How business combinations under common control are accounted for under IFRS and US GAAP

Business combinations under common control (BCUCC) transfer a business from one entity to another within the same ultimate parent without changing that parent’s control. Because there is no change in ultimate control, the accounting objective differs from third-party acquisitions. Under IFRS (IFRS 3 excludes BCUCC from scope; policy choices apply, commonly a predecessor/book-value method) and US GAAP (ASC 805-50), the acquirer typically uses carryover (predecessor) basis, does not recognize new goodwill, and records differences in equity, not profit or loss.

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How common control combinations arise.

BCUCC typically occur in group reorganizations, pre-IPO restructurings, spin-ins/spin-outs across sister entities, or insertion of a new HoldCo. The ultimate parent controls both transferor and transferee before and after the transaction, and that control is not transitory. The transferred set of activities and assets must meet the definition of a business (or be a business-like operation) for combination accounting; otherwise, it is an asset transfer with similar carryover concepts.

Common examples include:

• Moving a profitable operating subsidiary from one sub-holding to another.

• Carving out a division into a new legal entity under the same parent ahead of listing.

• Inserting a new intermediate parent above an operating company.

The lack of third-party exchange price means book-value accounting generally better reflects continuity of interests.

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Recognition and measurement under IFRS (outside IFRS 3).

IFRS 3 explicitly excludes BCUCC. In practice, entities establish an accounting policy (applied consistently) often referred to as the predecessor or pooling of interests method. Some entities use the acquisition method by analogy only when there is a substantive change in the rights of non-controlling shareholders; however, the dominant approach is book value.

Key features of the predecessor/book-value method under IFRS policy:

• Assets and liabilities of the transferred business are recognized at their existing carrying amounts in the consolidated financial statements of the ultimate parent (or the transferor), not remeasured to fair value.

• No goodwill is recognized. Any difference between consideration and carrying amounts is recorded directly in equity (often “common control reserve” or retained earnings).

• Comparatives are often presented as if the combination had occurred at the beginning of the earliest period presented when this better reflects continuity of operations (if permitted by law and applied consistently).

• Transaction costs are expensed as incurred, unless they relate to issuing instruments classified as equity (then deducted from equity).

Illustrative journal entries (IFRS — book-value method):Assume Entity B (carrying net assets 2,800,000) is transferred to Entity A for 3,000,000 (cash).

• Debit: Identifiable Assets (aggregate carrying amounts) 3,900,000

• Credit: Identifiable Liabilities 1,100,000

• Credit: Cash 3,000,000

• Debit/Credit: Common Control Reserve (Equity) 1,000,000 (plug to balance to book values)

(Alternatively presented net: recognize net assets at 2,800,000, record equity difference of (200,000) when comparing to consideration; formats vary, but no goodwill arises.)

If the group policy requires predecessor basis using the ultimate parent’s carrying amounts, align to those figures even if the transferor’s books differ.

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Recognition and measurement under US GAAP (ASC 805-50).

ASC 805-50 provides explicit guidance for common control transactions:

• Use a carryover basis (predecessor amounts) for the assets and liabilities received.

• Do not recognize goodwill or step-up. Any difference between consideration given and the predecessor carrying amounts is recognized in equity (generally Additional Paid-In Capital (APIC)).

• Comparative periods are retrospectively adjusted to combine the entities for periods during which common control existed (i.e., “as if” the combination had occurred at the beginning of the earliest period presented), unless impracticable.

• Transaction costs are expensed; costs to issue equity instruments are recorded as a reduction of equity.

Illustrative journal entries (US GAAP — carryover basis):Assume carryover net assets 2,800,000 transferred for 3,000,000 cash.

• Debit: Identifiable Assets (carryover) 3,900,000

• Credit: Identifiable Liabilities (carryover) 1,100,000

• Credit: Cash 3,000,000

• Credit: APIC 200,000 (difference to equity)

If consideration is less than carrying amount, APIC is debited (i.e., a distribution).

Pushdown accounting: for common control reorganizations, the receiving entity does not establish a new basis via pushdown merely due to the internal transfer. Pushdown (ASC 805-50-25-4) is relevant to change-in-control by a new parent from an external business combination, not to purely internal shifts of control.

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Determining whether the transfer is a business or an asset deal.

If the transferred set does not meet the “business” definition (screen and inputs-process-outputs assessment), both IFRS policy and US GAAP still apply carryover accounting, but disclosures should clearly state that an asset transfer occurred. Under GAAP, ASC 805-50 covers transfers of net assets between entities under common control using the same carryover principles.

Journal entry (asset deal, both frameworks):

• Debit: PPE/Intangibles/Inventory (carryover) xxx

• Credit: Liabilities (carryover) xxx

• Credit/Debit: Equity (APIC/common control reserve) (plug) xxx

• Credit/Debit: Cash/Intercompany Payable (consideration) xxx

No gain/loss is recognized in the receiving entity’s income statement.

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Presentation of comparatives and continuity of interests.

IFRS practice. Many entities present combined historical financial information as if the entities had always been combined when this improves understandability and is permitted by regulation. The approach should be disclosed and applied consistently, including the date from which results are combined.

US GAAP. ASC 805-50 generally requires retrospective presentation for periods during which common control existed, aligning with the predecessor carryover objective.

Example disclosure line (both frameworks):“The combination has been accounted for as a transaction under common control using predecessor carrying amounts. The comparative consolidated financial statements have been retrospectively adjusted to include the results of [Transferred Business] from 1 January 20X3, the earliest period presented, as the entities were under common control of [Parent] throughout.”

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Comparative table: IFRS vs US GAAP.

Aspect	IFRS (BCUCC outside IFRS 3)	US GAAP (ASC 805-50)
Measurement	Predecessor/book-value policy (carryover amounts); no FV step-up by default	Carryover basis required
Goodwill	Generally none under predecessor method	None (carryover)
Equity impact	Difference between consideration and carrying values → equity reserve	Difference → APIC (credit/debit)
Comparatives	Often presented as if combined for all periods of common control (policy)	Retrospective presentation for periods of common control
Transaction costs	Expense; equity issuance costs → deduction from equity	Expense; equity issuance costs → deduction from equity
When acquisition method?	Rare; some policies use acquisition method only with substantive NCI change; otherwise predecessor	Not applicable for common control (no acquisition method)
Disclosures	Policy choice, basis of carrying amounts, effective combination date, comparative treatment	Nature of transaction, basis of presentation, periods adjusted, equity impact

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Journal entries for common scenarios.

1) Cash consideration exceeds carrying net assets (equity credit).

• Debit: Net Assets Received (carryover amounts) 2,800,000

• Credit: Cash 3,000,000

• Credit: Common Control Reserve / APIC 200,000

2) Carrying net assets exceed consideration (equity debit).

• Debit: Net Assets Received (carryover) 3,200,000

• Credit: Cash 3,000,000

• Debit: Common Control Reserve / APIC 200,000

3) Non-cash consideration (shares issued).

• Debit: Net Assets Received (carryover) xxx

• Credit: Share Capital / Share Premium xxx

• Credit/Debit: Equity Reserve (plug) xxx

4) Subsequent elimination of intercompany balances.

• Debit: Intercompany Payable xxx

• Credit: Intercompany Receivable xxx

No income statement gain or loss is recognized by the receiving entity.

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Presentation and disclosures.

Disclose the nature and purpose of the reorganization, the identities of combining entities, the date of combination, the basis of accounting (carryover/predecessor), the source of carrying amounts (ultimate parent or transferor), and how comparatives have been presented. Provide a reconciliation in equity for the difference between consideration and carrying amounts, and explain any non-controlling interest effects if the transaction changes ownership percentages within the group.

Example balance sheet excerpt (receiving entity, immediately after transfer):

Equity	Amount (USD)
Share Capital and Premium	10,500,000
Common Control Reserve / APIC	(200,000)
Retained Earnings	5,380,000

Note extract:“Assets and liabilities of [Subsidiary] were recognized at their carrying amounts as reflected in the consolidated financial statements of [Ultimate Parent] at the combination date. No goodwill was recognized. The excess of consideration over carrying amounts was recorded in equity.”

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Impact on financial performance and ratios.

Because no remeasurement to fair value occurs and no goodwill is recognized, profitability metrics are typically unchanged except for depreciation/amortization patterns that continue on predecessor bases. Equity is affected by the plug to APIC/common control reserve, which can change leverage and ROE optics without altering cash flows. Retrospective presentation under GAAP (and often under IFRS policy) improves trend analysis but requires careful articulation of pro forma comparatives, covenants, and KPI baselines.

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Operational considerations.

Finance teams should obtain parent-approved carrying amounts, confirm the date of common control, and document legal steps (merger, share transfer, contribution in kind). Establish a group policy for BCUCC (source of book values, comparative treatment, naming of the equity reserve). Update consolidation procedures to eliminate pre- and post-combination intercompany balances and transactions. Ensure disclosures clearly explain the continuity of interest and the absence of fair-value step-ups.

Consistent application of carryover accounting preserves the economic story of the group while avoiding artificial gains or goodwill from internal reorganizations.

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