Discussion Paper on business combinations under common control

Keywords: Mazars, Thailand, IFRS, BCUCC, IFRS 3, IASB, Mergers and acquisitions, Business combinations under common control, IAS 1, IAS 8

15 January 2021

Readers will remember that IFRS 3 – Business Combinations excludes these transactions from its scope, despite the fact that they are common in practice.

Aiming to reduce diversity in practice

In the absence of IFRS requirements on this topic, companies end up presenting similar transactions in various ways: some use an approach based on the fair value of the acquired business (the acquisition method), while others use an approach based on its book value. Through this Discussion Paper, the Board is aiming to reduce this diversity in practice and thus to improve the transparency and comparability of financial reporting on these transactions.

What the IASB is proposing

Rather than imposing a single method (acquisition method or book-value method) for all such transactions, the IASB is proposing that the chosen approach should depend on the characteristics of the transaction. If the transaction does not affect the non-controlling shareholders of the receiving company, the book-value method should be used.

If the non-controlling shareholders are affected, particularly in cases where the shares of the receiving company are traded in a public market, then unless an exemption or exception applies, the acquisition method should be used (as for business combinations between unrelated companies falling within the scope of IFRS 3).

A decision tree is used to illustrate the various questions that should be considered in order to determine whether the book-value method or acquisition method should be used.

What the IASB is expecting from the consultation

In the Discussion Paper, the Board is seeking for feedback on when each measurement method should be applied, how these methods should be applied, and the disclosure requirements.

The comment period closes on 1 September 2021.

The press release and all the documents published by the IASB are available here.

Taking climate-related matters into account in IFRS financial statements

In an environment of increasingly rapid development of standards for non-financial reporting, the IFRS Foundation published an educational document in November. It reminds issuers that although IFRS standards do not explicitly refer to climate-related matters, they nonetheless require such matters to be taken into account if their impact on the financial statements as a whole is material.

For this, the Foundation draws on the concept of materiality as recently redefined in IAS 1 – Presentation of Financial Statements and IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors. IFRS Practice Statement 2: Making Materiality Judgements provides useful practical guidance on the topic. The Foundation also notes that companies frequently have to make use of judgement to assess whether information is material, when preparing their IFRS financial statements.

In the educational material published in November, the Foundation provides a non-exhaustive list of provisions in IFRSs that may require entities to reflect the impact of climate-related matters (and of other emerging risks) in their financial statements, if this impact is material for the entity in question. These provisions are likely to apply if significant use of judgement is made in determining carrying amounts, estimates and/or disclosures required in the notes.

The IFRS Foundation also emphasises that IAS 1 requires issuers to consider whether they need to provide additional information, beyond what is specified in the standards, if investors would need this information in order to understand the impacts of climate-related matters on a company’s financial position and performance.

The November 2020 publication is available here.