14 IASB Update, April 2017, IASB Update,
Contingent consideration of an Acquiree (“pre-
October 2017.
existing contingent consideration”), p.3.
15 ED/2016/1, pp.9-10.
41 IASB Update, May 2013.
16 IASB Update, June 2017.
42 Put options written on non-controlling interests
17 ED/2016/1, pp.11-12.
(Proposed amendments to IAS 32), Project
18 IASB Update, June 2017.
news, IASB Website, 23 June 2014.
19 ED/2016/1, p.9.
43 IFRIC Update, November 2010.
20 ED/2016/1, p.16.
44 IASB Update, July 2016.
21 ED/2016/1, p.9.
45 IFRIC Update, March 2013.
22 ED/2016/1, p.17.
46 IFRIC Update, September 2011.
23 IASB Update, June 2017.
705
Chapter 10
Business combinations
under common control
1 INTRODUCTION ............................................................................................ 707
1.1
Common control transactions ............................................................................ 707
1.2 Group
reorganisations ........................................................................................ 708
1.3
Scope of this chapter .......................................................................................... 709
2 THE IFRS 3 SCOPE EXCLUSION ................................................................... 710
2.1
Business combinations under common control ............................................. 710
2.1.1
Common control by an individual or group of individuals ........... 711
2.1.2 Transitory control ................................................................................ 713
3 ACCOUNTING FOR BUSINESS COMBINATIONS INVOLVING ENTITIES
OR BUSINESSES UNDER COMMON CONTROL .............................................. 715
3.1
Pooling of interests method or acquisition method ...................................... 715
3.2
Application of the acquisition method under IFRS 3 .................................... 719
3.3
Application of the pooling of interests method .............................................. 721
3.3.1
General requirements .......................................................................... 721
3.3.2
Carrying amounts of assets and liabilities ........................................ 722
3.3.3
Restatement of financial information for periods prior to
the date of the combination ............................................................... 724
3.3.4
Equity reserves and history of assets and liabilities carried
over .......................................................................................................... 726
3.3.5
Acquisition of non-controlling interest as part of a
business combination under common control ............................... 728
4 ACCOUNTING FOR TRANSACTIONS UNDER COMMON CONTROL (OR
OWNERSHIP) INVOLVING A NEWCO ........................................................... 730
4.1
Introduction ........................................................................................................... 730
4.2
Setting up a new top holding company ............................................................ 731
706 Chapter
10
4.2.1
Setting up a new top holding company: transactions
effected through issuing equity interests ......................................... 732
4.2.2
Setting up a new top holding company: transactions
involving consideration other than equity interests ...................... 734
4.3
Inserting a new intermediate parent within an existing group .................... 734
4.4 Transferring
businesses outside an existing group using a Newco ............. 736
5 ACCOUNTING FOR TRANSFERS OF ASSOCIATES OR JOINT
VENTURES UNDER COMMON CONTROL ..................................................... 738
6 FUTURE DEVELOPMENTS ............................................................................. 741
List of examples
Example 10.1:
Common control involving individuals ............................................ 712
Example 10.2:
The meaning of ‘transitory’ common control ................................. 714
Example 10.3:
Accounting for business combinations under common
control – use of acquisition method? (1) ........................................... 717
Example 10.4:
Accounting for business combinations under common
control – use of acquisition method? (2) ......................................... 718
Example 10.5:
Acquisition method – cash consideration less than the fair
value of acquired business ................................................................. 720
Example 10.6:
Pooling of interests method – carrying amounts of assets
acquired and liabilities assumed ........................................................ 723
Example 10.7:
Pooling of interests method – restatement of financial
information for periods prior to the date of the
combination (1) ...................................................................................... 725
Example 10.8:
Pooling of interests method – restatement of financial
information for periods prior to the date of the
combination (2) ..................................................................................... 726
Example 10.9:
Pooling of interests method – no restatement of financial
information for periods prior to the date of the combination
– impact of carrying over equity reserves and history .................... 727
Example 10.10:
Pooling of interests method – acquisition of non-
controlling interest as part of a business combination
under common control ........................................................................ 729
Example 10.11:
Newco inserted at the top of an existing group ............................. 732
Example 10.12:
Newco inserted at the top of entities owned by the same
shareholders thereby creating a new reporting group .................. 733
Example 10.13:
Newco inserted as a new intermediate parent within an
existing group ........................................................................................ 735
Example 10.14:
Newco created to take over a business of an existing group
(spin-off) .................................................................................................. 736
Example 10.15:
Transfer of an associate within an existing group ........................ 740
707
Chapter 10
Business combinations
under common control
1 INTRODUCTION
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
708 Chapter
10
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.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
Business combinations under common control 709
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. asset acquisitions) 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 transferees in group
reorganisations 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
710 Chapter
10
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 control is not 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
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