IFRS 3 Business Combinations set outs reporting requirements for mergers and acquisitions—referred to as business combinations in IFRS Standards. However, that Standard does not specify how to report transactions that involve transfers of businesses between companies within the same group. Such transactions are common in many countries around the world.
As a result of this gap in IFRS Standards, companies report these combinations in different ways. In some cases, they use the acquisition method. That method measures the assets and liabilities received in the combination at fair value and recognises goodwill. In other cases, companies use a book-value method. That method measures those assets and liabilities at their existing book values. There is a variety of book-value methods used in practice. Furthermore, companies often provide little information about these combinations. This diversity in practice makes it difficult for investors to understand the effects of such transactions on companies that undertake them and to compare companies that undertake similar transactions.
The Discussion Paper Business Combinations under Common Control sets out the Board’s preliminary views on how to fill this gap in IFRS Standards. The Board’s aim is to explore possible reporting requirements that would reduce diversity in practice and provide users of the receiving company’s financial statements with better information about these combinations. The Board’s view is that companies should provide similar information about similar business combinations when the benefits of that information to investors outweigh the costs of providing it. Specifically, the Board is suggesting that the acquisition method should be used when a business combination under common control affects non-controlling shareholders. That method is required by IFRS 3 for mergers and acquisitions between unrelated companies. In all other cases, the Board is suggesting that a book-value method should be used. A single form of a book-value method would be specified in IFRS Standards.
The Discussion Paper seeks feedback on the Board’s preliminary views on when and how each method should be applied.
Access the Discussion Paper below. The comment letter period is open until 1 September 2021.