The IASB has issued for comment a discussion paper Business Combinations under Common Control, with comments requested by September 1, 2021.
Here’s some of how the accompanying news release summed that up:
- IFRS 3 Business Combinations set outs reporting requirements for mergers and acquisitions—referred to as business combinations in IFRS Standards. However, that Standard does not specify how to report transactions that involve transfers of businesses between companies within the same group. Such transactions are common in many countries around the world.
- As a result of this gap in IFRS Standards, companies report similar business combinations in different ways. In some cases, they provide fair-value information about the acquired company and in other cases, they provide book-value information. Moreover, book-value information is provided in various ways and is often insufficient. This diversity in practice makes it difficult for investors to understand the effects of such transactions on companies that undertake them and to compare companies that undertake similar transactions.
- The Discussion Paper Business Combinations under Common Control sets out the Board’s preliminary views on how to fill this gap in IFRS Standards. The Board’s aim is to reduce diversity in practice and to improve transparency and comparability in reporting these transactions.
- The Board’s view is that companies should provide similar information about similar business combinations when the benefits of that information to investors outweigh the costs of providing it. Specifically, the Board is suggesting that fair-value information should be provided when a business combination under common control affects shareholders outside the group. That suggestion is consistent with the existing requirements in IFRS 3 for mergers and acquisitions between unrelated companies. In all other cases, the Board is suggesting that book-value information should be provided using a single approach to be specified in IFRS Standards.
We’ll no doubt look at this in greater detail in later posts. For now, one can probably fairly easily grasp the main governing notion. If a common control transaction consists solely of a single shareholder moving things around between entities wholly owned by him or her, then nothing is taking place to warrant remeasuring any of the assets or liabilities transferred. But that view may change when some of those entities also have other shareholders, the holders of which may find the nature of their interests changed. As the discussion paper puts it:
- some business combinations under common control result in a change in the ultimate ownership interests in the economic resources transferred in the combination, just as occurs in business combinations covered by IFRS 3. Specifically, this occurs when the receiving company has non-controlling shareholders. In those circumstances, those non-controlling shareholders acquire an ownership interest in those economic resources that they did not previously have, whereas the ownership interest of the controlling party in those economic resources is reduced. Hence, such a business combination under common control has a substantive effect on both the receiving company and its shareholders and is not a mere reallocation of economic resources within the group.
The Board considered whether “it should set a quantitative threshold specifying that the acquisition method should not be applied if the extent of the ownership interest of non-controlling shareholders is below that threshold. However, the Board has rejected such an approach because a quantitative threshold would be arbitrary and would lack a conceptual basis.” The discussion paper does propose though making a distinction between publicly-traded and private companies. For the latter it proposes the following:
- an optional exemption from the acquisition method—the receiving company should be permitted to use a book-value method rather than the acquisition method, if it has informed all of its non-controlling shareholders that it proposes to use a book-value method and they have not objected (the optional exemption from the acquisition method); and
- an exception to the acquisition method—the receiving company should be required to use a book-value method rather than the acquisition method if all of its non-controlling shareholders are related parties of the company, as defined in IAS 24 Related Party Disclosures (the related-party exception to the acquisition method).
In the first case, the thinking is largely that if for example the non-controlling interests aren’t significant, or if they don’t rely on the financial statements for the information they need, and they’ve been given an opportunity to express otherwise, then the costs of applying acquisition accounting may outweigh the likely benefits. In the second case, the Board went a little further concluding that requiring a book-value method would prevent opportunities to structure a combination by issuing shares to related parties for the sole purpose of qualifying for the acquisition method. I’m not so sure about that second piece of reasoning at first reading, but I suppose I have plenty of time to get comfortable with it!
Well, as I said, we’ll look at this again in the future…
The opinions expressed are solely those of the author