IASB set to amend IFRS 3 for M&As under common control
1 Dec 2020
The International Accounting Standards Board (IASB) is consulting on possible new accounting requirements under current IFRS 3 standard for mergers and acquisitions involving companies within the same group
1 Dec 2020
The new requirements are designed to make reporting on business combinations under common control more consistent and more easily comparable.
IFRS 3 Business Combinations set out reporting requirements for mergers and acquisitions, which are referred to as business combinations in IFRS standards.
However, the standard does not specify how to report transactions that involve transfers of businesses between companies within the same group, which are common in many countries around the world.
Currently there are requirements for the parent consolidated financial statements and for the selling entity, but no rules for the acquiring entity.
As a result of this gap in IFRS standards, companies report similar business combinations in different ways. In some cases, they provide fair-value information about the acquired company and in other cases, they provide book-value information, which may be presented in various ways and which IASB says is often insufficient.
The standards setter says 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.
IASB first began work to address this gap in standards in 2009, but the project was put on hold for a while following the financial crisis and reactivated in 2012.
Now it has published a discussion paper ‘Business Combinations under Common Control’ setting out its preliminary views.
The proposed requirements would apply to all transactions under common control. There would no longer be any differentiation as to whether or not these transactions have economic substances, ie whether they constitute pure capital reorganisations or not.
In its paper, IASB states its view that one size does not fit all—for some business combinations under common control, the acquisition method should be used, and for the others a book-value method should be used.
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, IASB is suggesting that fair-value information should be provided when a business combination under common control affects shareholders outside the group, as this is consistent with the existing requirements in IFRS 3 for mergers and acquisitions between unrelated companies.
In all other cases, the board is suggesting that book-value information should be provided using a single approach to be specified in IFRS standards.
Hans Hoogervorst, IASB chair, said: ‘Stakeholders have been vocal about the need to establish requirements for business combinations involving companies under common control, particularly for listed companies or companies preparing for listing.
‘Our suggested approach would give investors the information they need without imposing unnecessary costs on companies.’
The deadline for comments on the discussion paper is 1 September 2021.