CONSIDERATIONS ON THE ACCOUNTING OF BUSINESS COMBINATIONS UNDER COMMON CONTROL

The question of the correct method for recording business combinations under common control (BCUCC) has already been the subject of debate both domestically and internationally for some time now. IFRS are currently silent on the treatment of Business Combinations Under Common Control (BCUCC) as they are scoped out of IFRS 3- Business Combinations and there is no clear consensus on how these transactions should be accounted for in the financial statements of the transferee. A project to address the accounting for BCUCC was initially added to the IASB’s agenda in December 2007, but the project was paused in 2009 and no formal proposal on how to account for these transactions has been formally issued until now. Anyway, the discussion concerning a set of rules for recording such operations has been recently fuelled by the inclusion in the OIC and EFRAG’s agendas of a joint project regarding accounting rules for BCUCC in consolidated financial statements prepared under IFRS. To this very moment the preliminary output of this joint project has been the drafting of a joint discussion paper published in October 2011. This paper was open for comments until the 30th of April 2012; after it was followed by the issuing of a Feedback Statement in October 2012. The objective of the discussion paper was to stimulate the debate on how to account for BCUCC, but an overall accepted definition of BCUCC has not yet been framed. Furthermore no new single accounting model to be generally applied to all types of BCUCC has been developed. Regarding the definition of BCUCC, to this very moment the notion is included in Appendix B of IFRS 3 “revised“ which describes a business combination involving entities or businesses under common control as an operation “in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory”. In this regard, the recent introduction of the IFRS 10, which has been effective since the 1st of January 2013, provides a new notion of control and a new model to be applied in the control assessment process. Therefore, as this new definition of control should also be applied to BCUCC, it becomes essential to investigate the key elements which determine the existence of control in order to develop a common understanding of the type of transactions that are under consideration in BCUCC. The present work at first frames the object of the research, analyzing the definition of business combination under common control. For this purpose the paper will briefly expose and comment both the notion of “business combination” (ex IFRS 3) and the notion of “control” (ex IFRS 10). Secondly, the paper will represent and analytically discuss the possible alternative accounting approaches for BCUCC (not limited to those considered by the discussion paper) currently applied by the main standard setters all over the world that use a similar conceptual framework to IAS-IFRS one’s. In this regard, merger accounting, predecessor basis of accounting, fresh start method and acquisition method will be taken into consideration. In particular, the alternative accounting methods are examined with a view to the user need they should be capable of satisfying, thus leading back the issue to the theoretical debate historical cost accounting versus fair value accounting. According to the historical cost accounting the enterprise value is directly linked to its core business and to the capability of the entity to generate positive income. From this point of view, the financial information contained in the financial statement it is not aimed at representing the potential income, but at representing the effective one in order to assess and evaluate the conduct of the management, thus reconducting the analysis to the stewardship. In this contest, in terms of accountability, the information provided by the income statement is much more significant than the one included in the balance sheet, which as a consequence represents sort of “derivative” of the income statement. On the contrary, fair value accounting is aimed at providing to financial users (actual and potential investors) information about the entity’s future cash flow, thus giving information not only about the effective income but also about the potential one, which is only partially determined by the management’s action. The attention is then addressed to the entity’s ability to create value for a potential investor in terms of shareholders’ future cash flows. Therefore assets and liabilities are recognized at their fair value. Thus, in terms of accountability, the information provided by the balance sheet is much more significant than that included in the income statement, which merely reflects the fluctuations between two different financial periods of the values included in the balance sheet. Finally, this paper will propose the model that in our opinion is able to better represent in accounting terms the essence of BCUCC. In particular starting from the assumption that (i) the accounting model to be applied for BCUCC should be able to reflect the economic substance of the transaction regardless of the various legal forms, and (ii) that BCUCC can be divided in this regard into two main classes -with merely internal or also with external relevance-, this work tries to individuate the accounting model that best suits to each category of BCUCC.