Business Combinations under Common Control

discussion at a public meeting of the International Accounting Standards Board (Board


1.
In December 2017, the International Accounting Standards Board (Board) 4. The staff recommend that the Board should use the acquisition method set in IFRS 3 Business Combinations as the starting point in developing proposals for transactions within the scope of the BCUCC project.
6. Appendix A and Appendix B report the feedback received from ASAF and EEG members respectively. ASAF and EEG members did not express a clear preference regarding the starting point the Board should use in developing proposals for transactions within the scope of the project.

7.
Following the December 2017 educational session with the Board and the consultations with the ASAF and the EEG, the staff identified the following broad alternatives for developing proposals for transactions within the scope of the project: (a) Alternative 1-start from a blank sheet of paper; (b) Alternative 2-start from IFRS Standards; and (c) Alternative 3-start from existing practice.

8.
These alternatives are not discrete and they overlap. In addition, the resulting proposals under each alternative could be very similar. This is because the main focus of each alternative is to provide useful information for primary users of the reporting entity's financial statements (the reporting entity the Board is considering in this project is the entity that obtains control over the transferred business or businesses, ie the 'receiving' entity in the transaction).

9.
However, each alternative identified by the staff approaches the development of proposals from a different starting point. 13. The Board would finally need to develop different proposals for those transactions for which the existing requirements would not result in useful information or would result in information whose benefits do not justify the cost of applying those requirements. In developing these proposals, the Board would primarily rely on the guidance in the Conceptual Framework but it would likely consider existing practice as well.

Alternative 1-start from a blank sheet of paper
14.
The staff considered which IFRS Standard ( (c) transfer of a single item: applicable IFRS Standards require the acquirer to recognise acquired items at cost or at fair value depending on the nature of the item.

15.
As stated in paragraph 1 of this paper, the Board tentatively decided that the project will address transactions that involve a transfer of control over one or more businesses. Therefore, in the staff's view, if the Board decides to start from existing requirements in IFRS Standards in developing proposals for transactions where in equity to recognise any difference between the consideration transferred and the carrying amounts of the assets acquired and the liabilities assumed.

24.
In addition, some interested parties suggested-and the staff agree with that view-that there is an interaction between how the predecessor method should be applied, when that method should be applied and why. In other words, if the Board decides to use the predecessor method as the starting point, it may need to answer those three questions at the same time.

25.
The staff acknowledge that under Alternative 3-start from existing practice-the Board could also decide to use the acquisition method as the starting point.
However, that would result in selecting the same starting point as if the Board followed Alternative 2-start from IFRS Standards (paragraphs 12-16 of this paper). Accordingly, using the acquisition method as the starting point has not been considered under Alternative 3.

26.
The staff think that using the acquisition method set in IFRS 3 as the starting point in developing proposals for transactions within the scope of the project would provide the best path forward and recommend taking this approach.
27. This is because the acquisition method: (a) is already required for business combinations not under common control and hence, in the Board's view, provides primary users with useful information about such transactions, at a cost that is justified by the benefits of that information. The staff think it would be logical to consider whether this method would also provide useful information, at a cost that is justified by the benefits of that information, for at least some transactions within the scope of the project.
(b) provides a clear starting point as this method is described in IFRS 3, tested and well understood.
(c) is already used in practice in some cases to account for transactions within the scope of the project.

28.
As stated in paragraph 16, using the acquisition method as the starting point does not mean that this method would be applied to all or many transactions within the scope of the project. This is just a starting point in the analysis.

29.
If the Board agrees with the staff recommendation, it would need to assess whether and when a transaction within the scope of the project is similar enough to a business combination not under common control that the same information should be provided. In making that assessment, the Board would consider the guidance in the Conceptual Framework.

30.
It would then need to determine which method or methods should be applied to other transactions within the scope of the project in order to provide useful information, at a cost that is justified by the benefits of that information.

31.
In developing such methods, the Board could consider a variation of the predecessor method or indeed start from a blank sheet of paper and develop a new method.

32.
A new accounting method could involve, for example: (a) measuring assets and liabilities of all the combining parties at fair value at the date of the transaction (sometimes referred as 'fresh start' or 'new basis' accounting); or (b) measuring the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values but without recognising any goodwill or gain from a bargain purchase. Instead, the difference between the fair value of the net assets acquired and the consideration transferred could be accounted for in equity.