Business Combinations Under Common Control
Timeline
Following the post-implementation review of IFRS 3 Business Combinations in 2015, the IASB published its Discussion Paper DP/2020/2 Business Combinations under Common Control in November 2020 with a comment deadline of 1 September 2021. Since that date, the IASB has been discussing the feedback received on the topics set out in the DP and the plan for redeliberating the preliminary view.
The project objective was to develop reporting requirements for a receiving entity that would reduce diversity and improve the transparency of reporting BCUCC. More specifically, the IASB aim was to provide users of a receiving entity’s financial statements with better information that is both:
- more relevant—by setting up reporting requirements based on user information needs; and
- more comparable—by requiring similar transactions to be reported in a similar way.
The IASB considered the project direction, including whether to move this from a research project to standard-setting. The IASB explored three options:
- Option I—develop recognition, measurement and disclosure requirements.
- Option II—develop disclosure-only requirements.
- Option III—discontinue the project.
In November 2023 the International Accounting Standards Board (IASB) decided not to develop requirements for reporting BCUCCs. Accordingly, the IASB has discontinued its work on the project.
The project summary was published in April 2024, summarising the research findings and decisions of the IASB.
Background
IFRS Accounting Standards do not specify how to account for business combinations involving companies controlled by the same party. In the absence of specific requirements, companies tend to provide little information about such combinations and report on them in different ways. This diversity in practice makes it difficult for users of financial statements to understand how a business combination under common control affects a company and to compare companies that undertake similar transactions.
The IASB’s research project considers whether and, if so, how to fill the gap in IFRS Accounting Standards.
BCUCC occur when a business is transferred from one company to another company within the same group. In the example below, Company C is transferred from Company A to Company B, within the same group (headed by Company P). From a group point of view nothing has changed – the group still contains the same assets and liabilities as before. However, they have been reorganised.
Today, in the absence of guidance, some receiving companies (B) choose to measure the assets and liabilities of Company C received in the combination at book value. Other receiving companies would choose to follow the IFRS 3 acquisition method and recognise Company C at fair value. This creates inconsistency.
Key IASB Proposals
In overview, the IASB’s preliminary views proposed a multipath approach to accounting for BCUCC in the receiving company. Key proposals include:
- When the receiving company is listed or has non-controlling shareholders, it should use the IFRS 3 acquisition method of accounting (with some limited exceptions).
- When the receiving company is not listed, and does not have non-controlling shareholders, it should use the book value method of accounting, further details of which are specified in the Discussion Paper.
- Specifying the book value that should be used, if using the book value method.
- Clarifying how any difference between consideration and the value of the assets and liabilities acquired should be accounted for.
- Specifying disclosure requirements for BCUCC.
UKEB Outreach
To inform the UKEB response to the Discussion Paper, the UKEB performed outreach including an educational webinar, a stakeholder survey and public consultation on our draft comment letter.
Our outreach suggested that BCUCC were most frequently administrative exercises to streamline the group structure, reflected other internal restructuring or were performed for tax purposes, and that accounting for the majority of these transactions is under local GAAP.
Discussion Paper video with IASB and UKEB
The UKEB Secretariat launched a video guide on the IASB’s DP/2020/2 Business Combinations Under Common Control.
Jointly hosted by the UKEB Secretariat and the IASB technical staff, the video provides an overview of the proposals in the discussion paper, gives an insight into the IASB thinking behind these proposals and reflects on some of the stakeholder feedback received to date. The presentation slides can be found below and the video can be seen here.
Final Comment Letter
On 26 August 2021, the UKEB published its final comment letter on the IASB Discussion Paper DP/2020/02 Business Combinations under Common Control. A link to the letter can be found at the foot of this page.
Overall, the UKEB supports the proposals in the discussion paper as they should provide users of financial statements with more useful information on BCUCC. In particular, the UKEB expects the proposals to reduce diversity in accounting practice, improve transparency and lead to greater comparability between financial statements.