(b) recognise the transaction at the fair value of the acquired business (with the
difference between the fair value of the consideration transferred and acquired
business as either an equity contribution or equity distribution).
Whichever accounting policy is adopted, it should be applied consistently.
This is considered in Example 10.5 below. As the example does not include any non-
controlling interest in the acquiree, nor any previously held interest in the acquiree by
the acquirer, the computation of goodwill or gain on a bargain purchase only involves
the comparison between (a)(i) and (b) above.
Example 10.5: Acquisition method – cash consideration less than the fair value
of acquired business
Assume the same facts as in Example 10.3 above, except that Entity C, rather than acquiring Entity B from
Entity A for cash at its fair value of £1,000, only pays cash of £700. Assuming there is still substance to the
transaction, how should this be reflected by Entity C when applying the acquisition method for its acquisition
of Entity B?
In our view, there are two acceptable ways of accounting:
(a) The transaction is recognised at the consideration transferred as agreed between Entity A and Entity C,
being the acquisition-date fair value of the cash given as consideration, i.e. £700. Accordingly, goodwill
of only £100 (£700 less £600) is recognised.
(b) The transaction is recognised at the fair value of the acquired business (£1,000), with a deemed capital
contribution from Entity A for the excess over the acquisition date fair value of the cash given as
consideration, i.e. £300 (£1,000 less £700), reflected in Entity C’s equity. Accordingly, goodwill of
£400 (£1,000 less £600) is recognised.
Whichever method is adopted, it should be applied on a consistent basis.
If Entity C only paid cash of £500, assuming there is still substance to the transaction, then the impact under
(a) and (b) above would be:
(a) Since the consideration transferred is only £500, no goodwill is recognised. However, a gain on a bargain
purchase of £100 (being the excess of the acquisition-date fair value of the net identifiable assets of
Entity B of £600 over the consideration transferred of £500) is recognised immediately in profit or loss.
(b) As before, goodwill of £400 is recognised, but a capital contribution of £500 (£1,000 less £500) would
be reflected in equity.
Business combinations under common control 721
In Example 10.3 and Example 10.5 above, the consideration transferred by Entity C was
in cash. However, what if Entity C issued shares to Entity A to effect this business
combination under common control?
If an acquirer issues equity interests to effect a business combination, IFRS 3 requires
the consideration transferred to be measured at the acquisition-date fair value of these
equity interests issued. [IFRS 3.37]. As discussed in Chapter 9 at 7, in a business
combination in which the acquirer and the acquiree (or its former owners) exchange
only equity interests, the acquisition-date fair value of the acquiree’s equity interests
may be more reliably measurable than that of the acquirer’s equity interests. In that
case, IFRS 3 requires goodwill to be calculated using the fair value of the acquiree’s
equity interests rather than the fair value of the equity interests transferred. [IFRS 3.33].
IFRS 3 does not include any guidance on determining the fair value of such
consideration. In such circumstances IFRS 13 – Fair Value Measurement – is applicable
as it provides guidance on how to measure fair value when another IFRS requires or
permits fair value measurements. Fair value is defined as ‘the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date’. [IFRS 13.9]. IFRS 13 requires that entities
maximise the use of relevant observable inputs and minimise the use of unobservable
inputs to meet the objective of a fair value measurement. [IFRS 13.36]. If either the
acquirer’s or acquiree’s equity shares are quoted, this would indicate which fair value is
more reliably measurable. However, in arrangements between entities under common
control, a quoted price for either the acquirer’s or the acquiree’s shares might not
always be available. IFRS 13 is discussed in detail in Chapter 14.
In Example 10.5 above, if Entity C issued shares to Entity A to acquire Entity B, and
there is no quoted price for either Entity B’s or Entity C’s equity shares, then the fair
value of the consideration transferred would need to be based on whichever shares are
considered to be more reliably measurable. If this were Entity C’s shares and their fair
value was only £700, then Entity C would similarly have an accounting policy choice
between (a) and (b) above. This choice exists regardless of whether Entity C transfers
cash or equity interests as consideration. However, if Entity B’s shares are considered
to be more reliably measurable, both approaches would result in a similar outcome.
This is because the consideration transferred by Entity C would then be based on the
fair value of Entity B, i.e. £1,000. Thus, goodwill of £400 would be recognised, with the
£1,000 consideration transferred reflected in equity.
3.3
Application of the pooling of interests method
We believe that if an entity does not adopt an accounting policy of using the acquisition
method under IFRS 3, or if the transaction has no substance, the pooling of interests
method should be applied when accounting for business combinations under common
control (see 3.1 above).
3.3.1 General
requirements
IFRS 3 makes no reference to the pooling of interests method, except in the context of
rejecting it as a method of accounting for business combinations generally. Various local
standard-setters have issued guidance and some allow or require a pooling of interests-
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type method (sometimes known as ‘predecessor accounting’, ‘merger accounting’ or
‘carry over accounting’) to account for business combinations under common control.
The pooling of interests method is generally considered to involve the following:4
• The assets and liabilities of the combining parties are reflected at their
carrying amounts.
No adjustments are made to reflect fair values, or recognise any new assets or
liabilities, at the date of the combination that would otherwise be done under the
acquisition method. The only adjustments made are to align accounting policies.
• No ‘new’ goodwill is recognised as a result of the combination.
The only goodwill that is recognised is any existing goodwill relating to either of
the combining parties. Any difference between the consideration transferred and
the acquired net assets is reflected within equity.
• The income statement reflects the results of the combining parties.
Different practice exists as to where in equity any difference between the consideration
transferred and acquired net assets is presented (e.g. retained earnings or a separate
merger reserve). IFRS does generally not prescribe presentation within equity. Also,
this is often
influenced by legal or regulatory requirements in an entity’s jurisdiction.
Apart from the second bullet point above, the application of the pooling of interests
method, in the context of accounting for business combinations under common control
under IFRS, does raise particular issues as discussed below.
3.3.2
Carrying amounts of assets and liabilities
In general, no adjustments would be expected to be required to conform accounting
policies of the entities involved in a business combination under common control. This
is because in preparing the consolidated financial statements of the ultimate parent
entity under IFRS, uniform accounting policies should have been adopted by all
members of the group. [IFRS 10.B87]. However, it may be necessary to make adjustments
where the combining entities or businesses used different accounting policies when
preparing their own financial statements or were not part of the same group before.
The main issue relating to the use of predecessor carrying amounts, when the receiving
entity applies the pooling of interests method for business combinations under common
control, is whether the carrying amounts of the assets acquired and liabilities assumed
should be based on:
(a) the carrying amounts recognised by the controlling party (e.g. those reported in
the consolidated financial statements of the parent); or
(b) the carrying amounts recognised by the transferred business (e.g. those reported
in the financial statements of the acquiree).
A difference between (a) and (b) above might result from fair value adjustments and/or
goodwill that have/has arisen on the past acquisition of the transferred business by that
controlling party.
The carrying amounts of the receiving entity’s assets and liabilities remain the same as
those in its existing financial statements prior to the business combination under
common control.
Business combinations under common control 723
In our view, the receiving entity applying the pooling of interests method should
generally use the carrying amounts in (a) above for the transferred business. This is
because the carrying amounts recognised by the controlling party may be more recent
(and therefore relevant) and reflect the perspective of that party that effectively directs
the transaction. Nevertheless, in certain circumstances, it may be acceptable to use the
amounts in (b) above, but this may not always be appropriate. When evaluating if the
carrying amounts in (b) above can be used, the following factors should be considered:
• The timing of the transaction in comparison to when the transferred business was
acquired by the controlling party. Generally, the carrying amounts in (a) are
deemed more relevant as they were reassessed more recently. However, the
longer the period since the previous acquisition by the controlling party, the less
relevant this factor may be.
• Whether the transaction is a ‘grooming transaction’ in preparation for a spin-off,
sale or similar external transaction. Generally, the carrying amounts in (a) above
will be more relevant in such situation (for the reasons explained above).
• The identity and nature of the users of the financial statements. If a broad group of
users of the financial statements of the receiving entity after the transaction are parties
that previously relied upon the financial statements of, or including, the transferred
business before the transaction (e.g. if there are significant non-controlling interests
and/or creditors), using the amounts in (b) might provide more relevant information.
• Whether consistent accounting policies are used within the group for similar and
related common control transactions (e.g. whether the accounting policy for this
transaction is consistent with the accounting policy applied to legal mergers
between a parent and a subsidiary – see Chapter 8 at 4.4.3.B).
The rationale for using the carrying amounts as recognised by the controlling party is
explained further in Example 10.6 below.
Example 10.6: Pooling of interests method – carrying amounts of assets
acquired and liabilities assumed
Entity A currently has two businesses (as defined in IFRS 3) operated through wholly-owned subsidiaries
Entity B and Entity C. The group structure (ignoring other entities within the group) is as follows:
Entity A
Entity B
Entity C
Both entities have been owned by Entity A for a number of years.
On 1 October 2019, Entity A restructures the group by transferring its investment in Entity C to Entity B,
such that Entity C becomes a subsidiary of Entity B. The accounting policy adopted for business
combinations under common control excluded from IFRS 3 is to apply the pooling of interests method.
In Entity B’s consolidated financial statements for the year ended 31 December 2019, which carrying
amounts should be reflected in respect of the assets and liabilities of Entity C?
Entity B generally should use the carrying amounts reported in Entity A’s consolidated financial statements,
rather than the carrying amounts reported in Entity C’s own financial statements.
724 Chapter
10
Accordingly, they will be based on their fair value as at the date Entity C became part of the Entity A group
and adjusted for subsequently in accordance with the applicable IFRSs. Any goodwill relating to Entity C
that was recognised in Entity A’s consolidated financial statements, will also be recognised in Entity B’s
consolidated financial statements. Any difference between the equity of Entity C and those carrying amounts
are adjusted against equity. The carrying amounts of the net assets of Entity B will remain as before.
The rationale for applying this approach is that the transaction is essentially a transfer of the assets and
liabilities of Entity C from the consolidated financial statements of Entity A to the financial statements of
Entity B. From a group perspective of Entity B’s shareholder, nothing has changed except the location of
those assets and liabilities. Entity B has effectively taken on the group’s ownership. Therefore the carrying
amounts used in the consolidated financial statements are the appropriate and most relevant values to apply
to the assets and liabilities of Entity C, as they represent the carrying amounts to the Entity A group.
In our view, when applying the pooling of interests method to business combinations
under common control, the receiving entity should apply the approach outlined above
regardless of the legal form of the transaction. Therefore if, in Example 10.6 above,
Entity B had acquired the business of Entity C, rather than the shares, or the entities
had been merged into one legal entity whereby Entity B was the continuing entity, then
the same treatment would apply in Entity B’s financial statements, even if they are not
consolidated financial statements.
3.3.3
Restatement of financial information for periods prior to the date of
the combination
Another issue is whether the receiving entity should restate financial information for
periods prior to the date of the business combination when applying the pooling of
interests method. That is, from which date should the transaction be accounted for and
The pooling of interests method is generally considered to involve the combining parties
being presented as if they had always been combined. To this effect, the receiving entity
accounts for the transaction from the beginning of the period in which the combination
occurs (irrespective of its actual date) and restates comparatives to include all combining
parties. However, in applying the IAS 8 hierarchy (see 3.1 above), an entity would need to
consider whether the pooling of interests method is consistent with IFRS 10 specifically.
That standard indicates that an entity only includes the income and expenses of a subsidiary
in the consolidated financial statements from the date the entity gains control. [IFRS 10.B88].
The Interpretations Committee discussed the presentation of comparatives when
applying the pooling of interests method to business combinations under common
control, prior to the issuance of IFRS 10, under the regime of IAS 27 – Consolidated
and Separate Financial Statements (now superseded). However, as resolving the issue
would require interpreting the interaction of multiple IFRSs and the IASB had added a
project on business combinations under common control to its research agenda, the
Interpretations Committee decided not to add the issue to its agenda.5 There was no
substantial change in IFRS 10 from the superseded IAS 27 regarding the measurement
of income and expenses of a subsidiary in the consolidated financial statements.6
One view is that the concept of pooling does not conflict with the requirements of
IFRS 10, on the basis that the combined entity is considered a continuation from the
perspective of the controlling party. In business combinations under common control,
there has been no change in control, because the ultimate controlling party already had
Business combinations under common control 725
control over the combined resources – it has merely changed the location of its
resources. Accordingly, the receiving entity restates the periods prior to the
combination to reflect that there has been no change in ultimate control. Paragraph B88
of IFRS 10 restricts when the pooling of interests method is applied (i.e. not until the
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