1.1 Common control transactions

Transactions between entities under common control (or common control transactions) occur frequently in business. For example, many entities conduct their business activities through subsidiaries and there are often transactions between the entities comprising the group. It is also common for entities under common control, which are not a group for financial reporting purposes, to transact with each other.

Examples of common control transactions include the sale of goods, property and other assets, the provision of services (including those of employees), leasing, transfers under licence agreements, financing transactions and the provision of guarantees.

It cannot always be assumed that common control transactions are undertaken on an arm's length basis or that equal values have been exchanged. Standard setters internationally have developed standards that require disclosures about related party transactions (which include common control transactions), rather than requiring the transactions to be recognised at an arm's length price. The IASB also adopted this approach in IAS 24 – Related Party Disclosures – which is a disclosure standard and does not establish recognition or measurement requirements. Entities would need to account for such transactions in accordance with the requirements of any IFRS specifically applicable to that transaction. [IAS 8.7].

In January 2018, the IFRS Interpretations Committee (or Interpretations Committee) confirmed that IFRSs do not provide a general exception or exemption from applying the requirements in a particular standard to common control transactions. The Interpretations Committee observed that ‘unless a Standard specifically excludes common control transactions from its scope, an entity applies the applicable requirements in the Standard to common control transactions’.¹

Nonetheless, IFRSs do not provide a complete framework and particular common control transactions may not be covered in any IFRS. Specific requirements may also be absent when common control transactions are excluded from the scope of a standard that would otherwise apply. There is often more than one acceptable way of accounting for common control transactions which gives rise to an accounting policy choice. General guidance on accounting for transactions between a parent and its subsidiaries, or between subsidiaries within a group, is included in Chapter 8 at 4.

One specific area where there is a scope exclusion for common control transactions is IFRS 3 – Business Combinations (discussed in Chapter 9). That standard addresses business combinations but excludes ‘a combination of entities or businesses under common control’ from its scope. [IFRS 3.2]. The IASB noted that current IFRSs do not specify how to account for business combinations under common control and is discussing whether it can develop requirements to improve the comparability and transparency of accounting for such transactions.² The IASB's research project, Business Combinations under Common Control (discussed at 6 below), is not limited to transactions that strictly satisfy the description of business combinations under common control currently excluded from the scope of IFRS 3. It also considers other types of group reorganisations where there is a lack of specific requirements.

This chapter discusses the implications of the scope exclusion in IFRS 3 for business combinations under common control and the absence of guidance in IFRSs for certain types of group reorganisations, as well as the accounting treatments which may currently be adopted for such transactions.

1.2 Group reorganisations

Group reorganisations involve restructuring the relationships between entities or businesses within a group (or under common control) and can take many forms. They may be undertaken for various reasons, for example to reorganise activities with an aim to achieve synergies, to simplify a group structure, or to obtain tax efficiency (e.g. by creating a tax grouping in a particular jurisdiction). In some cases, a group reorganisation takes place to split an existing group into two or more separate groups or to create a single new reporting group, possibly as a prelude to a subsequent sale or initial public offering (IPO).

Group reorganisations involve transferring entities or businesses between existing or newly formed entities under common control. From the perspective of the controlling party, the transfer does not affect the entities or businesses that party holds. In principle, such changes should have no impact on the consolidated financial statements of an existing group, provided there are no non-controlling interests affected. This is because the effects of transactions within an existing group are generally eliminated in full (see Chapter 7 at 2.4). Alternatively, some reorganisations may involve transferring entities or businesses outside the existing group (e.g. demergers).

Transfers of entities or businesses between existing or newly formed entities under common control may be in exchange for cash or shares. Other transfers may be without any consideration, such as a distribution by a subsidiary to its parent or a contribution by a parent to its subsidiary. There can also be legal arrangements that have similar effect, including reorganisations sanctioned by a court process or transfers after liquidation of the transferor (i.e. the transferring entity). In addition, some jurisdictions allow a legal merger between a parent and its subsidiary to form a single entity.

From the perspective of the transferee in the reorganisation (i.e. the receiving entity), there may well be a business combination that needs to be accounted for. This business combination would be excluded from the scope of IFRS 3 if it satisfies the description of a business combination under common control. Alternatively, the transaction may not represent a business combination as defined in IFRS 3 because the assets acquired and liabilities assumed do not constitute a business (i.e. an asset acquisition) or because neither of the combining entities can be identified as the acquirer (e.g. in some situations where a newly formed entity is involved). The accounting by the receiving entity in a group reorganisation is often not covered in existing IFRSs.

The transferor in the reorganisation will need to account for its part of the transaction in its own financial statements. The relevant requirements for transferors are discussed in other chapters, as set out at 1.3 below.

1.3 Scope of this chapter

This chapter deals with common control transactions that involve the transfer of control over one or more businesses (as defined in IFRS 3) and focuses on the perspective of the receiving entity. That receiving entity may or may not be identifiable as the acquirer if IFRS 3 were applied to the transaction (see Chapter 9 at 4.1). If the entity or net assets being transferred do not meet the definition of a business (see Chapter 9 at 3.2), the transaction represents an asset acquisition. The accounting for acquisitions of (net) assets under common control is discussed in Chapter 8 at 4.4.2.D.

This chapter consecutively addresses:

• the scope exclusion in IFRS 3 for business combinations under common control (see 2 below);
• the accounting for business combinations under common control excluded from the scope of IFRS 3 (see 3 below);
• the accounting for transactions under common control (or sometimes common ownership) involving a newly formed entity (see 4 below);
• the accounting for transfers of investments in associates or joint ventures from entities under common control (see 5 below); and
• the status of the IASB's research project on business combinations under common control (see 6 below).

Although the discussion at 3 and 4 below (particularly the examples contained therein) generally refers to ‘consolidated financial statements’ and transfers of ‘entities’, the accounting may be equally applicable to the separate or individual financial statements of an entity that receives the net assets of a business (rather than the shares in the entity holding that business) in a common control transaction. In contrast, if the receiving entity obtains control over a business housed in a separate legal entity, it would recognise an investment in a subsidiary in accordance with IAS 27 – Separate Financial Statements – in its separate financial statements (and individual financial statements are not applicable). This is consistent with business combinations that are in the scope of IFRS 3. That standard specifies only to which transactions it applies, but not to which financial statements (e.g. consolidated, separate, individual).

This chapter, however, does not specifically deal with the accounting for common control transactions in separate or individual financial statements, which is covered in Chapter 8 at 4. Chapter 8 also discusses the accounting for legal mergers between a parent and its subsidiary (at 4.4.3.B).

Although no control is obtained by the receiving entity, this chapter does address the transfer of an investment in an associate or joint venture from an entity under common control (at 5 below). The issue is whether the scope exclusion in IFRS 3 for business combinations under common control can be applied by analogy to this scenario.

The transferor that loses control over an entity or business in a common control transaction will also need to account for the transaction in its own financial statements. In doing so, it will need to consider the requirements of other relevant IFRSs, in particular, the requirements of IFRS 10 – Consolidated Financial Statements – relating to disposals of, or loss of control over, subsidiaries (see Chapter 7 at 3.2) and the requirements of IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations – relating to disposal groups held for sale and discontinued operations (see Chapter 4). The discussion in Chapter 7 at 3.7 and in Chapter 8 at 2.4.2 relating to demergers (e.g. the spin-off of a subsidiary or business) may also be relevant.

Finally, any transaction between entities under common control is a related party transaction under IAS 24, the requirements of which are dealt with in Chapter 39.

2.1 Business combinations under common control

For the purpose of the scope exclusion, a business combination involving entities or businesses under common control is ‘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’. [IFRS 3.B1]. This will include transactions such as the transfer of subsidiaries or businesses between entities within a group, provided the transaction meets the definition of a business combination in IFRS 3.

The extent of non-controlling interests in each of the combining entities before and after the business combination is not relevant to determining whether the combination involves entities under common control. [IFRS 3.B4]. This is because a partially-owned subsidiary is nevertheless under the control of the parent entity. Therefore transactions involving partially-owned subsidiaries are also outside the scope of the standard. Similarly, the fact that one of the combining entities is a subsidiary that has been excluded from the consolidated financial statements of the group in accordance with IFRS 10 is not relevant to determining whether a combination involves entities under common control. [IFRS 3.B4]. This is because the parent entity controls the subsidiary regardless of that fact.

3.1 Pooling of interests method or acquisition method

IFRS 3 scopes out business combinations under common control and is not prescriptive otherwise as to the method of accounting for such transactions. Entities should therefore develop an accounting policy that results in relevant and reliable information by applying the hierarchy in paragraphs 10‑12 of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors (discussed in Chapter 3 at 4.3).

Applying that hierarchy, entities may refer to IFRS 3 as a standard that deals with a similar and related issue, and apply the acquisition method by analogy. Entities may also consider the most recent pronouncements of other standard-setting bodies having a similar framework to IFRS, other accounting literature and accepted industry practices, to the extent that these do not conflict with any IFRS or the Conceptual Framework for Financial Reporting (Conceptual Framework). Several standard-setting bodies have issued guidance and some allow or require a pooling of interests-type method (also referred to as ‘predecessor accounting’, ‘merger accounting’ or ‘carry over accounting’ in some jurisdictions) to account for business combinations under common control.

Accordingly, we believe that a receiving entity accounting for a business combination under common control should apply either:

1. the acquisition method set out in IFRS 3 (see 3.2 below); or
2. the pooling of interests method (see 3.3 below).

We do not consider that the ‘fresh start’ method, whereby all assets and liabilities of all combining businesses are restated to fair value, is an appropriate method of accounting for business combinations under common control.

However, in our view, this accounting policy choice is only available if the transaction has substance for the combining parties. This is because the acquisition method results in measuring the net identifiable assets of one or more of the businesses involved at their acquisition-date fair values (with some limited exceptions; see Chapter 9 at 5) and/or the recognition of goodwill (or gain on a bargain purchase). IFRS contains limited circumstances when net assets may be restated to fair value and prohibits the recognition of internally generated goodwill. A common control transaction should not be used to circumvent these limitations. Careful consideration is required of all facts and circumstances, before it is concluded that a transaction has substance. If there is no substance to the transaction, the pooling of interests method is the only method that may be applied to that transaction. If there is substance to the transaction, whichever accounting policy is adopted, should be applied consistently.

Evaluating whether the transaction has substance will involve consideration of multiple factors, including (but not necessarily limited to):

• the purpose of the transaction;
• the involvement of outside parties in the transaction, such as non-controlling interests or other third parties;
• whether or not the transaction is conducted at fair value;
• the existing activities of the entities involved in the transaction; and
• whether or not it is bringing entities together into a ‘reporting entity’ that did not exist before.

The concept of ‘reporting entity’ is clarified in the Conceptual Framework, which was revised in March 2018. A reporting entity is described as an entity that is required, or chooses, to prepare financial statements. This can be a single entity or a portion of an entity or comprise more than one entity. A reporting entity is not necessarily a legal entity. [CF 3.10]. Further discussion is included in Chapter 2 at 6.2.

In Example 10.3 above, Entity C had to account for its business combination with Entity B, as it was preparing consolidated financial statements. In some situations, Entity C would not need to account for the business combination at all, as it may be exempt as an intermediate parent company from preparing consolidated financial statements (see Chapter 6 at 2.2.1). If in Example 10.3 above, Entity C had acquired the business of Entity B, rather than the shares, then the same accounting policy choice would have to be made for the business combination in Entity C's financial statements, even if they are not consolidated financial statements.

However, in other types of reorganisations, careful consideration of the factors above may indicate that there is no substance to the transaction. This is illustrated in Example 10.4 below by transaction (ii).

In Example 10.4 above, Entity D had to account for its business combination with Entity E, as it was preparing consolidated financial statements. In some situations, Entity D would not need to account for the business combination at all, as it may be exempt as an intermediate parent company from preparing consolidated financial statements (see Chapter 6 at 2.2.1). If in Example 10.4 above, Entity D had acquired the business of Entity E, rather than the shares, then the business combination would similarly have to be accounted for using the pooling of interests method in Entity D's financial statements, even if they are not consolidated financial statements.

3.2 Application of the acquisition method under IFRS 3

The application of the acquisition method is set out in IFRS 3 and discussed generally in Chapter 9. This method involves the following steps:

1. identifying an acquirer (see Chapter 9 at 4.1);
2. determining the acquisition date (see Chapter 9 at 4.2);
3. recognising and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree (see Chapter 9 at 5); and
4. recognising and measuring goodwill or a gain on a bargain purchase (see Chapter 9 at 6). [IFRS 3.5].

As far as (a) above is concerned, it may be that in some cases the identification of the acquirer means that the business combination needs to be accounted for as a reverse acquisition (see Chapter 9 at 14). Careful consideration is required where the business combination under common control involves a Newco, as it may be a high hurdle for a Newco to be identified as the acquirer under IFRS 3 (see 4 below).

As far as (d) above is concerned, goodwill at the acquisition date is computed as the excess of (a) over (b) below:

1. the aggregate of:
   1. the consideration transferred (generally measured at acquisition-date fair value);
   2. the amount of any non-controlling interest in the acquiree; and
   3. the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree.
2. the net of the acquisition-date fair values (or other amounts measured in accordance with IFRS 3) of the identifiable assets acquired and the liabilities assumed. [IFRS 3.32].

Where (b) exceeds (a) above, IFRS 3 regards this as giving rise to a gain on a bargain purchase. [IFRS 3.34].

The requirements of IFRS 3 in relation to the acquisition method have clearly been developed for dealing with business combinations between parties transacting on an arm's length basis. The consideration transferred in a business combination at arm's length will generally be measured at the acquisition-date fair values of the assets transferred, liabilities incurred and/or equity interests issued by the acquirer (see Chapter 9 at 7). The fair value of that consideration will generally reflect the value of the acquired business. For business combinations under common control, however, this may not be the case. The transaction may not be at arm's length and the fair value of the consideration transferred may not reflect the value of the acquired business.

Where a higher value is given up than received, economically, the difference represents a distribution from the receiving entity's equity. Conversely, where a higher value is received than given up, the difference represents a contribution to the receiving entity's equity. Nevertheless, IFRS neither requires nor prohibits the acquirer to recognise a non-arm's length element in a business combination under common control. If such transaction is not at arm's length, this may suggest that there is no substance to the transaction and application of the acquisition method might not be appropriate (see 3.1 above). If, however, the acquisition method is appropriate, in our view, the receiving entity may either:

1. recognise the transaction at the consideration transferred as agreed between the parties (measured at the acquisition-date fair value in accordance with IFRS 3); or
2. recognise the transaction at the fair value of the acquired business (with the difference between the fair value of the consideration transferred and acquired business as either an equity contribution or equity distribution).

Whichever accounting policy is adopted, it should be applied consistently.

This is considered in Example 10.5 below. As the example does not include any non-controlling interest in the acquiree, nor any previously held interest in the acquiree by the acquirer, the computation of goodwill or a gain on a bargain purchase only involves the comparison between (a)(i) and (b) above.

In Example 10.3 and Example 10.5 above, the consideration transferred by Entity C was in cash. However, what if Entity C issued shares to Entity A to effect this business combination under common control?

If an acquirer issues equity interests to effect a business combination, IFRS 3 requires the consideration transferred to be measured at the acquisition-date fair value of these equity interests issued. [IFRS 3.37]. As discussed in Chapter 9 at 7, in a business combination in which the acquirer and the acquiree (or its former owners) exchange only equity interests, the acquisition-date fair value of the acquiree's equity interests may be more reliably measurable than that of the acquirer's equity interests. In that case, IFRS 3 requires goodwill to be calculated using the fair value of the acquiree's equity interests rather than the fair value of the equity interests transferred. [IFRS 3.33].

IFRS 3 does not include detailed guidance on measuring the fair value of equity interests issued as consideration. In such circumstances, IFRS 13 – Fair Value Measurement – is relevant as it applies when another IFRS requires or permits fair value measurements. [IFRS 13.5]. Fair value is defined as ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date’. [IFRS 13.9]. IFRS 13 requires that entities maximise the use of relevant observable inputs and minimise the use of unobservable inputs to meet the objective of a fair value measurement. [IFRS 13.36]. If either the acquirer's or acquiree's shares are quoted, this would indicate which fair value is more reliably measurable. However, in arrangements between entities under common control, a quoted price for either the acquirer's or the acquiree's shares might not always be available. IFRS 13 is discussed in detail in Chapter 14.

In Example 10.5 above, if Entity C issued shares to Entity A to acquire Entity B, and there is no quoted price for either Entity B's or Entity C's shares, then the fair value of the consideration transferred would need to be based on whichever shares are considered to be more reliably measurable. If this were Entity C's shares and their fair value was only £700, then Entity C would similarly have an accounting policy choice between (a) and (b) above. This choice exists regardless of whether Entity C transfers cash or equity interests as consideration. However, if Entity B's shares are considered to be more reliably measurable, both approaches would result in a similar outcome. This is because the consideration transferred by Entity C would then be based on the fair value of Entity B, i.e. £1,000. Thus, goodwill of £400 would be recognised, with the £1,000 consideration transferred reflected in equity.

3.3 Application of the pooling of interests method

We believe that if an entity does not adopt an accounting policy of using the acquisition method under IFRS 3, or if the transaction has no substance, the pooling of interests method should be applied when accounting for business combinations under common control (see 3.1 above).

4.1 Introduction

The receiving entity in a common control transaction involving the transfer of control over one or more businesses is not always an existing entity, but could also be a newly formed entity (or Newco). This raises particular questions since IFRS 3 indicates that a new entity formed to effect a business combination is not necessarily the acquirer. If a new entity issues equity interests to effect a business combination, one of the combining entities that existed before the transaction shall be identified as the acquirer by applying the guidance in paragraphs B13-B17. In contrast, a new entity that transfers cash or other assets or incurs liabilities as consideration may be the acquirer. [IFRS 3.B18].

Whether a Newco can be identified as the acquirer may be relevant to determine if a transaction is a business combination and thus within the scope of IFRS 3 (unless otherwise excluded). The standard defines a business combination as ‘a transaction or other event in which an acquirer obtains control of one or more businesses’. [IFRS 3 Appendix A]. This requires one of the combining entities to be identified as the acquirer. IFRS 3 also states that ‘the accounting acquiree must meet the definition of a business for the transaction to be accounted for as a reverse acquisition’. [IFRS 3.B19]. Since a Newco does not have its own operations, it would not be a business as defined. Accordingly, if a Newco combines with only one business, neither party might be capable of being identified as the acquirer under IFRS 3 and the transaction would not be a business combination.

Whether a Newco can be identified as the acquirer is also relevant in case the acquisition method is applied. When, for example, a Newco combines with two businesses and is identified as the acquirer, acquisition-date fair values would be attributed to the assets acquired and liabilities assumed of both existing businesses, and any goodwill or gain on a bargain purchase relating to those businesses would be recognised. In contrast, if Newco itself is not the acquirer under IFRS 3, one of the existing businesses must be identified as the acquirer and the acquisition method of accounting would be applied only to the other business.

IFRS 3 does not specify in which circumstances a Newco that effects a business combination other than through the issue of shares may be the acquirer, but it is clear that ‘control’ is the fundamental concept when identifying an acquirer. This is discussed further in Chapter 9 at 4.1.1. The analysis requires careful consideration of all facts and circumstances, and ultimately depends on whether a Newco can be considered as an extension of the party (or parties) that ultimately gains control over the combining entities. In common control transactions, however, there is typically no change of ultimate control over the transferred business or businesses. In that situation, a Newco would not be identified as an acquirer under IFRS 3.

That conclusion might be different when a reorganisation involving a Newco is used to facilitate an external sale or IPO. That is, if the transfer under common control is an integral part of another transaction that ultimately results in a change of control over the transferred business or businesses, the facts and circumstances may be such that a Newco could be regarded as the acquirer under IFRS 3. This situation is illustrated in Example 9.10 in Chapter 9, where the transfer of two businesses from a parent to a newly incorporated entity for cash (i.e. under common control) is contingent on the completion of an IPO of that Newco. In this scenario, the parent loses ultimate control over the two businesses and Newco could in effect be considered as an extension of its new shareholders after the IPO. However, if the change of control is only planned, but not an integral part of the transaction, Newco would be viewed as an extension of the parent (or possibly the transferred businesses) and would not be the acquirer.

While the Interpretations Committee discussed a few similar fact patterns in 2011, it ultimately observed that the accounting for arrangements involving the creation of a newly formed entity and for common control transactions is too broad to be addressed through an interpretation or an annual improvement. The Interpretations Committee concluded that these matters would be better considered in the context of a broader project on accounting for common control transactions.⁷ In December 2017, the IASB tentatively decided that transactions followed by or conditional on a future sale or IPO are included within the scope of its research project on business combinations under common control (see 6.1 below).

The discussion at 4.2, 4.3 and 4.4 below addresses different scenarios involving a Newco. While this chapter mainly deals with transactions under common control, Examples 10.11, 10.12 and 10.14 below also discuss the accounting treatment where the same group of shareholders owns the combining entities before and after the transaction, but without a single shareholder, or sub-group of the shareholders by virtue of a contractual arrangement (see 2.1.1 above), having control. All of the examples at 4.2, 4.3 and 4.4 below assume that all entities are owned 100% by the party or parties at the top of the particular structure.

4.2 Setting up a new top holding company

In Examples 10.11 and 10.12 below, a new holding company has been inserted between shareholders and either an existing group or a series of entities with common ownership (but not necessarily common control). At 4.2.1 below, Newco issues shares to effect the transaction and is not identified as the acquirer in either case. However, the accounting consequences may differ depending on whether or not the transaction represents a business combination according to IFRS 3. Transactions such as this may also be effected for consideration other than shares or a combination of shares and other consideration. Arrangements in which Newco transfers cash or other assets or incurs liabilities are discussed at 4.2.2 below.

4.3 Inserting a new intermediate parent within an existing group

In Example 10.13 below, a new intermediate holding company has been inserted within an existing group, so as to form a new sub-group.

In Example 10.13 above, the reorganisation was effected by Newco issuing shares. If Newco gave cash or other consideration as part of the transaction, then in most situations this will not affect the analysis above and the further consequences would be the same as those described at 4.2.2 above.

Only in limited circumstances would it be possible to identify Newco as the acquirer under IFRS 3, as discussed at 4.1 above. This accounting may be appropriate when, for example, the transaction was contingent on completion of an IPO that resulted in a change of control over Newco. In that case, the application of the acquisition method would result in fair values being attributed to the assets acquired and liabilities assumed of both sub-groups C and D, and the recognition of goodwill or a gain on a bargain purchase relating to those businesses.

4.4 Transferring businesses outside an existing group using a Newco

Example 10.14 below illustrates a scenario where a business is transferred outside an existing group to a Newco owned by the same shareholders.

Apart from any necessary change in share capital, the accounting treatment set out in Example 10.14 above is the same as would have been applied if the business was transferred by distributing the shares in Entity E directly to Parent A's shareholders, without the use of a Newco. In that case, there would be no question that there had been a business combination at all. Entity E would not reflect any changes in its financial statements. The only impact for Entity E would be that, rather than only having one shareholder (Entity C), it now has a number of shareholders.

In Example 10.14 above, the reorganisation was effected by Newco issuing shares. If Newco gave cash or other consideration as part of the transaction, then in most situations this will not affect the analysis above. The only difference is that any consideration transferred to the shareholders is effectively a distribution and should be accounted for as such (see 4.2.2 above).

Only in limited circumstances would it be possible to identify Newco as the acquirer under IFRS 3, as discussed at 4.1 above. This accounting may be appropriate when, for example, the transaction was contingent on completion of an IPO that resulted in a change of control over Newco. In that case, the application of the acquisition method would result in fair values being attributed to the assets acquired and liabilities assumed of Entity E, and the recognition of goodwill or a gain on a bargain purchase relating to that business.

For Entity A, this transaction is a spin-off (or demerger) of Entity E, and therefore the discussion in Chapter 7 at 3.7 and in Chapter 8 at 2.4.2 would be relevant.

6.1 BCUCC research project – background and scope

Historically, the IASB noted that the absence of specific requirements for business combinations under common control has led to diversity in practice. Following views received in response to the Agenda Consultation 2011, the IASB identified ‘business combinations under common control’ (BCUCC) as one of its priority research projects.¹¹ In June 2014, when setting the scope of the project, the IASB tentatively decided that the project should consider:

• business combinations under common control that are currently excluded from the scope of IFRS 3;
• group restructurings; and
• the need to clarify the description of business combinations under common control, including the meaning of ‘common control’.

The IASB also tentatively decided that the project should give priority to considering transactions that involve third parties, for example, those undertaken in preparation for an IPO.¹² At that time, the IASB did not discuss which reporting entity (e.g. acquirer, acquiree, transferor, ultimate parent) and which financial statements of that reporting entity (e.g. consolidated, separate, individual) the project would focus on.

The 2015 Agenda Consultation confirmed the importance and urgency of providing guidance on business combinations under common control. Accordingly, as discussed in the November 2016 Feedback Statement on the 2015 Agenda Consultation, the IASB decided to retain BCUCC as one of the eight projects on its research programme. It was noted that the topic is highly ranked by comment letter respondents from a wide range of countries and in emerging market outreach, and is important to regulators and members of the Advisory Council.¹³

During the second half of 2017, the IASB continued its discussions on the scope of the BCUCC research project. Although ‘business combinations under common control’ are described in IFRS 3, there are application questions as to whether particular transactions satisfy that description. Specifically, interested parties had raised questions on the meaning of ‘transitory control’ and whether particular business combinations satisfy the description of ‘under common control’. In addition, the staff had noticed that ‘group restructuring’ is not a defined term and is understood differently by different parties. Hence, the question arose what transactions, other than business combinations under common control, are included in the scope of the project.¹⁴

In October and December 2017, the IASB tentatively decided to clarify that the scope of the project (which focuses on the perspective of the receiving entity) includes transactions under common control in which a reporting entity obtains control of one or more businesses, regardless of whether:

• the reporting entity can be identified as the acquirer if IFRS 3 were applied to the transaction (e.g. when a Newco issues shares to acquire one business under common control);¹⁵
• the transaction is preceded by an external acquisition and/or followed by an external sale of one or more of the combining parties; or
• the transaction is conditional on a future sale, such as in an IPO.¹⁶

This means that the project will address both business combinations under common control and other common control transactions involving the transfer of control over one or more businesses. Consistent with IFRS 3, the scope of the project specifies only which transactions it applies to. Therefore, depending on whether the receiving entity acquires the shares or net assets of a business and/or whether it has other subsidiaries, any guidance developed in the project may affect the consolidated, individual and/or separate financial statements. The IASB will also consider the interaction with other common control transactions that are outside the scope of the project (e.g. transfers of investments in associates or joint ventures under common control).¹⁷

6.2 BCUCC research project – methods of accounting

Having finalised the scope, the IASB continued investigating the different methods of accounting for transactions within the scope of the project. Previous research and outreach activities had shown that, in practice, BCUCC are sometimes accounted for using the acquisition method, but variations of the predecessor method are more typically used.¹⁸ In February 2018, the IASB tentatively decided to use the acquisition method set out in IFRS 3 as the starting point in its analysis of transactions within the scope of the project, noting that this would not determine whether it would ultimately propose applying the acquisition method to all, or even to many, of these transactions.¹⁹

During the remainder of 2018, the IASB focused on a specific subset of transactions within the scope of the project, being acquisitions that affect non-controlling shareholders of the receiving entity (i.e. where the receiving entity is not wholly-owned by the controlling party). In the deliberations, broadly speaking, three alternative measurement approaches were explored as to how the receiving entity could reflect the acquired assets and liabilities in a BCUCC:

• ‘Historical cost’ approach – where the receiving entity allocates the consideration transferred across the acquired assets and liabilities (e.g. based on their relative fair values; consistent with the accounting required for asset acquisitions).
• ‘Current value’ approach – where the receiving entity reflects the acquired assets and liabilities at their current values (e.g. at their fair values; consistent with the acquisition method required by IFRS 3 for business combinations).
• ‘Predecessor’ approach – where the receiving entity reflects the acquired assets and liabilities at their historical carrying amounts.

In evaluating the information needs of these non-controlling shareholders, the staff expressed the view that neither a historical cost approach nor a predecessor approach would provide useful information. Where equal values are exchanged in a BCUCC, a historical cost approach might overstate the acquired net assets and result in the recognition of an impairment loss, while a predecessor approach might result in recognising a distribution from equity. Where unequal values are exchanged, both approaches might fail to reflect an overpayment or underpayment. In contrast, a current value approach would aim to reflect an exchange of equal values as such, whereas it would aim to reflect an overpayment or underpayment as an equity transaction if unequal values are exchanged.²⁰

Accordingly, in June 2018, the IASB directed the staff to develop a current value approach based on the acquisition method in IFRS 3 and to consider whether and how that method should be modified to provide the most useful information about BCUCC that affect non-controlling shareholders. The IASB noted that possible modifications could include requirements for the receiving entity to do one or more of the following:

• provide additional disclosures;
• recognise any excess identifiable net assets acquired as a contribution to equity, instead of recognising that excess as gain on a bargain purchase; or
• recognise any excess consideration (which could be measured in different ways) as a distribution from equity instead of including it implicitly in the initial measurement of goodwill.²¹

The IASB also discussed, in December 2018, whether such a current value approach should be applied to all or only some BCUCC that affect non-controlling shareholders of the receiving entity and how any such distinction should be made.²² This could be based on qualitative factors (e.g. whether the receiving entity's shares are traded in a public market; whether or not non-controlling shareholders are only related parties or key management personnel), a quantitative threshold (e.g. whether non-controlling shareholders hold 10% or more), or a combination of both.²³

The IASB then moved on to discuss more broadly the information needs of different primary users of the receiving entity's financial statements (i.e. not just non-controlling shareholders) and how those needs are considered in developing measurement approaches for BCUCC. From March to July 2019, the staff presented to the IASB its analysis of the information needs of: (i) lenders and other creditors;²⁴ and (ii) potential equity investors.²⁵ Partway through, in April 2019, the IASB tentatively decided that it need not pursue a single measurement approach for all transactions within the scope of the project. Specifically, it could pursue:

• a current value approach for all or some transactions that affect non-controlling shareholders of the receiving entity; and
• a different approach, such as a form of predecessor approach, for transactions that affect lenders and other creditors in the receiving entity but do not affect non-controlling shareholders.

At the same time, the IASB also directed the staff to continue developing measurement approaches for transactions within the scope of the project by considering:

• whether and how such transactions can be different from business combinations not under common control;
• what information would be useful to various primary users of the receiving entity's financial statements;
• whether the benefits of providing particular information would justify the costs of providing that information; and
• the complexity and structuring opportunities that could arise under the various approaches.²⁶

In line with the first bullet above, in June 2019, the staff set out why they believe BCUCC that do not affect non-controlling shareholders of a receiving entity differ both from transactions that do affect such shareholders and from business combinations not under common control. In their view, a distinction based on whether non-controlling shareholders of the receiving entity acquire residual interest (equity claim) in the transferred businesses is a viable approach to explore in determining when to apply a current value approach, and when to apply a form of predecessor approach, to BCUCC.²⁷ The staff's analysis in July 2019 considered the information needs of potential equity investors and reiterated their standpoint that a form of predecessor approach would be more appropriate for transactions within the scope of the project that do not result in non-controlling shareholders of the receiving entity acquiring residual interest in the transferred businesses.²⁸ The IASB was not asked to make any decisions at its June and July 2019 meetings.

6.3 BCUCC research project – next steps

At the time of writing, the staff have indicated that at future IASB meetings they plan to:

• present an updated analysis of BCUCC that affect non-controlling shareholders of the receiving entity and ask the IASB for decisions on: (i) whether a current value approach should be applied to all such transactions and, if not all, how that distinction should be made; and (ii) whether a form of predecessor approach should be applied to all remaining transactions within the scope of the project;
• present an analysis of how a current value approach based on the acquisition method in IFRS 3 could apply and ask the IASB for decisions;
• present an analysis of how a form of predecessor approach could apply and ask the IASB for decisions; and
• present an analysis of what disclosures should be provided about transactions within the scope of the project and ask the IASB for decisions.²⁹

In addition, among other things, the IASB still needs to consider the interaction with other common control transactions that are outside the scope of the project.

At the time of writing, the Discussion Paper is expected during the first half of 2020.³⁰