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Accounting treatment
There is no guidance in IFRS for the accounting treatment that should be applied to business combinations involving entities under common control. When there is no guidance in IFRS, IAS 8 requires that the accounting treatment applied to each transaction should result in information that is relevant to users of the entity’s financial statements and is reliable [IAS8.10(R.05)]. Management must select an appropriate accounting policy for business combinations involving entities under common control and apply that policy consistently.
There are two basic methods of accounting for business combinations – the purchase method and the predecessor values method. Neither IFRS 3 nor any other IFRS require or prohibit the application of either method to business combinations involving entities under common control. Management can therefore elect to apply purchase accounting to a business combination involving entities under common control, but is not required to apply this method. The purchase method may be used because the transaction is a business combination. IFRS 3 provides guidance for business combinations [IAS8.11(a)(R.05)]. Management could also elect to apply the predecessor values method. This method may be used by reference to other GAAPs that permit or require it for similar transactions [IAS8.11(b)(R.05)] . Related party disclosures are used to explain the impact of transactions with related parties on the financial statements.
When there is a choice of acceptable accounting policies, IAS 8 requires that management choose one policy and apply that policy consistently [IAS8.13(R.05)]. Management must therefore select an accounting policy for business combinations involving entities under common control and apply that policy consistently to all such transactions. The accounting policy can be changed only when the criteria in IAS 8 are met . An accounting policy should be selected for each entity within a group, although it is not necessary for all of the entities in a group to have the same accounting policy.
Purchase method
An entity that chooses to apply the purchase method to business combinations involving entities under common control, must apply the guidance in IFRS 3 . An entity may not apply only some aspects of IFRS 3. It would not be acceptable, for example, to recognise the tangible assets and liabilities of the acquiree from the date of acquisition, but exclude the identification and recognition of intangible assets.
In most circumstances, IFRS 3 prohibits a new entity being identified as the acquirer when purchase accounting is used. This guidance must be applied when the legal acquirer in a business combination involving entities under common control is a new entity formed to issue shares. This might result in the transaction being accounted for as a reverse acquisition in accordance with IFRS 3 .
Predecessor values method
An entity that chooses to apply the predecessor values method in its consolidated financial statements should generally record:
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the transaction as if it had taken place at the beginning of the earliest period presented (or the date that the entities were first under common control, if later);
- the assets and liabilities of the acquiree using book values; and
- the difference between the consideration given and the aggregate book value of the assets and liabilities (as of the date of the transaction) of the acquired entity as an adjustment to equity. This may be recorded in retained earnings or as a separate reserve. No additional goodwill is created by the transaction.
Restatement of comparatives is often presented in a transaction recorded using the predecessor values method, describing the financial statements including the period prior to the legal combination as ‘consolidated and combined’. The predecessor values method does not restate the assets and liabilities of the acquiree to fair value. The financial statements are a continuation of amounts that have been reported previously and it is consistent with this approach to restate the comparatives. The restatement of comparatives provides more information to the users of the financial statements, particularly when the transaction is a reorganisation ahead of an IPO or a spin-off. When comparative information is restated, the predecessor values method can only be applied for the periods in which the combining entities were under common control .
Regulators in some jurisdictions may prohibit restatement of comparative information when predecessor values are used. Comparatives should not be restated in these jurisdictions. The regulator will often require largely equivalent information by way of proforma financial information.
The acquiree’s book values are generally those in the consolidated financial statements of the highest entity that has common control for which consolidated IFRS financial statements are prepared. This includes any goodwill relating to the acquiree that appears in those consolidated financial statements. When the acquiree has been under common control since it was formed, these values will be the same as those in the acquiree’s own books. When the acquiree was previously acquired in a business combination, the values in the consolidated financial statements should be used, adjusted where necessary to be consistent with IFRS. Predecessor values should also be adjusted to ensure uniform accounting policies .
When the controlling party does not prepare financial statements because it is not a parent company the book values from the financial statements of the acquired entity are used .
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