EFRAG draft comment letter on Business Combinations under Common Control

​​EFRAG has published its draft comment letter​ in response to the IASB's Discussion Paper DP/2020/2 Business Combinations under Common Control and seeks constituents' views on the proposals. Comments on the draft comment letter are requested by 30 July 2021.

​​In its draft comment letter, EFRAG welcomes the discussion paper on Business Combinations under Common Control (BCUCC) and the IASB's efforts to explore possible reporting requirements for BCUCC. 

Scope of the project

EFRAG supports the proposed scope of the discussion paper (DP) to include all transfers of businesses under common control. However, EFRAG considers that the IASB should better define 'group restructurings' without labelling them BCUCC when they do not meet the description of a business combination in IFRS 3 Business Combinations. EFRAG also suggests that the IASB considers common control transactions in a future project, including the effects on the separate financial statements.

Selecting the measurement method

EFRAG agrees that a single measurement method is not appropriate for all BCUCC. EFRAG also supports the application of the acquisition method to BCUCC that affect the non-controlling shareholders of the receiving company (with limited exceptions). However, EFRAG proposes a few modifications to the IASB’s decision tree on when to apply each method. EFRAG is consulting constituents on two possible modifications:

  • Reversing Step 1 and Step 2 of the IASB’s diagram; and

  • Expanding the scope of entities included in the proposed new Step 1 (three different options)

EFRAG cautions that selecting the measurement method relies on the definition of a ‘public market,’ which includes both regulated and unregulated markets. EFRAG suggests that the IASB clarifies the meaning of the term ‘traded’.

EFRAG supports the optional exemption and the related-party exception to the acquisition method for privately-held entities with non-controlling shareholders. However, EFRAG is consulting constituents on whether the related-party exception should be optional rather than required.

Applying the acquisition method and a book-value method

EFRAG generally agrees with the IASB's proposals on how to apply the acquisition method. EFRAG agrees that the IASB should not develop a requirement for the receiving company to identify, measure and recognise a distribution from equity but rather recognise any difference between the fair value of consideration paid and the fair value of identifiable acquired assets and liabilities entirely as goodwill.

However, EFRAG is consulting constituents on whether to recognise a contribution to equity when the consideration paid is lower than the net identifiable assets in the business combination by considering the following:

  • Alternative 1 - support the rationale for the IASB proposals to recognise the difference in equity as a contribution to equity; or

  • Alternative 2 - support consistency with the requirements in IFRS 3 and recognise the difference as a gain in profit or loss.

EFRAG also generally agrees with the IASB's proposals on how to apply a book-value method. However, EFRAG is consulting constituents on:

  • measurement of assets and liabilities received: whether the carrying amounts in the consolidated financial statements of the transferor or the carrying amounts in the financial statements of the transferred company provide more relevant information for users;

  • pre-combination information: whether prospective reporting of the BCUCC  is in conflict with current practice or with current reporting requirements in some jurisdictions.

Disclosure requirements

EFRAG supports the proposed disclosure requirements for BCUCC accounted for under both the acquisition method and a book-value method.

A summary of EFRAG's preliminary position on the IASB's DP can be found here​.

EFRAG's draft comment letter can be found here​.

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