PAAinE Project

EFRAG/OIC Discussion Paper ‘Accounting for Business Combinations under Common Control’

In the October 2011, the European Financial Reporting Advisory Group and the Organismo Italiano di Contabilità published a Discussion Paper ‘Accounting for Business Combinations under Common Control’.  The Discussion Paper is part of EFRAG’s ongoing proactive work with European National Standard Setters.

The objective of the project is to stimulate debate about how business combinations under common control should be reflected in the financial statements.  It is an area of financial reporting where opinions remain divided on what is the best approach to account for such transactions.  At present, IFRS is silent on how to account for business combinations under common control and a number of different approaches are applied in practice.

The DP represents a first step in responding to the diversity that exists.  It includes a comprehensive analysis of the issues and of the relevant IFRS literature.  The analysis begins from the needs of users of the financial statements and considers what information is likely to assist them in understanding the impact of such transaction on the reporting entity.  Whilst drawing on IFRS 3 Business Combinations it is not presumed that the acquisition method in that standard is necessarily the best approach.  It notes that there is no ´ideal´ accounting approach but draws out three different views or ways of looking at the problem. The Discussion Paper does not favour one view over another, but presents them as different points on a ´spectrum´ of thinking about the issues, highlighting some of the strengths and weaknesses of each view.

The issue of the Discussion Paper is supported by 16 standard-setters in Europe.

The Discussion Paper was open for comment until 30 April, 2012 and published together with a short presentation on its content.

On the 20 December 2012, the OIC and the EFRAG published the Feedback Statement ‘Accounting for Business Combinations under Common Control’. The Feedback Statement has been prepared for constituents to consider the analysis of comment letters received, together with EFRAG’s and OIC’s responses to the issues raised by respondents and the way they have decided to further develop the project.

OIC and EFRAG have finalised the feedback statement that they jointly prepared as a result of the comments received on the Discussion Paper ‘Accounting for Business Combinations under Common Control’, which was published in October 2011. In the public consultation to the Discussion Paper, comment letters were received from commentators in Europe, but also from a wider audience. This input has demonstrated the importance of, and interest in this initiative.

Most of the respondents welcomed the Discussion Paper as an introduction to an important debate; however, they raised a number of concerns and suggested that more work was needed. In this respect, OIC and the EFRAG agreed that further work in their overall project on Business Combinations under Common Control (BCUCC) would encompass the following:

- Review real- life examples to see whether they provide a basis for categorizing BCUCC into different types of transactions, for which different accounting treatments should apply. If this is successful, indicators of difference in economic substance may be eventually drawn from this exercise; and
- Define what a business combination under common control is.

OIC and EFRAG would like to thank all the respondents to the Discussion Paper for their contribution hopefully to influencing the development of IFRS on this issue.