IASB discontinues its business combinations under common control project
IASB discontinues its business combinations under common control project
IFRS standards do not specify how to account for transactions involving a business’s transfer between entities in the same group. These transactions are often called business combinations under common control (BCUCC) and are scoped out of IFRS 3 Business Combinations. As a result, diversity abounds, and investors have a hard time comparing companies that undertake similar transactions. Some entities use the acquisition method, which involves measuring assets and liabilities acquired at their fair value on acquisition date, and recognising goodwill. Others use a ‘book value’ method, which measures assets and liabilities acquired at their existing book values.
Discussion Paper
In November 2020, the International Accounting Standards Board (IASB) published its Discussion Paper DP/2020/2 Business Combinations under Common Control which suggested that:
- The acquisition method should be used when BCUCC transactions affect non-controlling shareholders
- The ‘book value’ method should be used in other cases, and a single form of a ‘book value’ method would be specified in IFRS Standards.
BCUCC project discontinued
After considering feedback from the Discussion Paper, the IASB discussed at its November 2023 Board meeting whether to continue to explore developing requirements for recognition and measurement for BCUCC transactions, or to change the project direction, and they decided to change the project direction. They then discussed whether to explore disclosure-only requirements for BCUCC transactions, or to discontinue the project. All members present voted to discontinue the BCUCC project.
What next?
Without specific guidance, entities undertaking BCUCC transactions will continue to develop an appropriate accounting policy by applying the hierarchy in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraphs 10 to 12. That is, in formulating an accounting policy, they must:
- Firstly, consider requirements within other IFRS Standards that deal with similar and related issues
- Secondly, consider the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework for Financial Reporting, and
- Lastly, consider pronouncements from similar standard-setting bodies and other accounting literature and industry practice (to the extent they do not conflict with the above).
| Is it appropriate to apply IFRS 3 acquisition accounting by analogy? |
As the requirements in other IFRS standards dealing with similar and related issues must be considered first, preparers may ask whether it is appropriate to apply the IFRS 3 acquisition method by analogy for BCUCC transactions.
Transactions with substance
If a BCUCC transaction has substance, the entity can choose as its accounting policy, either the acquisition method or the ‘book value’ method (sometimes referred to as the ‘pooling of interests’ method). However, this policy must be applied consistently to all BCUCC transactions. Further, entities need to consider whether there are local regulatory requirements that prohibit either of these methods.
| Careful consideration is required to assess whether the BCUCC has substance. This is because if the acquisition method is used, it will result in fair value adjustments and the recognition of goodwill, with carrying amounts of assets and liabilities on the balance sheet being recorded at higher values than if the ‘book value’ method were used. Also, the BCUCC transaction must have substance from the perspective of all entities involved, as if the transaction was undertaken with an unrelated party. Often BCUCC transactions are undertaken at the direction of the parent entity and may not have substance. |
Transactions that do not have substance
Only book value accounting is appropriate if the BCUCC transaction does not have substance.Regulatory requirements
Preparers should also determine whether there are any jurisdiction-specific regulatory requirements:
- That may prohibit the acquisition method being used, and
- If the ‘book value’ method is used, whether a particular level of book values is mandated, and whether comparatives must be included.
Need help?
Financial reporting for BCUCC transactions is complex and involves a lot of judgement. Please contact our IFRS Advisory team if you need help.
For more on the above, please contact your local BDO representative.
This article has been based on an article that originally appeared on BDO Australia, read the full article here.