Accounting for a merger between a parent entity and its subsidiary – New IFRIC agenda decision

IFRS Interpretations Committee (the Committee) agenda decisions are those issues the Committee decided not to take onto its agenda. Although not authoritative guidance, these decisions are regarded as being highly persuasive in practice. All entities reporting under IFRS should be aware of these decisions, as they could impact how particular transactions and balances are accounted for.

In January 2024, the Committee published its final agenda decision regarding how a parent entity accounts for a merger with its subsidiary in its separate financial statements.

Fact pattern

Parent entity ABC prepares separate financial statements applying IAS 27 Separate Financial Statements.

It recognises its investment in subsidiary XYZ at cost as permitted by IAS 27, paragraph 10(a).

Subsidiary XYZ contains a business, as defined in IFRS 3 Business Combinations.

Parent entity ABC merges with subsidiary XYZ, and subsidiary XYZ’s business becomes part of Parent entity ABC.

Question

The agenda decision addresses a question by the requestor as to how parent entity ABC should account for the merger transaction in its separate financial statements. In particular, whether the merger transaction:

  • Constitutes a business combination as defined in IFRS 3, and therefore, whether parent entity ABC should apply the acquisition method set out in IFRS 3, or
  • Should not be accounted for as a business combination, and parent entity ABC should account for the acquisition of subsidiary XYZ’s assets and liabilities at their previous carrying amounts?

Conclusion

The Committee noted little, if any, evidence of diversity in practice in the way acquirer parent entities were accounting for such mergers. It said that parent entities generally do not apply the IFRS 3 acquisition method of accounting.

Based on its findings that the matter is not widespread, the Committee decided not to add a standard-setting project to its work plan.

Need help?

Accounting for the acquisition of assets and businesses can be complex and requires significant expertise regarding the ins and outs of IFRS 3. Making an incorrect assessment of whether an acquisition constitutes a business combination can have far-reaching consequences for your balance sheet and future financial performance, and you don’t want surprises when your auditor tells you that you have made the wrong call.

Please contact BDO’s IFRS & Corporate Reporting team if you need help implementing this IFRIC agenda decision or any aspect of business combination accounting.