Related Party Combinations

The AcSB completed its deliberations on the Exposure Draft, “Improvements to Accounting for Common Control Combinations." The Board approved the issuance of the amendments to Section 3840, Related Party Transactions; Section 1582, Business Combinations; and Section 3856, Financial Instruments. The amendments:

• clarify the application of Section 1582 to business combinations under common control accounted for in accordance with Related Party Transactions, paragraph 3840.44(a);
• provide an option to retrospectively restate prior periods when carrying amounts are used to account for a combination or to prospectively account for these transactions; and
• clarify that financial instruments acquired or liabilities assumed when a business is transferred between two enterprises are initially measured in accordance with paragraph 3840.44.

The Board intends to issue these amendments and the accompanying Basis for Conclusions in the Handbook by September 2023.

The Private Enterprise Advisory Committee received an update on the Related Party Combinations project. The Committee discussed which issues in accounting for combinations between businesses under common control are a high priority. The Committee also discussed whether the AcSB should consider a phased approach to expedite standard setting, addressing some issues now and other issues at a later time.

Committee members supported the proposal to amend Related Party Transactions, paragraph 3840.44(a), to remove reference to the exchange amount to clarify that business combinations under common control meeting the criteria in paragraph 3840.29 would only be subject to requirements in Section 1582, Business Combinations. Committee members agreed that this proposal is unlikely to change current practice as the exchange amount in business combinations under common control approximates the fair value.

Some Committee members suggested that additional guidance regarding business combinations between related companies that are not under common control would be useful to preparers.

Several Committee members indicated that addressing the requirement in paragraph 3840.44(b) to retroactively restate comparatives is a high priority item. Providing optionality over the retroactive restatement would allow entities to meet user needs and provide relief from added reporting.

The AcSB will consider the Committee’s feedback at the July 2022 Board meeting.

The AcSB received an update on the Related Party Combinations project and discussed a preliminary staff proposal to address stakeholder concerns with the current accounting for related party business combinations under Section 3840, Related Party Transactions. The Board also discussed the feedback received from the Private Enterprise Advisory Committee on the proposal.

The AcSB directed staff to conduct further research to better understand the interactions of the staff proposals with the existing requirements. The Board will discuss the research results at its March 2022 meeting.

The Private Enterprise Advisory Committee received an update on the Related Party Combinations project and discussed a proposal to widen the scope of Related Party Transactions, paragraph 3840.44, to reference all related party business combinations.

Some Committee members supported the proposal and indicated that it would simplify the current accounting for related party combinations.

Other Committee members noted that the proposal would result in more combination transactions being captured within paragraph 3840.44(b), and that the current requirement to restate the comparatives in the financial statements of the combined enterprise may prove more burdensome. A few Committee members indicated that, in some instances, it is more cost efficient to obtain independent fair value estimates for the acquired assets and liabilities.

The Committee discussed whether relief from the requirement in paragraph 3840.44(b) to restate comparatives would address the challenges raised. The Committee also discussed whether an accounting policy choice should be explored as an option to accommodate circumstances where the carrying values of the acquired assets and liabilities are impracticable to obtain. Some members expressed concern that an accounting policy choice may lead to additional diversity in practice.

The AcSB will consider the Committee’s feedback at the February 2022 Board meeting. 

The Committee discussed how enterprises distinguish a business combination under common control from other types of related party combinations. The Committee also provided advice for the AcSB’s consideration on how to define common control.

The AcSB will discuss the Committee’s feedback later this year.

The AcSB discussed the results of its user consultations on related party combinations. The Board also considered different approaches for a potential standard-setting project. The Board directed staff to research how common control could be defined before proceeding to a project proposal.

The AcSB received an update on research activities on related party combinations. This included a summary of the input from the Related Party Combinations Working Group and feedback from the Private Enterprise Advisory Committee (PEAC).

The AcSB decided to consult with users to further understand their information needs when a related party combination occurs.

The AcSB discussed the merits of amending the guidance in Section 1582, Business Combinations, relating to the definition of a business to assist stakeholders in determining whether a related party combination involves a business or a group of assets. In particular, the Board considered whether the definition of a business should be addressed concurrently with the Related Party Combinations project or as a standalone project. The Board decided to consider the definition of a business as part of its other domestic standards priorities as these projects are not interdependent.

The AcSB further considered PEAC’s recommendation to clarify the definition of a related party. The Board decided that clarifying the definition of a related party is beyond the scope of this project and, therefore, will not be considered at this time. 

The AcSB will discuss additional research on this project at its March 2020 meeting.

The AcSB discussed a project proposal to research related party combinations. The Board approved the project and decided that the research should include business combinations under common control, business combinations not under common control and combinations not considered a business (i.e., acquisitions of assets). It also decided that the research should focus on better understanding the types and purpose for different types of related party combinations, and the challenges with accounting for these transactions.

The AcSB directed the staff to form a working group of tax and assurance practitioners from across Canada that specialize in these transactions to assist in the research activities.

The AcSB also considered the interaction between this research project and its current combinations project for not-for-profit organizations. Accordingly, the Board directed the staff to include related party combinations that occur between not-for-profit organizations within the scope of this project’s research activities.