17 August 2012
A business combination under common control is a transaction in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the transaction. These combinations often occur in group reorganisations in which the direct ownership of subsidiaries changes but the ultimate parent remains the same. Such combinations can arise prior to an initial public offering or a sale of combined entities.
Currently common control combinations are excluded from the scope of IFRS 3 Business Combinations
. However, they are within the standard’s scope, if that control is only ‘transitory’. This latter rule was imposed to alleviate concerns that business combinations could be structured through the use of “grooming” transactions in a way that the combining businesses are under common control for only a brief period in order to circumvent the application of the rules of IFRS 3: however, the term ‘transitory’ is not explained in the standard.
As a result of the scope exemption, accounting practice currently diverges. A project was added to the IASB’s agenda in 2007 but work was deferred pending completion of the projects in the IASB’s Memorandum of Understanding with the FASB. The IASB will decide at a later date whether it should resume its work on common control transactions.
Combinations under common control can take many forms. Consequently, this article cannot deal with all possible aspects. The following illustration refers to the transfer of a business between two subgroups of an existing group. It explains the accounting treatment in the consolidated financial statements of an intermediate parent company and only deals with the acquiring subgroup. It does not address combinations which represent reverse acquisitions.
If the combination is outside the scope of IFRS 3, management must develop an accounting policy in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
. This leaves preparers with a range of possible approaches, providing that the chosen policy gives relevant and reliable information. The chosen method must be applied consistently to all similar common control combinations.
The two most common approaches are set out below:
- IFRS 3 accounting: this means that the acquisition method of IFRS 3 is applied, e.g. by recognising goodwill, fair value adjustments etc. This approach is based on the view that the acquirer is a separate entity in its own right.
- Book value accounting: under this method, the assets and liabilities of the acquiree are recognised at their previous carrying amounts. No adjustments are made to reflect fair values and no new assets and liabilities of the acquiree are recognised at the date of the business combination. No new goodwill is recognised. However, it is necessary to harmonise accounting policies. Any difference between the acquired net assets and the consideration is recognised directly in equity. This approach is based on the view that the business simply has been transferred from one part of the group to another.
In the consolidated financial statements of the acquiring subgroup, further issues may arise as a result of a business combination under common control:
- If book value accounting is used, the question arises, which carrying amounts of the acquiree’s assets and liabilities should be recognised by the acquirer. Should these be the book values in the financial statements of the transferor, the entity transferred, the ultimate parent or any intermediate parent? In many cases, it is considered appropriate to use the carrying amounts from the consolidated financial statements of the highest entity that has common control. However, the opinions expressed in accounting literature differ to some extent.
- If book value accounting is used, the acquirer can choose between two different presentation methods:
- The acquirer includes the acquiree’s results and carrying amounts prospectively from the date of the acquisition.
- The acquirer presents the prior period as well as its current period prior to the date of the acquisition under the presumption that the combination had occurred before the start of the earliest period presented. However, this restatement must not extend to periods during which the entities were not under common control.
- The consideration transferred may be below the fair value of the business acquired. If the acquirer decided to apply IFRS 3 as discussed above, the acquirer can generally either
- measure the consideration transferred at the acquisition-date fair value of the consideration actually given or
- impute an additional equity contribution from the parent to recognise the consideration at the fair value of the business received.
Similar considerations also apply, when an associate or a jointly controlled entity accounted for using the equity method is transferred in a transaction under common control. In such situations, the acquirer can choose between the following methods:
- Acquisition accounting: The acquisition is accounted for just as any other acquisition of an associate or a jointly controlled entity under the equity method.
- Pooling of interests: The acquirer applies the pooling of interests method and carries over the previous equity-accounted values.
Note that IASeminars offers the following events with regard to business combinations and consolidations: