The IASB is proposing changes that may be of interest to finance leaders. Emer Keaveney takes a deep dive into who will benefit from them.

To date, the International Accounting Standards Board (IASB) has focused on the requirements for publicly traded entities rather than group companies or standalone statutory financial statements. My interest was piqued by two recent publications from the IASB, which suggest a change in this focus.

Widening scope to include group restructuring

In November 2020, the IASB issued a discussion paper proposing how to account for business combinations under common control (BCUCC). A BCUCC is one in which all the combining entities are ultimately controlled by the same party, before and after the combination. This type of transaction is sometimes called a group reorganisation or a restructuring.

Who will this affect? In today’s dynamic business environment, group reorganisations are very common across all sectors, from large public entities to small and medium-sized enterprises. They can be structured as transfers of shares or transfers of trade/business. There are a number of reasons for a group to restructure. It could be to facilitate the sale of a part of the business, for succession planning, for banking or tax purposes, or to simplify the legal structure.

There is currently no International Financial Reporting Standards (IFRS) that address how to account for BCUCCs. In fact, common control transactions are specifically excluded from the scope of IFRS 3 Business Combinations. This has caused a great deal of diversity in practice, making it difficult for users of financial statements to understand the effects of these transactions. It certainly drives the need for more clarity.

Currently, there are two allowable methods of accounting by the entity receiving the transfer of shares or trade/business: the ‘acquisition method’ and the ‘book value’ method. There is no consensus on which method is appropriate in which situation. This discussion paper aims to reduce this diversity in practice. IASB’s view is that there is no single method that can be applied to all scenarios. The discussion paper proposes detailed prescriptive rules, reducing the scope for policy choices and bringing clarity to which method should be applied in each scenario.

A new take on reduced disclosures

In July 2021, the IASB issued the exposure draft that proposes to allow eligible entities to elect to apply reduced disclosure requirements while still applying the recognition, measurement, and presentation requirements in IFRS. The board’s aim here is to reduce the cost of preparing IFRS financial statements for subsidiaries that are not publicly accountable while maintaining the usefulness of the information provided. The election is optional and can be revoked at any time.

So, which entities will benefit from the proposals? This will be any entity which, at the end of the reporting period:

• is a subsidiary as defined in IFRS 10 Consolidated Financial Statements;
• does not have public accountability. That is, “its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market” or it “holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses”; and
• has a parent that prepares consolidated financial statements available for public use that comply with IFRS.

If you work with entities meeting these above criteria, I encourage you to provide feedback to the IASB through comment letters until 31 January 2022.

The intent of this proposal is similar to the existing FRS 101 reduced disclosure framework applied by many group companies in the UK and Ireland. FRS 101 differs significantly in the details from the proposals in IASB’s exposure draft, and it is currently unclear how the two will interact in practice.

Globally, a number of national standard-setters have implemented different national IFRS-based reduced disclosure regimes. However, IASB’s exposure draft has the potential to enable a radical streamlining of the preparation of statutory financial statements for organisations operating across multiple jurisdictions – for example, in a shared service centre environment.

Emer Keaveny is an Associate Partner in Financial Accounting Advisory Services at EY.