Appendix B — Accounting for Common-Control Transactions

B.2 Identifying Common-Control Transactions

B.2.1 Meaning of the Term “Common Control”

The term “control” has the same meaning as the term “controlling financial interest” in ASC 810-10-15-8, which states:

For legal entities other than limited partnerships, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.

In determining control, an entity cannot consider only voting interests. Control may be established in other ways, such as:

Variable interests (see the “Variable Interest Entities” subsections of ASC 810-10 and Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest).
Contractual arrangements (see the “Consolidation of Entities Controlled by Contract” subsections of ASC 810-10).

While “common control” is not defined, we often think of the term as encompassing situations in which separate entities were consolidated by the same parent both before and after the transfer (or would have been consolidated by the same parent if the parent prepared consolidated financial statements).

Example B-1

Entities Under Common Control

Parent controls Subsidiary A with its 60 percent voting equity interest and Subsidiary B with its 100 percent voting equity interest. Because Parent controls both A and B, they are under the common control of Parent.

ASC 805-50-15-6 gives the following examples of other common-control transactions:

ASC 805-50

Transactions

15-6 The guidance in the Transactions between Entities under Common Control Subsections applies to combinations between entities or businesses under common control. The following are examples of those types of transactions:

An entity charters a newly formed entity and then transfers some or all of its net assets to that newly chartered entity.
A parent transfers the net assets of a wholly owned subsidiary into the parent and liquidates the subsidiary. That transaction is a change in legal organization but not a change in the reporting entity.
A parent transfers its controlling interest in several partially owned subsidiaries to a new wholly owned subsidiary. That also is a change in legal organization but not in the reporting entity.
A parent exchanges its ownership interests or the net assets of a wholly owned subsidiary for additional shares issued by the parent’s less-than-wholly-owned subsidiary, thereby increasing the parent’s percentage of ownership in the less-than-wholly-owned subsidiary but leaving all of the existing noncontrolling interest outstanding.
A parent’s less-than-wholly-owned subsidiary issues its shares in exchange for shares of another subsidiary previously owned by the same parent, and the noncontrolling shareholders are not party to the exchange. That is not a business combination from the perspective of the parent.
A limited liability company is formed by combining entities under common control.
Two or more not-for-profit entities (NFPs) that are effectively controlled by the same board members transfer their net assets to a new entity, dissolve the former entities, and appoint the same board members to the newly combined entity.

Changing Lanes

In October 2018, the FASB issued ASU 2018-17, which amends the related-party guidance in ASC 810 to add an elective private-company scope exception to the VIE guidance for entities under common control. For more information, see Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest.

EITF Issue 02-5 also provides examples of common-control transactions. Although EITF Issue 02-5 was nullified by FASB Statement 141(R), which was codified in ASC 805-10, ASC 805-20, and ASC 805-30, we believe that the guidance provided by that Issue remains applicable to both public and private companies because of a lack of other authoritative guidance on this topic. While no consensus was reached, the SEC observer stated that the SEC staff believes that common control exists between (or among) separate entities in the following situations:

An individual or enterprise holds more than 50 percent of the voting ownership interest of each entity.
Immediate family members hold more than 50 percent of the voting ownership interest of each entity (with no evidence that those family members will vote their shares in any way other than in concert).
1. Immediate family members include a married couple and their children, but not the married couple’s grandchildren.
2. Entities might be owned in varying combinations among living siblings and their children. Those situations would require careful consideration regarding the substance of the ownership and voting relationships.
A group of shareholders holds more than 50 percent of the voting ownership interest of each entity, and contemporaneous written evidence of an agreement to vote a majority of the entities’ shares in concert exists.

We understand that the guidance about immediate family members should not be extended to other family relationships such as shares held by in-laws, cousins, or divorced couples. In addition, we understand that the SEC staff has objected to assertions that different companies owned by individuals that are not members of an immediate family are under common control unless there was written evidence of an agreement in place at the time of the transaction to vote a majority of an entity’s shares together.

A downstream merger is another example of a common-control transaction. In a downstream merger, a partially owned subsidiary exchanges its common shares for the outstanding voting common shares of its parent. As a result, the consolidated net assets are owned by both the former shareholders of the parent and the former shareholders of the noncontrolling interest in the subsidiary. Regardless of its legal form, a downstream merger is accounted for as if the parent acquired the shares of its subsidiary. Therefore, the reporting for a downstream merger is similar to that for a reverse acquisition without a change in basis for the assets and liabilities. The parent is treated as the ongoing reporting entity from an accounting perspective. The consolidated financial statements of the surviving entity are those of the parent, even though the subsidiary is the surviving legal entity. The shareholders’ equity of the surviving entity is adjusted to reflect the shareholders’ equity of the former parent, after effect is given to the acquisition of the noncontrolling interest, which is accounted for as an equity transaction in accordance with ASC 810-10-45-23.

In some cases, judgment must be used in the determination of whether entities are under common control. An entity should consider all facts and circumstances in making this determination.

B.2.2 Transactions Between Entities With Common Ownership

Common ownership exists when two or more entities have the same shareholders but no one shareholder controls all of the entities. Transfers of net assets or equity interests among entities that have common ownership are not common-control transactions. However, they may be accounted for similarly to common-control transactions if the transfer lacks economic substance. In prepared remarks at the 1997 Annual Conference on Current SEC Developments, Donna Coallier, then professional accounting fellow in the SEC’s OCA, addressed transactions between entities with a high degree of common ownership, stating:

When there is a transaction between entities with a high degree of common ownership, but that are not under common control, the staff assesses the transaction to determine whether the transaction lacks substance. FTB 85-5 provides an example of a similar assessment in an exchange between a parent and a minority shareholder in one of the parent’s partially owned subsidiaries. Paragraph 6 of FTB 85-5 states, in part:

[I]f the minority interest does not change and if in substance the only assets of the combined entity after the exchange are those of the partially owned subsidiary prior to the exchange, a change in ownership has not taken place, and the exchange should be accounted for based on the carrying amounts of the partially owned subsidiary’s assets and liabilities.

Similarly, in a transfer or exchange between entities with a high degree of common ownership, the staff compares the percentages owned by shareholders in the combined company to the percentages owned in each of the combining companies before the transaction. When the percentages have changed or the owned interests are not in substance the same before and after the transaction, the staff believes a substantive transaction has occurred and has objected to historical cost accounting.

FASB Statement 141(R) nullified FASB Technical Bulletin 85-5. However, in the absence of other authoritative guidance, we believe that it continues to provide relevant guidance on assessing whether a transaction lacks economic substance. On the basis of the guidance in paragraph 6 of Technical Bulletin 85-5 and the prepared remarks of the SEC staff, for a transaction between entities with common ownership to be accounted for in a manner consistent with a common-control transaction, entities are expected to have identical owners and the ownership percentages would need to be very similar both before and after the transaction to demonstrate that the transaction lacks economic substance. Such fact patterns are unusual.

Example B-2

Transfer Between Entities With Common Ownership That Lacks Economic Substance

Investors A and B each have a 35 percent interest and Investor C has a 30 percent interest in Companies A, B, and C. No individual investor controls any of the companies. The investors agree to merge the three companies. Further, the investors exchange their shares in each of the three companies for shares of the new, merged company, Company ABC. After the transaction, A and B each have a 35 percent interest and C has a 30 percent interest in ABC.

Before Transfer

After Transfer

Because A’s, B’s, and C’s ownership interests in the underlying assets are the same before and after the merger, the transaction lacks economic substance. Thus, the transaction would be accounted for in a manner consistent with a common-control transaction in accordance with ASC 805-50. As the receiving entity, Company ABC would recognize the assets and liabilities of A, B, and C at their historical carrying amounts.

Example B-3

Transfer Between Entities With Common Ownership That Has Economic Substance

Investors A, B, C, and D together own Companies A and B. No individual investor controls both A and B. The investors agree to merge A and B. Further, the investors exchange their shares in each of the two companies for share of the new, merged company. The number of shares received is based on the relative fair values of the share held in A and B before the merger.

Company A is significantly larger than B such that after the merger, the ownership in Company AB is as follows:

Although A and B had identical owners before the merger, given the resulting change in relative ownership, it would not be appropriate to account for the transaction in a manner consistent with a common-control transaction.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.