November 30, 2020
Published: Accounting Today
The International Accounting Standards Board began a consultation process Monday in preparation for possible changes in the accounting standards for mergers and acquisitions involving companies within the same group, or in other words, business combinations under common control.
A current International Financial Reporting Standard, IFRS 3, Business Combinations, already provides the reporting requirements for mergers and acquisitions, which are referred to as business combinations in IFRS standards. However, the existing standard doesn’t actually specify how to report transactions involving transfers of businesses between companies that are already within the same group. Such transactions are common in many countries around the world.
Because of this gap in IFRS, companies tend to report similar business combinations in different ways. In some cases, they offer fair-value information about the acquired company and in other cases, they give the book-value information. In addition the book-value information is described in different ways and is often insufficient. The diversity in practice makes it hard for investors to understand the effects of such transactions on companies that undertake them and to compare companies that do similar transactions.
A new discussion paper on business combinations under common control explains the IASB’s preliminary views on how to fill this gap in IFRS standards. The goal is to reduce diversity in practice and to improve transparency and comparability in reporting these transactions.
The IASB 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, the IASB is suggesting that fair-value information should be provided when a business combination under common control affects shareholders outside the group. That suggestion 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.
The discussion paper asks for feedback on the IASB’s preliminary views on when and how each approach should be applied.
“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,” said IASB chair Hans Hoogervorst in a statement Monday. “Our suggested approach would give investors the information they need without imposing unnecessary costs on companies.”
Separately, last week the IASB proposed some amendments to its leases standard, IFRS 16, to improve the accounting for sale and leaseback transactions by specifying how a company measures the lease liability. Sale and leaseback transactions are transactions for which a company sells an asset and leases that same asset back from the new owner.
IFRS 16 includes some requirements for how to account for sale and leaseback transactions at the time when the transaction takes place, but it doesn’t specify how to measure the lease liability when reporting after that date. The proposed amendment would provide more clarity for a company selling and leasing back an asset both at the date of transaction and subsequent to that date. By doing so, the amendment would help the standard be applied more consistently to sale and leaseback transactions. However, the proposed amendment wouldn’t change the accounting for leases aside from those arising in a sale and leaseback transaction.
The exposure draft is available here. The deadline for comments is March 29, 2021.