How common control reorganizations are presented under IFRS and US GAAP

Business combinations under common control (BCUCC) occur when ownership of a business is transferred between entities within the same ultimate group, without any change in control at the top level. These transactions are frequent in group restructurings, pre-IPO consolidations, spin-ins, and internal transfers. Unlike ordinary acquisitions, they do not create new goodwill at the group level because no new control relationship arises. However, IFRS and US GAAP handle their measurement bases, disclosures, and presentation differently, depending on whether the transaction has commercial substance.

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What defines a business combination under common control

A combination qualifies as common control when:

• All combining entities are ultimately controlled by the same parent before and after the transaction.

• The control is not transitory (i.e., the parent is not created solely for the transaction).

• The transaction does not result in any change of control outside the group.

Examples include:

• A parent transferring a subsidiary to another wholly owned subsidiary.

• The insertion of a new holding company above an existing group.

• The spin-in of an operating business from a sister entity.

Since control at the ultimate parent level does not change, the transaction does not meet the definition of a business combination under IFRS 3 or ASC 805.

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IFRS approaches — predecessor accounting versus acquisition method

IFRS 3 explicitly excludes BCUCC from its scope. Consequently, IFRS preparers apply one of two policy choices:

1. Predecessor (book-value) method — preferred and commonly accepted:

   • Assets and liabilities are recorded at their existing carrying amounts.

   • No new goodwill is recognized.

   • The difference between the carrying amount of net assets and consideration paid is adjusted directly in equity.

   • Comparative information is often restated as if the combination had occurred from the beginning of the earliest period presented.

2. Acquisition method by analogy — allowed only if the transaction has substantive commercial substance or involves non-under-common-control interests (rare).

   • Assets and liabilities recognized at fair value.

   • Goodwill or bargain gain recognized accordingly.

Illustrative entry (book-value method):

• Dr Identifiable Assets (book values) xx

• Cr Liabilities xx

• Cr Cash / Consideration xx

• Cr / Dr Equity (common control reserve) xx (balancing figure).

Example:A parent transfers a subsidiary with net assets of €12 million to another subsidiary for €14 million.→ Recognize the €2 million difference in equity, not profit or loss.

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Presentation and comparatives under IFRS

Under the predecessor method, the financial statements of the receiving entity are presented as if the transferred business had always been part of the group:

• Assets, liabilities, and results of the transferred business are included from the beginning of the earliest comparative period.

• Common control reserves (equity differences) track the cumulative net difference between consideration and net assets transferred.

• No fair value uplift and no goodwill appear in the accounts.

This approach enhances continuity and avoids artificial profit effects from internal transfers.

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US GAAP accounting for common control transactions

Under ASC 805-50 (Transactions Between Entities Under Common Control):

• The receiving entity recognizes the net assets transferred at carrying amount from the transferring entity’s books (i.e., predecessor basis).

• No new basis of accounting and no goodwill are created.

• The transaction is recorded prospectively, not retroactively, unless guidance for specific registrants (e.g., SEC Regulation S-X) requires pooling of prior periods.

• Any difference between consideration and carrying amount of net assets is recorded in equity (APIC or retained earnings).

Illustrative entry (US GAAP):

• Dr Identifiable Assets (carrying value) xx

• Cr Liabilities xx

• Cr Cash / Payable xx

• Cr / Dr APIC (balancing figure) xx.

If the consideration exceeds carrying value, reduce APIC or retained earnings; if lower, increase APIC or create contribution surplus.

Disclosure: describe the transaction, the entities involved, and the basis of presentation (predecessor basis).

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Comparative framework — IFRS vs US GAAP

Topic	IFRS (IAS 1 / IAS 8 / IFRS 3 exclusion)	US GAAP (ASC 805-50)
Scope	Explicitly excluded from IFRS 3	Covered under ASC 805-50
Measurement basis	Policy choice: book value (common) or FV (rare)	Book value from transferring entity
Goodwill recognition	None (under book value method)	None
Profit or loss impact	None; equity adjustment	None; equity adjustment
Comparative presentation	Often restated for continuity	Usually prospective
Disclosure	Nature, rationale, entities, and treatment	Nature, entities, and accounting basis

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Worked example — intra-group transfer of a subsidiary

Facts (currency: €):ParentCo owns two subs: A and B.

• A holds a business unit with net assets of €20,000,000.

• Parent transfers this unit to B for €25,000,000.

IFRS / US GAAP (book-value method):

• Dr Identifiable Assets 20,000,000

• Cr Cash / Intercompany Payable 25,000,000

• Cr / Dr Equity (Common Control Reserve / APIC) 5,000,000

Presentation:

• No gain or loss in P&L.

• Comparative periods may or may not be restated (IFRS often yes, GAAP generally no).

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Journal entries summary

Receiving entity (both frameworks):

• Dr Assets (carrying amounts) xx

• Cr Liabilities xx

• Cr Consideration / Intercompany Payable xx

• Cr / Dr Equity (balancing) xx

Transferring entity:

• Derecognize assets and liabilities at book value.

• Record difference with parent in equity.

Parent company (consolidated):

• No effect—both entities under common control.

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Disclosure package

Disclose:

• Nature and purpose of the reorganization.

• Identity of entities involved and relationship under common control.

• Basis of measurement (book value or fair value).

• Treatment of differences in equity.

• Comparative presentation policy and restatement if applicable.

Example note (IFRS/GAAP):

On 1 July, the Group transferred the XYZ division from Subsidiary A to Subsidiary B as part of a reorganization under common control. The transaction was accounted for at book value with no impact on profit or loss. The €5 million difference between consideration and net assets was recognized in equity.

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Impact on financial performance and ratios

• EBITDA and profit: unaffected—no fair value adjustments or goodwill.

• Equity: may increase or decrease depending on consideration versus book value.

• Leverage ratios: can change because book values move between entities, but consolidated group remains unchanged.

• Comparability: if comparatives are restated (IFRS practice), trends remain continuous; GAAP’s prospective view may create step changes.

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Operational considerations

• Document control relationships clearly before and after transfer.

• Apply consistent policy across all BCUCCs in the group.

• Coordinate tax treatment—local rules may require fair value or deemed sales.

• Prepare a common control reserve reconciliation for audit traceability.

• Ensure disclosures highlight that the transaction is not a business combination.

Accurate treatment of common control reorganizations ensures continuity of reporting, preserves equity integrity, and avoids artificial profit recognition during internal restructurings.

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