Let’s return to the IASB’s discussion paper Business Combinations under Common Control, on which comments are requested by September 1, 2021. As we covered here, the main proposal is that fair-value information should be provided when a business combination under common control affects shareholders outside the group. 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. One’s first thought may be that “providing book value information” sounds pretty easy, no more than adding things together. That’s true to an extent, but we’ve already covered a few issues arising in applying the concept. Let’s look at a few more today.
The consideration paid in a business combination under common control can take various forms – usually it’s paid in cash or in the receiving company’s own shares, but sometimes might be in non-cash assets or by incurring or assuming liabilities. The IASB considered how to measure each of these. Shares issued as consideration, for instance, might be measured at their fair value or at their par value or a nominal value. But given the mechanics of a book value approach, the difference between one approach and another only amounts to reallocating between different components of equity. The discussion paper reminds us: “The reporting of components within a reporting company’s equity and the measurement of issued shares for the purpose of that reporting are often affected by national requirements and regulations, and are generally not prescribed in IFRS Standards. For those reasons, the Board has reached a preliminary view that it should not prescribe how to measure the consideration paid in the receiving company’s own shares.”
The issue with consideration paid in assets is as follows:
- If the consideration is paid in cash, its fair value would also be its book value so both measurement approaches would produce the same outcome. However, if the consideration is paid in assets other than cash, the measurement of the consideration would affect whether the receiving company recognizes a gain or loss on disposal of those assets in the statement of profit or loss, as follows: (a) if the consideration paid is measured at the book value of those assets, no gain or loss would be recognized. (b) if the consideration paid is measured at the fair value of those assets, the receiving company would recognize a gain or loss on disposal of those assets if their book values differ from their fair values.
The preliminary view in the discussion paper was that such consideration should be measured at book value, noting among other things that measuring the consideration paid in assets at their fair values could be costly and could involve significant measurement uncertainty, and that measuring the consideration paid in assets at their book values is arguably more consistent with measuring the assets and liabilities received at their book values. The Board also reached the view that consideration paid by incurring or assuming liabilities should be measured at the amount determined on initial recognition of the liability at the combination date by applying IFRS Standards, rather than at its fair value (although of course the two would often be the same).
They also considered the treatment of transaction costs such as legal, accounting and other professional fees, reminding us that “in developing IFRS 3, the Board concluded that transaction costs incurred to effect a business combination are not part of the exchange between the buyer and the seller of the business. Rather, they are separate transactions in which the buyer pays for services received. Accordingly, the costs of those services received and consumed during the period should be recognized as expenses (except for costs to issue shares or debt instruments).” The Board noted that book-value methods typically use the same approach for transaction costs, and found no reason to recommend anything different.
For common control transactions measured at a fair value approach, the discussion paper takes the view that the IFRS 3 disclosure requirements for business combinations would usually be applicable, although some application guidance may be necessary. Many of those disclosures wouldn’t apply when a book value approach is applied – for example the discussion paper doesn’t contemplate requiring information about the strategic rationale, management’s objectives for the acquisition and subsequent performance of the acquisition, or the timing and estimated amount of expected synergies. But that still leaves a half-page of requirements, including the combination date, the percentage of voting equity interests transferred to the receiving company, the primary reasons for the combination, a description of how the receiving company obtained control, and so on.
OK, that’s the fourth article on the discussion paper, so that’s probably enough. Maybe we’ll come back to it once we have more comment letters to look at (as I write, there are only seventeen of them…)
The opinions expressed are solely those of the author.