IASB issues discussion paper on business combinations

KR Srivats New Delhi | Updated on January 11, 2021

ICAI has asked members to raise concerns on preliminary views   -  Getty Images/iStockphoto

CA Institute asks members to raise concerns on preliminary views expressed by IASB

You, as an investor, can get better insights and clarity on business combinations (mergers and acquisitions transactions) within the same corporate group soon if International Accounting Standards Board (IASB) has its way.

IASB has issued a paper that discusses a range of issues that would need to be addressed to set up reporting requirements for business combinations under a common control (M&A transactions between companies in same group).

This discussion paper seeks to reduce the diversity in practice and provide users of the receiving company’s financial statements with better information about these combinations. Currently, International Financial Reporting Standards (IFRS) — which is now globally recognised — does not specify how to report transactions that involve transfers of businesses between companies with the same group, informed sources said.

As a result of this gap in IFRS Standards, companies report these combinations in different ways. In some cases, they use the acquisition method. That method measures the assets and liabilities received in the combination at fair value and recognises goodwill. In other cases, companies use a book-value method. That method measures those assets and liabilities at their existing book values.

There is a variety of book-value methods used in practice.

Furthermore, companies often provide little information about these combinations. This diversity in practice makes it difficult for investors to understand the effects of such transactions on companies that undertake them and to compare them.

New suggestions

The Discussion Paper sets out the IASB’s preliminary views on how to fill this gap in IFRS Standards. The IASB’s 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 the acquisition method should be used when a business combination under common control affects non-controlling shareholders. That method is required by IFRS 3 for mergers and acquisitions between unrelated companies.

In all other cases, the IASB is suggesting that a book-value method should be used. A single form of a book-value method would be specified in IFRS Standards.

Meanwhile, the Institute of Chartered Accountants of India (ICAI) has asked its members to raise their concerns at the initial international standard setting stage itself and send their comments to the CA Institute by July 15.

Published on January 11, 2021

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