EFRAG & OIC Discussion Paper: Business Combinations under Common Control 21 October 2011

Why we have issued this Discussion Paper

• IFRS are currently silent on the treatment of Business Combinations under Common Control (BCUCC) as they are scoped out of IFRS 3 Business Combinations. In practice, there is no clear consensus on how these transactions should be accounted for in the financial statements of the transferee.

• Underlying the differences in views is the fact that BCUCC can differ substantially from business combinations under IFRS 3. As a result, there is a view that IFRS 3 should not be applied to BCUCC.

• For those reasons EFRAG and the OIC decided to issue this discussion paper. The intention is to stimulate debate about these issues and assist the IASB in developing a practical and workable response to these issues.

• The discussion paper sets out different perspectives in attempt to structure the debate on the topic and does not favour one view over another.

• The comment period closes on 30 April 2012. Please send comments to commentletters@efrag.org

Background to the Project

What we have said

• Much of the debate in practice is anchored in perceived differences between BCUCC and business combinations under IFRS.

• BCUCC represent a broad spectrum of transactions, motivated by a range of different business purposes. The unique features of BCUCC include: the purpose of the transaction, the absence of market conditions, and the nature of the items being exchanged. The related party aspect of the transaction means that the transaction is not subject to market forces so the usual assumptions about an exchange of value do not hold. Furthermore, the ‘transaction price’ may include a contribution or distribution from/to the parent entity.

• The information that is likely to be useful to users about such transactions will hinge on who they are and the types of decisions they will make as a result of the BCUCC. If the controlling equity investor is considered to be a ‘user’ then the information required is likely to be quite different to that reported under IFRS 3. However, if it is deemed that the controlling equity investor is not a user then it is difficult to support a view that information needs are likely to be different to those satisfied by information reporting under IFRS 3.

• It raises a fundamental question about whether the locus of user interest will be best served by making a clean break with reported values of the transferor prior to the combination (that is erasing its financial history and stepping up to fair value at the acquisition date). Alternatively, it may be more useful to maintain a historical trend of financial information that results from applying a predecessor basis of accounting.

What makes BCUCC different?

What we have said

• The DP deals with initial recognition and measurement in the consolidated financial statements of the transferee. It does not address, at this stage of the project, subsequent measurement, separate and individual financial statements, and disclosures.

• We suggest that any approach to BCUCC should result in decision-useful information for the users of the financial statements.

• Rather than starting from ‘first principles’ we follow the logic of the IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors hierarchy as this is the approach a standard-setter would typically take in developing an accounting standard. The analysis presented considers the Conceptual Framework, IFRS 3 as well as other authoritative literature.

• It is not clear from the analysis that IFRS 3 is a ‘good fit’ for BCUCC as such transactions are not at arm’s length and not subject to market forces.

• Three views are presented: (i) IFRS 3 could be adapted and a meaningful analogy can be drawn but there are variants within this view; (ii) IFRS 3 should never be applied and a predecessor basis or ‘fresh start’ accounting is likely to provide more relevant information; or (iii) the recognition and measurement principles should be driven by how the transaction impacts the decisions of users – that could result in an accounting outcome consistent with (i) or (ii).

Key Messages in the Discussion Paper

Next Steps

• The next steps will depend on the comments received. After the comment period closes, EFRAG and the OIC will publish a feedback statement summarising the key issues raised by constituents.

Next Steps