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The views expressed in this presentation are those of the presenter, not necessarily those of the International Accounting Standards Board or the IFRS Foundation.
Copyright © 2021 IFRS Foundation. All rights reserved.
IFRS® Foundation
Discussion Paper Business Combinations under Common Control
Live webinar for academics and practitioners
AASB March 2021
2
2Welcome
Ann Tarca
IASB Member
Paolo Dragone
IASB Technical Staff
Yulia Feygina
IASB Technical Staff
Ana Simpson
IASB Technical Staff
Serene Seah-Tan
KPMG HK
Partner
Doug Niven
ASIC
Chief Accountant
3
3Before we start
Housekeeping
The views expressed are those of the presenters, not necessarily those of the International Accounting
Standard Board or the IFRS Foundation.
The Discussion Paper, its accompanying documents and the slides used in this presentation are available
for download on the Business Combinations under Common Control project webpage at
https://www.ifrs.org/projects/work-plan/business-combinations-under-common-control/
To ask a question during the webinar, please use the Q&A function in the Zoom platform. You can submit
questions at any time during the presentation.
4
Introduction
Agenda
The Board’s preliminary views
Academic evidence
FAQ
Conclusions
Polling time
Introduction
7
7
Better information about business combinations under common control
Why are we doing this project?
IFRS 3 Business Combinations requires the acquisition method
but does not address business combinations under common control
Board’s objectives
Improved transparencyImproved comparability
Similar
transactions
reported differently
Such
combinations
are common
Priority project
in Agenda
Consultations
Particular
concern of
securities regulators
The acquisition method
or a book-value method
Relevant information
8
8Scope of the project
Receiving companyWhich company?
All transfers of businesses under common control
Which
transactions?
Typically consolidated financial statements
Which financial
statements?
Fill the gap in IFRS Standards
P
BA
C C
Company P has
common control
Company C
is a business
Company A is
the receiving
company
9
9Our focus
Non-controlling shareholders
Potential shareholders
Lenders and other creditors
Useful information for the primary users
of the receiving company’s financial statements
P
BA
C C
Subject to the cost–benefit trade-off
Primary users can have
different information needs
The Board’s preliminary views
11
11Which method to apply—at a glance
The acquisition method should apply when non-controlling shareholders are affected
How to ‘draw the line’?
Neither the acquisition method nor a book-value method should apply in all cases
A single method in all cases?
There is an exception to and an exemption from the acquisition method
What about the cost-benefit trade-off?
One size does not fit all
A book-value method should apply in all other cases
When to apply a book-value method?
12
12
Business combinations under common control…
What has the Board heard in developing its views?
Always use
a book-value method
Use the acquisition
method, subject to the
cost-benefit trade-off
Use the acquisition
method in some cases
and a book-value method
in other cases
May or may not have
‘economic substance’
May or may not be similar
to business combinations
covered by IFRS 3
Always have ‘economic
substance’
Are always similar to
business combinations
covered by IFRS 3
Do not have ‘economic
substance’
Are always different from
business combinations
covered by IFRS 3
13
13Combinations that affect non-controlling shareholdersPublic and private companies
P
BA
C
Business combination Business combination under common control
P
BA
P2P1
A B
C
Before the combination After the combination Before the combination After the combination
C
P1
A
C
NCSNCS NCSNCS
The acquisition method would provide useful information
Similar to business combinations covered by IFRS 3
14
14The exemption and the exception
Require the acquisition
method
Permit a book-value
method if non-controlling
shareholders do not object
Receiving company’s
shares are publicly tradedReceiving company’s shares are privately held
Require a book-value
method if non-controlling
shareholders are the
company’s related parties
The optional exemption
from the acquisition method
The related-party exception
to the acquisition method
What if non-controlling interest is ‘small’ or ‘not substantive’?
15
15Combinations between wholly-owned companiesPrivate companies, including in preparation for an IPO
Before the combination
A book-value method would provide useful information
Similar information is provided regardless of how the combination is structured
P
A
B
P
B
A
After the combination
PP
BA NewCo
BA
P
HoldCo
BA
Case 1 Case 2
Scenario 1 Scenario 2 Scenario 3
16
16What about lenders and other creditors?
Payments of principal and interestEconomic interest
Credit analysis
Information needs
Company’s ability to service and raise debt
Cash flows and debt commitments
Information lenders and other creditors need is largely unaffected by whether
the acquisition method or a book-value method is used
Information about fair values of particular assets is useful but
the outcome of credit analysis does not depend greatly on that information
17
17How to determine which method to use?
Does the transaction affect non-controlling shareholders
of the receiving company?
Acquisition methodBook-value method
Are the receiving company’s shares traded in a public market?
Are all non-controlling shareholders related parties of the
receiving company (related-party exception)?
Has the receiving company chosen to use a book-value
method, and have its non-controlling shareholders not
objected (optional exemption)?
Yes
No
NoYes
Yes
No
Yes
No
All criteria
are based
on existing
conditions
in IFRS
Standards
Both methods are already in use
18
18How to apply the acquisition method—at a glance
The acquisition method is already specified in IFRS 3
Recognise a contribution in a ‘bargain purchase’Special feature
Apply the acquisition method as set out in IFRS 3General principle
Disclose information about the transaction priceDisclosure
19
19How to apply a book-value method—at a glance
Assets and liabilities received Measure at transferred company’s book values
Transaction costs Generally recognised as an expense
Consideration paid Generally measure at book value
Difference Recognise as an increase or decrease in equity
Pre-combination information Include the transferred company prospectively, without restatement
Disclosure A subset of IFRS 3 disclosure requirements and the difference in equity
A single book-value method to be specified in IFRS Standards
20
20What improvements are we aiming for?
Better information for users without imposing unnecessary costs on preparers
Similar transactions are reported in a similar wayComparability
Accounting method used provides useful informationRelevance
Disclosures are improvedTransparency
Polling time
Academic evidence
23
23Summary of the academic evidence (1/2)
Descriptive evidence
• disclosures related to business combinations under common control
(Biancone, 2013)
• a third of sample companies disclose the reason for the BCUCC
• few companies disclose the accounting policies applied
• reasons for business combinations under common control (Baker, Biondi
and Zhang, 2012; Biancone, 2013)
• organisational motivations (eg restructuring), strategic motivations
• differences in accounting for business combinations under common control
across entities (Janowicz, 2017)
24
24Summary of the academic evidence (2/2)
Empirical evidence
• value relevance of acquisition versus book value method (Zhang, Chen and
Han, 2019)
• authors' conclusion: book value method is more value relevant than
acquisition method
• observation: limitations of research comparing audited numbers and 'as if'
numbers constructed from disclosures; 'as if' prices not available
• entities’ strategic choice of method for accounting for business
combinations under common control (Bonacchi, Marra and Shalev, 2015)
• authors' conclusion: entities use acquisition method to reduce their leverage
ratio
• observation: sample may not be representative
Tuesday 30 March 2021
IASB project:Business combinations under common control
26
Document Classification: KPMG Confidential
© 2021 KPMG, a Hong Kong partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights
reserved. Printed in Hong Kong, China.
.
20%
80%
BUSINESS COMBINATIONS UNDER COMMON CONTROL
HKFRS 3 Acquisition accounting AG 5 Merger accounting
Approach adopted by HKEX listed issuers between 2016-2020
Total number of BCUCCs: 92*
Number of transactions accounted for
under AG 5: 74
Number of transactions accounted for
under HKFRS 3: 18
*Major acquisitions and/or very substantial
acquisitions under the Listing Rules
Source: KPMG Research
Prevalence of AG 5 Merger Accounting could be driven by a number of factors
27
Document Classification: KPMG Confidential
© 2021 KPMG, a Hong Kong partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights
reserved. Printed in Hong Kong, China.
Straw poll results from our recent BCUCC webinar
22%
18%
32%
14%
0% 5% 10% 15% 20% 25% 30% 35%
Yes
No –FV method should be used (i.e. no e
xception)
No – AG 5 approach should be allowed
Unsure
Do you agree with the IASB’s book value approach (for non-listed companies) that the pre-
combination information would represent that of the receiving entity only?
31%
15%
22%
15%
0% 5% 10% 15% 20% 25% 30% 35%
Yes
No - book value under DPapproach should be allowed
No - book value under AG 5should be allowed
Unsure
Do you agree with the mandatoryuse of the acquisition method for
BCUCC for listed entities?
28
Document Classification: KPMG Confidential
© 2021 KPMG, a Hong Kong partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights
reserved. Printed in Hong Kong, China.
AG 5 Merger accounting vs IASB DP’s book value approachAG 5 IASB DP
Measurement approach Measure at book values stated in
controlling party’s financial
statements
Measure at transferred entity’s
book values
Presentation of pre-combination
information
Comparative amounts are
presented as if the entities or
businesses had been combined at
the previous balance sheet date
or from when entities are under
common control
Prospective presentation from
combination date without restating
pre-combination information
Measurement of difference
between consideration paid and
business acquired
Consistent approach in general to recognize difference in equity
Transaction cost Consistent approach to expense
Disclosures Disclose some of the required
information under IFRS 3
▪ Disclosure required on difference
between consideration paid and
assets/liabilities received
▪ Not required to disclose pre-
combination information
29
Document Classification: KPMG Confidential
© 2021 KPMG, a Hong Kong partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights
reserved. Printed in Hong Kong, China.
Observations – some areas requiring further consideration
Book value measurement
basis using transferred
company’s book values
Importance of pre-
combination information;
restatement vs
combined/carve-out
financial statements
Operationality of optional
exemption for private entities
with NCS
Thank you
Document Classification: KPMG Confidential
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a
thorough examination of the particular situation.
kpmg.com/cn/socialmedia
© 2021 KPMG, a Hong Kong partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG
International Limited, a private English company limited by guarantee. All rights reserved. Printed in Hong Kong, China.
The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation.
Business Combinations Under Common Control
Doug Niven
Chief Accountant
March 2021
Background
• Major impact on spin offs, demergers, IPOs
• Inconsistent accounting for similar transactions
• 2013 IOSCO letter:
–High priority
–Important to investor decision making
Business Combinations Under Common Control 33
Current challenges• Assume Newco acquires entities and parent loses control after IPO
• Common control exemption – differing views:
– Meaning of “transitory”
– Does hierarchy reapply IFRS 3?
– Reconstructions conditional on IPO
– Proximity of reconstruction to IPO
• No common control exemption:
– Newco not acquirer
– Fair values for all but “acquirer”
• What if parent retains control after IPO?
• Accounting policy choice disclosures
34Business Combinations Under Common Control
Importance of fair value
• Useful & meaningful information for investors & others
• Accountability & future results (amortisation,
impairment, profit on sale)
• Reliable measurement in external transactions
• “Cash box” comparison
• Fair value for in specie distributions to owners
• Goodwill of service entities
Business Combinations Under Common Control 35
True internal reconstructions
• Tax impediments
• Wholly owned entity reporting obligation?
• If consideration less than fair value:
–Vendor distribution to parent
–Parent capital contribution to purchaser
• Reliability of fair values & cost/benefit
Business Combinations Under Common Control 36
Book value challenges
• Vendor entity vs group values
• Businesses operating across legal entities
• Transaction taxes, transfer pricing, capital gains
• Difference where consideration is fair value or in
debt funded transactions
37Business Combinations Under Common Control
Questions and answers
39
Why use the acquisition method for some BCUCC?
Frequently asked questions
What about the needs of the controlling party?
Did you consider measurement uncertainty?
Why use a book-value method pre-IPO?
We hear the following questions and comments…
40
40
eRetailCo
Why use the acquisition method for some BCUCC? Consider the following fact pattern…
• SoftwareCo has significant
internally-generated intangible
assets.
• HoldingCo wishes to raise capital
from its successful SoftwareCo,
without losing control.
• ListedCo buys SoftwareCo from
PrivateCo for cash at fair value.
HoldingCo
>50%
PrivateCo
100%
ResearchCo
SoftwareCo
100%
InternetCo
ServiceCo
SoftwareCo
100%
Non-controlling
shareholders
<50%
ListedCoShares publicly traded
The Board’s view is that ListedCo
should use the acquisition method.
41
41
Why use the acquisition method for some BCUCC? Information provided by each method
Acquisition method Book-value method
Cash consideration paid CU 500 CU 500
Software CU 380 CU 20
Brand name CU 50 -
Other net assets CU 40 CU 40
Goodwill CU 30 -
Net assets recognised CU 500 CU 60
Difference (recognised in equity) n/a CU 440
Provides information about fair values of
identifiable net assets acquired, including:
- brand name (previously unrecognised);
- software (previously measured at book
value).
Does not provide information about fair
values of identifiable net assets acquired
and instead reports a reduction in equity.
42
42What about the needs of the controlling party?
HoldingCo does not need to rely on ListedCo’s financial statements for information about SoftwareCo.
The use of the acquisition method by ListedCo does not affect the amounts reported by the HoldingCo.
SoftwareCo
separate financial
statements
ListedCo
consolidated
financial statements
HoldingCo
consolidated
financial statements
SoftwareCo’s identifiable net assets Book value Fair value Book value
Software CU 20 CU 380 CU 20
Brand name - CU 50 -
Other net assets CU 40 CU 40 CU 40
Goodwill - CU 30 -
Net assets recognised CU 60 CU 500 CU 60
The Board’s
preliminary view
IFRS 10 Consolidated
Financial Statements
43
43Did you consider measurement uncertainty?
Some stakeholders say that using the
acquisition method for BCUCC would…
Result in measuring goodwill at an amount not
evidenced by a transaction price between
independent parties
Involve significant uncertainty in measuring at
fair value assets and liabilities transferred in a
related party transaction
However…
Measuring fair values of the assets and liabilities of
the transferred business is not affected by whether it
was acquired in a related party transaction
Goodwill recognised in a business combination under
common control will be subject to subsequent testing
for impairment
The acquisition method would only be applied to
transactions that affect NCS and are therefore likely
to be conducted at fair value
44
44
Why use a book-value method pre-IPO?Scenario 1—Sale in an IPO
Before After
There is no business combination.
Public investors in Company A will receive book-value information.
• Company P wishes to sell in
an IPO 90% of Company A,
and to retain a 10% interest.
• Company P loses control of
company A. No party gains
control.
P
A
Controlling party
Transferred
business
P
A
Public
shareholders
10% 90%
45
45
Why use a book-value method pre-IPO?Scenario 2—Sale to another party
Before After
This is business combination.
Company X, the acquirer, applies the acquisition method.
• Company P wishes to sell 90%
of Company A to another party,
and to retain a 10% interest.
• Company P loses control of
company A. Company X, the
acquirer, gains control.
P
A
Controlling party
Transferred
business
P
A
10% 90%
X
46
46
Why use a book-value method pre-IPO?Scenario 3—transfer conditional on an IPO
Before After
The Board has not yet considered the meaning of transitory control.
Is Scenario 3 more similar to Scenario 1 or Scenario 2?
• Company P wishes to sell in
IPO 90% of Company A, and
to retain a 10% interest.
• Company P forms a NewCo
that pays cash it raises in the
IPO to acquire Company A.
• The transfer of Company A to
NewCo is conditional on the
IPO of NewCo.
P
A
Controlling party
Transferred
business
P
New
Co
Public
shareholders
10% 90%
A
Conclusions
48
48Next steps and how you can help
November 2020
Discussion Paper
Feedback
Q4 2021
Publication of the
Discussion Paper
How you can help
• Spread the word
• Share academic evidence
• Submit a comment letter
December 2020−August 2021(Comments due 1 September 2021)
Comment period
and outreach
49
49Useful resources
For more information, please refer to the following materials on the IFRS website:
• Debrief Business Combinations under Common Control
• Fact Sheet Business Combinations under Common Control—At a glance
• Snapshot Discussion Paper Business Combinations under Common Control
• Project update Combinations of businesses under common control—one size does not fit all
• Webinar Explaining Discussion Paper Business Combinations under Common Control
• Discussion Paper Business Combinations under Common Control
• Investor webcast: The IASB seeks investor views on how to account for M&As between
companies under common control
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