Skip to content
Head of Global Accounting and Tax Consultancy
18 August 2021
Read time
5 minutes

New accounting requirements for business combinations under common control

Covid-19 took its toll on the mergers and acquisitions (M&A) industry; the level of M&A transactions was down significantly in 2020. The pandemic is not yet over but the M&A landscape is showing that a clear rebound in deal volumes is underway.

Increasing M&A activity and business model changes in response to Covid-19 call for the need for businesses to carry out group reorganisations more and more often. Group reorganisation is the restructuring of the relationships between companies under common control. There could be several reasons for undertaking group reorganisations – for example, to improve the synergies between the businesses, to accelerate the coordination of different entities or to create a tax group in a particular jurisdiction. Group reorganisation may take place under different formats, such as:

  • creation of a newly formed entity to transfer the net assets of a subsidiary
  • the combination of multiple companies under common ownership to form a new group entity
  • merger of a parent company into a wholly owned subsidiary
  • transfer of a subsidiary to another company
  • adding a new parent company to the group (eg, a shell company issuing shares to the existing shareholders of the group)
  • consolidating subsidiaries into fewer subsidiaries
  • demerger of a business of the parent company to its subsidiary.

What’s the matter?

Business combinations that involve entities under common control are outside the scope of the International Financial Reporting Standards (IFRS). There is currently no specific IFRS financial reporting guidance on the transfers of businesses between companies within the same group.

On 30 November 2020, the International Accounting Standards Board (IASB) issued a discussion paper on the possible accounting requirements for business combinations under common control from the perspective of the receiving entities. The objective of the Board is to reduce diversity in practice and to improve transparency and comparability in reporting these transactions.

Proposed accounting changes

According to the preliminary views of the IASB, the type of transaction determines the method to apply for measuring the common control transactions from the receiving company’s perspective. The discussion paper identifies two possible approaches for accounting of business combinations under common control:

  • the acquisition method in line with IFRS 3
  • the book value method, where businesses measure the transaction using the book value of the transferred companies.

In case the business transaction affects non-controlling shareholders, companies should apply the acquisition method in accordance with IFRS 3. There is an exception to the general rule when the receiving company’s shares are not traded in a public market and the non-controlling shareholders are the company’s related parties, as defined under IAS 24 Related Party Disclosures.

The board proposes a single book value method to apply to all other business combinations because those transactions in substance only move the economic resources within the same group.

Impact on businesses and finance teams

In practice, companies very often account for common control business combinations under the book value method (commonly referred to as the “predecessor method”) because of its inherent simplifications. As a result of the board’s new amendment, it is expected that a great number of group reorganisations would need to be treated under the acquisition method of IFRS 3. Applying the acquisition method requires finance teams to carry out the following steps:

  • identify the acquirer
  • determine the acquisition date
  • recognise and measure the assets acquired, the liabilities assumed, and any non-controlling interests
  • recognise and measure goodwill or a gain on bargain purchase.

There are a number of practical considerations that finance teams should take into account when applying the acquisition method, such as:

  • determination of the group reorganisation date (ie, the acquisition date);
  • identification and classification of all assets and liabilities acquired – eg, certain intangible assets and contingent liabilities should be recognised in the group even though they were not previously recognised in the books of the transferred entity
  • performing a detailed valuation exercise to determine the fair value of the assets and liabilities acquired as at the group reorganisation date
  • determination of the consideration paid for the acquisition on an “arm’s length basis”
  • calculation and allocation of goodwill to the cash generating units and subsequent testing for impairment
  • review of the consistency of accounting policies
  • aligning the accounting period of the transferred companies to the receiving companies
  • collection of all relevant information for the purpose of preparing the extensive and detailed disclosures as required by IFRS 3.

Entities should consider the implications on their financial reporting systems, processes and procedures when applying the acquisition method. The application of the acquisition method requires a considerable amount of time, cost and effort from businesses and there are certain areas where managerial judgements should be applied. TMF Group therefore suggests that businesses that would be affected by the board’s amendment, undertake the following actions:

  • identify all the business combinations in the scope of the amendment
  • plan ahead and consider the financial reporting implications of the new amendment
  • consider the necessity of engaging external consultants in technical accounting and/or valuation services
  • liaise with the external auditor on time.

Talk to TMF Group

With 9,100 experts and 120 offices in 85 jurisdictions around the world, TMF Group is uniquely positioned to help you with any reorganisation or M&A-related challenges, wherever you operate.

Our M&A services and accounting and tax professionals can help you to navigate complexity as you transact, grow, or reorganise. If you need support to plan or report a reorganisation transaction, or would like guidance on any of the methods outlined in this article, make an enquiry today.

Two male colleagues in a meeting presenting a financial planning on papers with laptop and smartphone on work desk
Global Business Complexity Index (GBCI)
GBCI 2022: Complexity in accounting and tax

TMF Group’s Global Business Complexity Index 2022 explores 292 different indicators relating to business complexity. Our analysis covers three core areas of business administration, and ultimately assigns an overall complexity score to each of the jurisdictions assessed.

Explore Topic
Mergers and acquisitions
The importance of Group Accounting Manuals

With M&A activity on the rise, a clearly structured group accounting manual is a fundamental requirement.

Explore Topic