parent company at the top of a group. (IFRS Viewpoint)

The “Controlling party” is “The party or parties that control both the receiving entity and transferred business before and after a BCUCC.”

The Problem: Lack of IFRS Guidance and Diversity in Practice

3.1. Exclusion from IFRS 3: IFRS 3 Business Combinations requires the acquisition method for business combinations but “does not apply to a business combination of entities or businesses under common control.”. This exclusion dates back to IAS 22, the predecessor standard.

3.2. Consequences of No Specific Guidance:

• Diversity in Reporting: “Similar transactions are reported differently.” (Factsheet) Receiving entities “vary in how they report BCUCCs,” applying “different measurement methods (IFRS 3’s acquisition method or a book-value method)” and “variations of a book-value method.”
• Comparability Issues: The use of “the acquisition method and a variety of book-value methods… making comparisons difficult.”
• Limited Information Disclosure: “Often, little information is provided about these transactions.”
• Stakeholder Costs: Preparers, auditors, and regulators incur costs in determining appropriate accounting policies and challenging reporting in the absence of specific standards.

Current Accounting Practices

In the absence of specific IFRS guidance, entities rely on IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to develop an accounting policy that provides relevant and reliable information.

The most common accounting policies currently applied are:

• Predecessor Value Method (Book-value method):
• Assets and liabilities are recorded at their “existing carrying values rather than at fair value.”
• “no goodwill is recorded.”
• “comparative periods are sometimes restated as if the combination had taken place at the beginning of the earliest comparative period presented.”
• A desktop review by the IASB found that “receiving entities applied a form of book-value method to 94% of BCUCCs.”
• Variations exist, such as using the controlling party’s book values (45.8% of reviewed BCUCCs) versus the transferred business’s book values (11.6%).
• Acquisition Method (by analogy to IFRS 3):
• Although outside IFRS 3’s scope, “IFRS 3’s principles can be applied by analogy.”
• This involves identifying an ‘accounting acquirer,’ recognising identifiable assets and liabilities at “acquisition date fair value,” and “recognis[ing] goodwill.”
• Applying IFRS 3 principles “in full” means identifying the accounting acquirer, which may not be the legal acquirer, and applying reverse acquisition accounting if necessary.

Key Differences between Methods:

Accounting TopicPredecessor Value MethodAcquisition MethodAssets and liabilitiesRecorded at previous carrying value; no fair value adjustments.Recognised at acquisition date fair value (with limited exceptions).Intangible assetsRecognised only if previously recognised by the acquiree.Recognised if separable/arise from contractual rights and fair value reliably measurable.GoodwillNo new goodwill recorded.Goodwill or a gain from bargain purchase is recognised.Non-controlling interestMeasured as proportionate share of book values.Measured at fair value or proportionate share of identifiable net assets.Profit or lossIncludes results for the full year, regardless of combination date (variations exist).Includes results from the date of business combination.ComparativesRestated as if combination took place at beginning of earliest comparative period (variations exist).No restatement of comparatives.

The IASB’s Research Project and Preliminary Views (2020)

The IASB initiated a research project to “fill the gap in IFRS Standards” (Factsheet) with the objective to “reduce diversity in practice and improve the transparency of reporting BCUCCs.”

5.1. Scope and Focus: The project focused on “reporting by the receiving company; typically, only in its consolidated financial statements; on the transfer of a business under common control.” (Factsheet) It did not affect reporting by the controlling party.

5.2. Proposed Solution (Preliminary Views in 2020 Discussion Paper): The Board’s preliminary view was that “one size does not fit all.”

• “When the receiving company has non‑controlling shareholders, it should use the acquisition method (with limited exceptions).” This method measures assets and liabilities at fair value and recognises goodwill.
• “In all other cases, the receiving company should use a book‑value method.” This method measures assets and liabilities at their existing book values.
• The Discussion Paper also suggested that the receiving entity “should use the transferred business’s book values” and “should not restate pre-combination information.”

Discontinuation of the Project (2023)

In November 2023, the IASB decided “not to develop requirements for reporting BCUCCs” and “discontinued its work on the project.”

6.1. Reasons for Discontinuation: The decision was based on a thorough analysis of stakeholder feedback and a cost-benefit assessment. Key factors included:

• Split Views: “Stakeholders’ views were split about whether the IASB should develop requirements for reporting BCUCCs and, if so, what those requirements should be.” This applied to selecting the measurement method and applying a book-value method.
• User Information Needs and Comparability:“users of financial statements are not significantly affected by diversity in how receiving entities report BCUCCs.”
• “users’ information needs varied among jurisdictions, making it difficult to develop requirements that would meet the information needs of users globally.” (Project Summary) For instance, almost all users from China preferred a book-value method for BCUCCs affecting non-controlling shareholders, while almost all users from other jurisdictions preferred the acquisition method.
• The project was considered “unimportant” to users.
• Cost-Benefit Trade-off: The IASB concluded that “any improvements to financial reporting that might result from developing requirements for reporting BCUCCs are likely to be outweighed by the costs of developing and implementing such changes.”
• Developing requirements would demand “significant resources from the IASB and its stakeholders” and “impose implementation costs.”
• Benefits for users were perceived as “limited.”
• Existing General Requirements: General disclosure requirements for accounting policies and related party transactions already apply to BCUCCs.
• Limited “Misleading” Reporting: Stakeholders identified “few examples of reporting for BCUCCs that could be described as ‘misleading’ for users.”

6.2. Alternatives Considered: The IASB considered “Option 1—continue to explore developing recognition, measurement and disclosure requirements,” “Option 2—explore developing disclosure-only requirements,” and “Option 3—discontinue the project.” Both Option 1 and Option 2 were rejected due to the reasons outlined above, particularly the high costs relative to limited benefits and persistent split views.

Conclusion

The discontinuation of the IASB’s project means that specific IFRS requirements for BCUCCs will not be developed. Entities will continue to rely on existing general IFRS Standards and exercise significant judgement, primarily applying predecessor value methods or IFRS 3 by analogy, leading to continued diversity in reporting practices globally. While this presents challenges for comparability, the IASB concluded that the benefits of standard-setting would not justify the costs given the varied user needs and lack of consensus among stakeholders.