combining parties have actually come under direct control), not how it is applied.
Another view is that the requirements of IFRS 10 are inconsistent with the concept of
pooling, on the basis that the combined entity did not exist before, from the perspective of
the combining parties. Therefore, the consolidated financial statements of the receiving
entity cannot include financial information of a subsidiary prior to the date it obtains control,
in accordance with paragraph B88 of IFRS 10. The fact that the business combination is
outside of the scope of IFRS 3 is irrelevant when considering the requirements of IFRS 10.
Accordingly, the pooling of interests method does not involve restatement of periods prior
to the combination and affects only the values assigned to the assets and liabilities of the
transferred business when the receiving entity obtains control (see 3.3.2 above).
Therefore, we believe that, in applying the pooling of interests method, the receiving
entity has a choice of two views for its accounting policy:
• View 1 – Restatement of periods prior to the business combination under common
control (retrospective approach)
The financial information in the consolidated financial statements is restated for
periods prior to the business combination under common control, to reflect the
combination as if it had occurred from the beginning of the earliest period
presented, regardless of the actual date of the combination.
However, financial information for periods prior to the business combination is
restated only for the period that the parties were under common control.
• View 2 – No restatement of periods prior to the business combination under
common control (prospective approach)
The financial information in the consolidated financial statements is not restated for
periods prior to the business combination under common control. The receiving
entity accounts for the combination prospectively from the date on which it occurred.
An entity must consistently apply its chosen accounting policy.
These views are illustrated in Examples 10.7 and 10.8 below.
Example 10.7: Pooling of interests method – restatement of financial
information for periods prior to the date of the combination (1)
Assume the same facts as in Example 10.6 above.
Entity B obtains control over Entity C on 1 October 2019. In preparing its consolidated financial statements
for the year ended 31 December 2019 (including comparatives for one year), from which date should Entity B
include financial information for Entity C when applying the pooling of interests method?
Entity B has a choice of two views for its accounting policy, which must be applied consistently:
View 1 – Restatement of periods prior to the business combination under common control
Entity B and C have been owned by Entity A for a number of years (i.e. common control already existed at
the start of the first comparative period presented). Entity B therefore restates the financial information in its
consolidated financial statements for 2019 (both the current year pre-combination results and the 2018
comparatives) to include financial information for Entity C as from 1 January 2018.
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View 2 – No restatement of periods prior to the business combination under common control
Entity B does not restate the financial information in its consolidated financial statements for 2019 (neither
the current year pre-combination results nor the 2018 comparatives). No financial information is included
for Entity C prior to 1 October 2019.
In Example 10.7 above, Entity C had been part of the Entity A group for a number of
years. What if this had not been the case? Entity B still has a choice of two views, to
restate or not to restate. Should it choose restatement, financial information in the
consolidated financial statements for periods prior to the combination is restated only
for the period that the entities were under common control. If the ultimate controlling
party has not always controlled these combined resources, then application of the
pooling of interests method reflects that fact. That is, an entity cannot restate the
comparative financial information for a period that common control did not exist.
Example 10.8: Pooling of interests method – restatement of financial
information for periods prior to the date of the combination (2)
Assume the same facts as in Example 10.6 above, except that in this situation Entity A had acquired Entity C
on 1 July 2018 (i.e. the transaction is under common control at the date of Entity B’s acquisition of Entity C,
but Entity B and Entity C were not under common control during the entire comparative period).
In preparing its consolidated financial statements for the year ended 31 December 2019 (including
comparatives for one year), from which date should Entity B include financial information for Entity C when
applying the pooling of interests method?
View 1 – Restatement of periods prior to the business combination under common control
If Entity B applies View 1 as its accounting policy, it restates the financial information in its consolidated
financial statements for 2019 (both the current year pre-combination results and the 2018 comparatives).
However, Entity B includes financial information for Entity C only as from 1 July 2018 (i.e. when both
entities were first under common control).
View 2 – No restatement of periods prior to the business combination under common control
If Entity B applies View 2 as its accounting policy, the change in fact pattern has no impact as Entity B does
not restate the financial information in its consolidated financial statements for 2019 (neither the current year
pre-combination results nor the 2018 comparatives). No financial information is included for Entity C prior
to 1 October 2019.
3.3.4
Equity reserves and history of assets and liabilities carried over
The concept of pooling generally is based on the premise of a continuation of the combining
parties. Consistently, the pre-combination equity composition and history associated with
the assets and liabilities would be carried forward upon the combination occurring and may
affect the post-combination accounting. For instance, certain equity reserves may be
transferred within equity or reclassified to profit or loss when specific conditions are met.
Examples include fair value reserves of financial assets at FVOCI, hedging reserves, foreign
currency translation reserves and other asset revaluation reserves. Similarly, previous
impairment losses recognised for assets may possibly reverse post-combination.
If the receiving entity in a business combination under common control adopts View 1
at 3.3.3 above, pooling is applied in full and the history of the combining parties (since
they were under common control) is continued as described above.
If the receiving entity adopts View 2 at 3.3.3 above, it would need to decide whether or
not to retain the pre-combination equity reserves and history of assets and liabilities of
Business combinations under common control 727
the transferred business. We believe that the receiving entity has a further accounting
policy choice here, between:
• View 2a – No restatement of periods prior to the business combination under
common control, but retention of equity reserves and history
This view considers the absence of restatement as only a presentation issue, but
to all intents and purposes the concept of pooling is applied in full.
While the financial information for periods prior to the business combination is
not restated, the transferred business continues within the combined entity as if
pooling had been applied since the combining parties were under common
control. The pre-combination equity reserves and history of assets and liabilities
of the transferred business are carried over as at the date of transaction and are
reflected in the post-combination financial statements of the receiving entity.
• View 2b – No restatement of periods prior to the business combination under
common control, with reset of equity balances and history
This view considers the absence of restatement as more than only a presentation
issue. Rather, the business combination is viewed as an initial recognition event at
that date, using the measurement principle of pooling.
While the financial information for periods prior to the business combination is
not restated, the transaction gives rise to an initial recognition of the assets and
liabilities of the transferred business at their predecessor carrying amounts. This
means that they essentially have a new deemed cost and their history is not
retained. Equally, the equity reserves of the transferred business are not carried
over but adjusted to another component of equity (e.g. retained earnings). The
post-combination financial statements of the receiving entity do not reflect any
pre-combination history of the transferred business.
Since any cash flow hedge reserves are not retained, this view may have
consequences for hedge effectiveness going forward.
An entity must consistently apply the chosen accounting policy.
Overall, View 2a and View 2b above result in the same net asset position at the date of
the combination. This is because under both views the assets and liabilities of the
transferred business are carried over at their predecessor carrying amounts. However,
they will have a different effect on the composition of equity at the date of the
combination and the treatment of certain transactions post-combination.
This is illustrated in Example 10.9 below.
Example 10.9: Pooling of interests method – no restatement of financial
information for periods prior to the date of the combination –
impact of carrying over equity reserves and history
Assume the same facts as in Example 10.7 above, with Entity B adopting View 2 – No restatement of periods
prior to the business combination under common control.
Entity B then has an accounting policy choice as to whether or not retain the pre-combination equity reserves
and history of assets and liabilities of Entity C. How does this choice affect the accounting for the post-
combination disposal of a foreign operation described below, in Entity B’s consolidated financial statements
for the year ending 31 December 2019?
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On 1 October 2019, the date of the combination occurring, Entity C had a foreign currency translation reserve
of €100 (credit) relating to a foreign operation – for example, an equity-accounted associate. On
31 October 2019, Entity C sold the associate carried at €500 for €700. Assume that the foreign exchange rate
had remained unchanged during October 2019.
View 2a – No restatement of periods prior to the business combination under common control, but retention
of equity reserves and history
Entity B recognises the foreign currency translation reserve of €100 at the date of the combination. When the
associate (i.e. the underlying foreign operation) is subsequently sold, that €100 is reclassified from equity to
profit or loss for the year. Therefore, a net gain on disposal of €300 is recognised in the statement of profit
or loss (€700 less €500 plus €100), with a €100 debit entry to OCI.
View 2b – No restatement of periods prior to the business combination under common control, with reset of
equity reserves and history
Entity B does not recognise the foreign currency translation reserve at the date of the combination. When the
associate is subsequently sold, a net gain on disposal of €200 is recognised (€700 less €500) and no additional
amount is reclassified from equity to the profit or loss for the year.
3.3.5
Acquisition of non-controlling interest as part of a business
combination under common control
As discussed at 2.1 above, the extent of non-controlling interests in each of the
combining entities before and after the business combination is not relevant to
determining whether the combination involves entities under common control for the
purposes of the scope exclusion in IFRS 3. [IFRS 3.B4]. Accordingly, the accounting for
business combinations under common control is not restricted to combinations
involving wholly-owned entities.
It may be that in a business combination under common control involving a partially-
owned subsidiary, any non-controlling interest in that subsidiary is acquired at the same
time as the common control transaction.
Where the receiving entity applies the pooling of interests method, the question arises
as to what date the acquisition of the non-controlling interest should be reflected in its
consolidated financial statements. This is particularly pertinent where the receiving
entity restates financial information for periods prior to the date of the combination
under View 1 as set out at 3.3.3 above.
In our view, there are two separate transactions to be accounted for:
(a) the reorganisation of entities under common control; and
(b) the acquisition of the non-controlling interest.
The basic principle of accounting for business combinations under common control
using the pooling of interests method is that the structure of ownership is discretionary
and any reorganisation thereof is without economic substance from the perspective of
the controlling party. The receiving entity may reflect that perspective and present the
combining parties as if they had always been combined, regardless of the actual date of
the combination (see 3.3.3 above). However, it is inconsistent with the principles of
pooling to reflect ownership of a portion or all of a business prior to the date the
controlling party (either directly or indirectly) obtained that ownership interest.
The acquisition of the non-controlling interest is a transaction with economic substance
from the perspective of the controlling party. IFRS 10 states that the change in
Business combinations under common control 729
ownership interest resulting from such a transaction is accounted for as an equity
transaction at that date. [IFRS 10.23, B96]. Also, IFRS does not include a principle that
transactions with a third party (such as the acquisition of non-controlling interest) may
be accounted for as of a date earlier than when the transaction is actually consummated.
Accordingly, the receiving entity accounts for the acquisition of non-controlling
interest at the actual date of acquisition. It is not appropriate to reflect the acquisition
of non-controlling
interest as if it occurred as of any prior date (as may be done for the
controlling interest transferred), even if the acquisition occurs simultaneously with a
common control transaction. This is consistent with requirements in IFRS to present
separately income attributable to the owners of the parent (see Chapter 3 at 3.2) and
calculate earnings per share based on profit or loss attributable to ordinary shareholders
of the parent (see Chapter 33 at 3 and at 6.2).
The discussion above is illustrated in Example 10.10 below.
Example 10.10: Pooling of interests method – acquisition of non-controlling
interest as part of a business combination under common control
Parent A controls Entity B and Entity C. Both subsidiaries are businesses as defined in IFRS 3. From the
group’s perspective, there is a 40% non-controlling interest in Entity C that is held by an unrelated party,
Entity Z. Entity B obtains control of Entity C by issuing additional shares on the same date to:
• acquire Parent A’s 60% interest in Entity C; and
• acquire Entity Z’s 40% interest in Entity C.
The group structure before and after these transactions is as follows:
Before
Parent A
Entity Z
100%
60%
40%
Entity B
Entity C
After
Parent A
Entity Z
70%
Entity B
30%
100%
Entity C
How should Entity B account for the acquisition of Entity Z’s 40% interest in Entity C when applying the
pooling of interests method in its consolidated financial statements?
Entity B should account for the acquisition of Entity Z’s 40% interest in Entity C at the actual date of the
transaction, regardless of whether financial information for periods prior to the business combination under
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common control is restated (see 3.3.3 above). Thus, if Entity B restates its consolidated financial statements
to reflect comparative information for Entity C for the period before the combination, it will include the 40%
non-controlling interest in Entity C within equity until the actual date of the transaction. The change in
ownership interest resulting from the acquisition of Entity Z’s 40% interest will be accounted for as an equity
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 144
