transactions that involve third parties, for example those undertaken in preparation for
an IPO.12 At that time, the IASB did not discuss which reporting entity (e.g. acquirer,
acquiree, transferor, ultimate parent) and which financial statements of that reporting
entity (e.g. consolidated, separate, individual) the project would focus on.
The 2015 Agenda Consultation confirmed the importance and urgency of providing
guidance on business combinations under common control. Accordingly, as discussed
in the November 2016 Feedback Statement on the 2015 Agenda Consultation, the IASB
decided to retain BCUCC as one of the eight projects on the research programme. It
was noted that the topic is highly ranked by comment letter respondents from a wide
range of countries and in emerging market outreach, and is important to regulators and
members of the Advisory Council.13
742 Chapter
10
During the second half of 2017, the IASB continued its discussions on the scope of the
BCUCC research project. Although ‘business combinations under common control’ are
described in IFRS 3, there are application questions as to whether particular
transactions satisfy that description. Specifically, interested parties had raised questions
on the meaning of ‘transitory control’ and whether particular business combinations
satisfy the description of ‘under common control’. In addition, the staff had noticed that
‘group restructuring’ is not a defined term and is understood differently by different
parties. Hence the question arose what transactions, other than business combinations
under common control, are included in the scope of the project.14
In October and December 2017, the IASB tentatively decided to clarify that the scope
of the BCUCC project (which focuses on the perspective of the receiving entity)
includes transactions under common control in which a reporting entity obtains control
of one or more businesses, regardless of whether:
• the reporting entity can be identified as the acquirer if IFRS 3 were applied to the
transaction (e.g. when a Newco issues shares to acquire one business under
common control);15
• the transaction is preceded by an external acquisition and/or followed by an
external sale of one or more of the combining parties; or
• the transaction is conditional on a future sale, such as in an IPO.16
This means that the project will address both business combinations under common
control and other common control transactions involving the transfer of control over
one or more businesses. Consistent with IFRS 3, the scope of the project specifies only
to which transactions it applies. Depending on whether the receiving entity acquires
the shares or net assets of a business and/or whether it has other subsidiaries, any
guidance developed in the project may affect the consolidated, individual and/or
separate financial statements. The IASB will also consider the interaction with other
common control transactions that are outside the scope of the project (e.g. transfers of
investments in associates or joint ventures under common control).17
Having finalised the scope, the IASB continued with investigating the different methods
of accounting for transactions within the scope of the project. Previous research and
outreach activities had shown that, in practice, BCUCC are sometimes accounted for
using the acquisition method, but variations of the predecessor method are more
typically used.18 At the time of writing, broadly speaking, three alternative approaches
were being considered to address the question how the receiving entity should reflect
the acquired assets and liabilities in a BCUCC:
• ‘Historical cost’ approach – where the receiving entity allocates the consideration
transferred across the acquired assets and liabilities (e.g. based on their relative fair
values; consistent with the accounting required for asset acquisitions).
• ‘Current value’ approach – where the receiving entity reflects the acquired assets
and liabilities at their current values (e.g. at their fair values; consistent with the
acquisition method required by IFRS 3 for business combinations).
• ‘Predecessor carrying amounts’ approach – where the receiving entity reflects the
acquired assets and liabilities at their historical carrying amounts.
Business combinations under common control 743
In April, May and June 2018, the IASB focused on a specific subset of transactions within
the scope of the BCUCC project. That is, an acquisition with NCI in the receiving entity.
In evaluating the information needs of the non-controlling shareholders, the staff
expressed the view that neither a historical cost approach nor a predecessor carrying
amounts approach would provide useful information. Where equal values are
exchanged in a BCUCC, a historical cost approach might overstate the acquired net
assets and result in the recognition of an impairment loss, while a predecessor carrying
amounts approach might result in recognising a distribution from equity. Where
unequal values are exchanged, both approaches might fail to reflect an overpayment or
underpayment. In contrast, a current value approach would aim to reflect an exchange
of equal values as such, whereas it would aim to reflect an overpayment or
underpayment as an equity transaction if unequal values are exchanged.19
Having discussed a number of newly-developed current value approaches, the IASB
directed the staff in June 2018 to develop an approach based on the acquisition method
in IFRS 3 and consider whether and how that method should be modified to provide
the most useful information about BCUCC that affect non-controlling shareholders.
The IASB noted that possible modifications could include requirements for the
receiving entity to do one or more of the following:
• provide additional disclosures;
• recognise any excess identifiable net assets acquired as a contribution to equity,
instead of recognising that excess as gain on a bargain purchase; or
• recognise any excess consideration (which could be measured in different ways)
as a distribution from equity instead of including it implicitly in the initial
measurement of goodwill.20
However, the discussions on methods of accounting are still in their early stages. For
example, the information needs of other primary users of the receiving entity’s financial
statements and cost constraint have not yet been considered. In addition, the IASB also
needs to address various other types of transactions within the scope of the project, as
well as the interaction with common control transactions outside the scope.
The Discussion Paper is not expected before the second half of 2019.21
References
1
IFRIC Update, January 2018, Committee’s 3
IFRIC Update, March 2006, p.6.
agenda decisions, Agenda Paper 2.
4 For example, see FASB ASC 805-50, Business
2
www.ifrs.org, Projects, Work plan, Business
Combinations – Related Issues; and FRC FRS 102
Combinations under Common Control, About,
Section 19, Business Combinations and Goodwill,
accessed on 10 September 2018.
paras. 29-32.
744 Chapter
10
5 IFRIC Update, January 2010, p.3.
14 Staff Paper, IASB Meeting, October 2017,
6 Paragraph B88 of IFRS 10 essentially retains
Agenda Paper 23, Business Combinations
the wording of paragraph 26 of the superseded
under Common Control – Scope of the project,
IAS 27, i.e.: “The income and expenses of a
paras. 9-17.
subsidiary are included in the consolidated 15 IASB Update, October 2017, Agenda Paper 23.
financial statements from the acquisition date
16 IASB Update, December 2017, Agenda
as defined in IFRS 3. Income and expenses of
Paper 23B.
the subsidiary shall be based on the values of
17 Live webinar by IASB staff, January 2018,
the assets and liabilities recognised in the
Business Combinations under Common
parent’s consolidated financial statements at
Control − Scope of the project.
the acquisition date...”.
18 Staff Paper, IASB Meeting, September 2017,
7
IFRIC Update, September 2011, pp.2-3.
Agenda Paper 23, Business Combinations
8
IFRIC Update, May 2013, pp.3-4.
under Common Control – Education session,
9
IFRIC Update, June 2017, Committee’s
pp.19-35.
tentative agenda decisions, Agenda Paper 8.
19 Staff Paper, IASB Meeting, June 2018, Agenda
10 Staff Paper, IASB Meeting, December 2017,
Paper 23, Business Combinations under
Agenda Paper 23A, Business Combinations
Common Control – Way forward for
under Common Control – Review of related
transactions affecting NCI, pp.11-27.
projects, paras. 30-32.
20 IASB Update, June 2018, Agenda Paper 23.
11 Feedback Statement: Agenda Consultation 21 www.ifrs.org, Projects, Work plan, Business
2011, December 2012, p.11.
Combinations under Common Control, Project
12 IASB Update, June 2014, p.8.
history, Next milestone, accessed on
13 IASB Work plan 2017-2021 (Feedback
10 September 2018.
Statement on the 2015 Agenda Consultation),
November 2016, p.27.
745
Chapter 11 Investments in associates
and joint ventures
1 INTRODUCTION ............................................................................................. 751
2 OBJECTIVE AND SCOPE OF IAS 28 ............................................................... 751
2.1
Objective ................................................................................................................ 751
2.2 Scope
....................................................................................................................... 752
3 DEFINITIONS ................................................................................................. 752
4 SIGNIFICANT INFLUENCE ............................................................................ 752
4.1
Lack of significant influence ............................................................................... 754
4.2
Holdings of less than 20% of the voting power .............................................. 754
4.3 Potential
voting rights .......................................................................................... 755
4.4
Voting rights held in a fiduciary capacity......................................................... 756
5 EXEMPTIONS FROM APPLYING THE EQUITY METHOD ............................. 756
5.1
Parents exempt from preparing consolidated financial statements ........... 756
5.2
Subsidiaries meeting certain criteria ................................................................ 756
5.3
Investments in associates or joint ventures held by venture capital
organisations and similar organisations ............................................................ 757
5.3.1
Investment entities exception ............................................................ 758
5.3.2
Application of IFRS 9 to exempt investments in associates
or joint ventures ..................................................................................... 758
5.3.2.A
Entities with a mix of activities ..................................... 758
5.3.2.B
Designation of investments as ‘at fair value
through profit or loss’ ...................................................... 759
5.4
Partial use of fair value measurement of associates ...................................... 759
6 CLASSIFICATION AS HELD FOR SALE (IFRS 5) ............................................ 761
7 APPLICATION OF THE EQUITY METHOD .................................................... 762
7.1
Overview ................................................................................................................ 762
746 Chapter
11
7.2
Comparison between equity accounting and consolidation........................ 764
7.3
Date of commencement of equity accounting ................................................ 766
7.4
Initial carrying amount of an associate or joint venture ............................... 766
7.4.1
Initial carrying amount of an associate or joint venture
following loss of control of an entity ................................................ 767
7.4.2
Piecemeal acquisition of an associate or joint venture ................. 769
7.4.2.A
Financial instrument becoming an associate or
joint venture ...................................................................... 769
I Applying a cost-based approach ..................................... 770
II Applying a fair value (IFRS 3) approach ........................ 774
7.4.2.B
Step increase in an existing associate or joint
venture without a change in status of the
investee .............................................................................. 775
7.4.2.C Existing
associate that becomes a joint
venture, or vice versa ...................................................... 777
7.5
Share of the investee ............................................................................................ 777
7.5.1
Accounting for potential voting rights .............................................. 777
7.5.2
Cumulative preference shares held by parties other than
the investor ............................................................................................ 778
7.5.3 Several
classes of equity ...................................................................... 779
7.5.4
Where the reporting entity is a group .............................................. 779
7.5.5
Where the investee is a group: non-controlling interests in
an associate or joint venture’s consolidated financial
statements .............................................................................................. 779
7.6
Trans
actions between the reporting entity and its associates or
joint ventures ........................................................................................................ 780
7.6.1
Elimination of ‘upstream’ and ‘downstream’ transactions .......... 780
7.6.1.A
Elimination of ‘downstream’ unrealised profits
in excess of the investment ............................................ 783
7.6.1.B Transactions
between associates and/or joint
ventures ............................................................................. 785
7.6.2
Reciprocal interests .............................................................................. 786
7.6.2.A
Reciprocal interests in reporting entity
accounted for under the equity method by the
associate ............................................................................. 786
7.6.2.B
Reciprocal interests in reporting entity not
accounted for under the equity method by the
associate ............................................................................. 788
7.6.3
Loans and borrowings between the reporting entity and
its associates or joint ventures ........................................................... 788
7.6.4 Statement
of cash flows....................................................................... 789
7.6.5
Contributions of non-monetary assets to an associate or a
joint venture .......................................................................................... 789
Investments in associates and joint ventures 747
7.6.5.A
‘Commercial substance’ .................................................. 791
7.6.5.B
Contributions of non-monetary assets –
practical application ........................................................ 792
I ‘Artificial’ transactions ....................................................... 794
II Accounting for the acquisition of a business on
formation of a joint venture ............................................. 795
7.6.5.C
Conflict between IAS 28 and IFRS 10 ......................... 796
7.7
Non-coterminous accounting periods .............................................................. 798
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 147
