Sunday, March 11, 2018

Accounting for acquisitions under common control

It is common for business to carry out restructuring activities and then spin off a certain sub-group within the main group for listing purpose / disposal purpose. I come to realize recently that there are two approaches available for accounting for acquisitions under common control:

a) Acquisitions method
b) Pooling of interest method

What's the definition of common control ? Generally, common control relates to two entities controlled by a shareholder / corporate entity, for which no consolidation has been prepared. However, due to certain development, e.g. IPO, the shareholder would like to package these two entities together as a listing vehicle on a stock exchange. The financial statements would then be prepared on a common control approach.

For this post, I would like to elaborate a choice available for the accountant.

Assuming entity A was directly owned by a shareholder, who also owns entity B directly. During the year, entity A acquired entity B. Generally, entity A would account for acquisition of entity B as a common control entity based on pooling of interest method. This means that the combined financial statements would be prepared by aggregating entity A + entity B balances. This is pooling of interest method.

However, another approach available is entity A can apply acquisition method to account for acquisition entity B, this approach is similar to the acquisition of a non-related entity/ external party. A purchase price allocation review is required.

This approach is allowed for common control entity if there's a business substance to account for such acquisition.

If you need more clarification , please contact myauditing@gmail.com