Appendix B — Accounting for Common-Control Transactions

B.4 Presentation

B.4.1 Change in the Reporting Entity

ASC 805-50

05-5 Some transfers of net assets or exchanges of shares between entities under common control result in a change in the reporting entity. In practice, the method that many entities have used to account for those transactions is similar to the pooling-of-interests method. The Transactions Between Entities Under Common Control Subsections provide guidance on preparing financial statements and related disclosures for the entity that receives the net assets.

The presentation of a common-control transfer in the receiving entity’s separate financial statements differs depending on whether the transfer results in a change in the reporting entity. If the nature of the net assets transferred does not result in a change in the reporting entity, the receiving entity presents the net assets received in its separate financial statements prospectively from the date of the transfer. If the nature of the net assets transferred results in a change in the reporting entity, the receiving entity presents the net assets received in its separate financial statements retrospectively for all periods during which the entities or net assets were under common control, similarly to a pooling of interests under APB Opinion 16.

ASC 250-10-20 provides guidance on accounting for a change in the reporting entity. It defines a “change in the reporting entity“ as:

A change that results in financial statements that, in effect, are those of a different reporting entity. A change in the reporting entity is limited mainly to the following:

Presenting consolidated or combined financial statements in place of financial statements of individual entities
Changing specific subsidiaries that make up the group of entities for which consolidated financial statements are presented
Changing the entities included in combined financial statements.

Neither a business combination accounted for by the acquisition method nor the consolidation of a variable interest entity (VIE) pursuant to Topic 810 is a change in reporting entity.

Although the above guidance is limited, it focuses on combining legal entities or subsidiaries. However, we do not believe that an entity should come to a different conclusion solely on the basis of how the transfer is structured (i.e., an exchange of shares versus a transfer of net assets). Rather, we believe that entities should assess the substance of the transfer rather than simply its legal form.

In addition, we understand that practice has interpreted the guidance as indicating that if the net assets transferred meet the definition of a business in either ASC 805-10 or SEC Regulation S-X, Article 11, the transfer of such net assets would represent a change in the reporting entity. Accordingly, we believe that the inclusion of a substantive new entity that constitutes a business would be likely to result in a change in the reporting entity, whereas the transfer of an asset or group of assets typically would not. For example, the transfer of an asset or a group of similar assets (e.g., the transfer of one or several parcels of land with no other assets or liabilities or any related operations) that do not constitute a business would generally not be expected to result in a change in the reporting entity, even if the legal entity has no other assets and the receiving entity acquires the shares of that legal entity as a result of a common-control transfer.

However, in light of the disparate outcomes in presentation, entities should use judgment and consider all relevant facts and circumstances (including both qualitative and quantitative considerations) in determining whether the receiving entity’s financial statements are “in effect” those of a new reporting entity. Discussion with accounting advisers is encouraged.

B.4.2 Financial Statement Presentation by the Receiving Entity

ASC 805-50

45-1 Paragraph 805-50-25-2 establishes that the assets and liabilities transferred between entities under common control are to be initially recognized by the receiving entity at the transfer date. This Subsection provides guidance on the presentation of financial statements for the period of transfer and comparative financial statements for prior years.

Financial Statement Presentation in Period of Transfer

45-2 The financial statements of the receiving entity shall report results of operations for the period in which the transfer occurs as though the transfer of net assets or exchange of equity interests had occurred at the beginning of the period. Results of operations for that period will thus comprise those of the previously separate entities combined from the beginning of the period to the date the transfer is completed and those of the combined operations from that date to the end of the period. By eliminating the effects of intra-entity transactions in determining the results of operations for the period before the combination, those results will be on substantially the same basis as the results of operations for the period after the date of combination. The effects of intra-entity transactions on current assets, current liabilities, revenue, and cost of sales for periods presented and on retained earnings at the beginning of the periods presented shall be eliminated to the extent possible.

45-3 The nature of and effects on earnings per share (EPS) of nonrecurring intra-entity transactions involving long-term assets and liabilities need not be eliminated. However, paragraph 805-50-50-2 requires disclosure.

45-4 Similarly, the receiving entity shall present the statement of financial position and other financial information as of the beginning of the period as though the assets and liabilities had been transferred at that date.

Comparative Financial Statement Presentation for Prior Years

45-5 Financial statements and financial information presented for prior years also shall be retrospectively adjusted to furnish comparative information. All adjusted financial statements and financial summaries shall indicate clearly that financial data of previously separate entities are combined. However, the comparative information in prior years shall only be adjusted for periods during which the entities were under common control.

If the common-control transaction does not result in a change in the reporting entity, the receiving entity begins reporting the net assets transferred in its separate financial statements prospectively from the date of the transfer. If the common-control transaction results in a change in the reporting entity, the receiving entity begins reporting the net assets transferred in its separate financial statements on the date of the transfer and retrospectively adjusts its historical financial statements to include the net assets received and related operations for all periods during which the entities were under common control. Regardless of whether the common-control transaction results in a change in the reporting entity, the receiving entity cannot begin reporting the net assets or operations of the transferring entity before the transfer date even if it is probable that the transfer will occur.

The requirement in ASC 805-50 to retrospectively adjust the receiving entity’s historical financial statements is consistent with the guidance in ASC 250-10 on reporting a change in the reporting entity. ASC 250-10-45-21 states:

When an accounting change results in financial statements that are, in effect, the statements of a different reporting entity, the change shall be retrospectively applied to the financial statements of all prior periods presented to show financial information for the new reporting entity for those periods. Previously issued interim financial information shall be presented on a retrospective basis. However, the amount of interest cost previously capitalized through application of Subtopic 835-20 shall not be changed when retrospectively applying the accounting change to the financial statements of prior periods.

B.4.2.1 Pooling-of-Interests Method

The method used to present a common-control transaction that results in a change in the reporting entity is similar to a pooling of interests. A pooling of interests was a method of accounting for a merger of two businesses. The assets and liabilities and operations of the two businesses were combined at their historical carrying amounts, and all historical periods were adjusted as if the businesses had always been combined. Similarly, in a common-control transaction, the receiving entity retrospectively adjusts its financial statements to include the transferred net assets and any related operations for all periods for which the entities or net assets were under common control. If the entities were not under common control for the entire period being reported on, the receiving entity’s financial statements are adjusted only retrospectively to the date on which the entities became under common control.

The accounting and reporting guidance on a pooling of interests was established in APB Opinion 16. However, FASB Statement 141 eliminated the pooling-of-interests method of accounting for business combinations and nullified the related guidance. While the guidance in APB Opinion 16 was eliminated, we believe that it continues to provide relevant guidance on presenting common-control transactions that result in a change in the reporting entity. The following bullets summarize how the receiving entity should report the transferred net assets if a change in the reporting entity has occurred and are based on the former guidance in APB Opinion 16 on accounting for a pooling of interests:

The receiving entity recognizes the transferred net assets at their historical carrying amounts in the ultimate parent’s consolidated financial statements. No new goodwill is recognized. The carrying values of the transferred net assets are added to the carrying values of the receiving entity’s net assets. If the receiving entity and transferring entity applied different accounting principles and the transferred assets or liabilities are adjusted to reflect the method of accounting applied by the receiving entity, the change in accounting principle should be applied retroactively for all periods presented (see Section B.3.1.2).
The equity accounts of the separate entities are combined:
- If the receiving entity issues shares to effect the combination, the par value of the shares issued by the receiving entity is credited to the receiving entity’s common-stock account. The entity may need to make adjustments to properly reflect the par value of the receiving entity’s common stock. Any adjustments should first be made to combined APIC and then to combined retained earnings.
- The retained earnings (or deficit) of the transferring entity are added to the retained earnings of the receiving entity.
- Any difference between consideration given by the receiving entity and the carrying amounts of the net assets received is recognized in equity (i.e., as a dividend paid or received).
The receiving and transferring entities’ results of operations are combined in the period in which the transfer occurs as though the entities had been combined as of the beginning of the period (or from the date the entities became under common control if they were not under common control for the entire period).
Intercompany balances and transactions between the receiving and transferring entities are eliminated.
Comparative financial statements are retrospectively adjusted as if the receiving and transferring entities had always been combined (or from the date the entities became under common control if they were not under common control for the entire period).

Example B-5

Pooling of Interests

Subsidiary A and Subsidiary B are wholly owned and under the common control of Parent. On January 1, 20X6, A issues 100 of its common shares for all of the outstanding common shares of B. The par value of A’s common stock is $2 per share. The first two columns summarize the financial information of A and B before the common-control transfer, and the last three columns illustrate combining the assets, liabilities, and shareholders’ equity of A and B and the adjustments necessary to state the common stock of the combined entity at its par value.

B.4.2.2 Identifying the Receiving Entity in a Common Control Transaction

ASC 805-50-30-5 states, in part, that “the entity that receives the net assets or the equity interests [i.e., the receiving entity] shall initially measure the recognized assets and liabilities transferred at [the] carrying amounts” of the parent of the entities under common control. Accordingly, we believe that it is typically acceptable to follow the legal form of the transaction and to identify the legal receiving entity as the receiving entity for accounting purposes. However, because the parent controls the legal form of the transaction, we note that practice has developed such that, at times, an entity also considers factors beyond the transaction’s legal form. This is particularly the case in situations in which (1) the carrying amount of the assets and the liabilities of one (or both) of the entities differs from the parent’s historical cost because pushdown accounting had not been applied (see Section B.3.1.1) or (2) such entities have not been under common control throughout the entire reporting period (see Section B.4.1). In these cases, entities have sometimes analogized to the SEC guidance on identifying the predecessor to identify the receiving entity for accounting purposes, which could result in identifying an entity other than the legal receiving entity (see Section B.4.2.3 below) as the receiving entity for accounting purposes. Because of the judgment involved, discussion with accounting advisers is encouraged.

B.4.2.3 Identifying the Predecessor in Certain Common-Control Transactions

As discussed in Section B.4.1, a common-control transaction that results in a change in the reporting entity requires that the combining entities be combined, retrospectively, for all periods in which they were under common control. If an SEC filing includes additional reporting periods before the entities were under common control, Regulation S-X requires the registrant to determine which entity’s financial statements should be presented as the predecessor. In some cases, the entity deemed to be the predecessor may not be the receiving entity identified for accounting purposes (see Section B.4.2.2).

In prepared remarks at the 2006 AICPA Conference on Current SEC and PCAOB Developments, Leslie Overton, then associate chief accountant in the SEC’s Division of Corporation Finance, stated that the predecessor is “normally going to be the entity first controlled by the parent of the entities that are going to be combined.” However, at the 2015 AICPA Conference on Current SEC and PCAOB Developments, while not specifically talking about common-control transactions, the SEC staff further highlighted a number of factors for registrants to consider in determining the predecessor, including, but not limited to (1) the order in which the entities are acquired, (2) the size of the entities, (3) the fair value of the entities, and (4) the ongoing management structure. The staff indicated that no single factor is determinative on its own, and that there could also be more than one predecessor. For instance, if the entity first controlled is insignificant or lacks substance, or if the entities were acquired in close proximity to each other, the first entity controlled by the parent may not be determined to be the predecessor. Consequently, entities should consider these other factors and exercise judgment when identifying the predecessor in a common-control transaction. Because of the judgment involved, discussion with accounting advisers is encouraged.

B.4.3 Financial Statement Presentation by the Transferring Entity

ASC 805-50 only addresses the receiving entity’s presentation. It contains no specific guidance on how the transferring entity should present a common-control transfer in its separate financial statements.

Although the transferring entity’s measurement generally matches the receiving entity’s, its presentation typically does not. Entities have analogized to SAB Topic 5.Z.7 for guidance on whether the transferring entity may present its separate financial statements as if a change in the reporting entity has occurred by derecognizing the transferred net assets and operations in the historical periods (sometimes referred to as a “depooling”). SAB Topic 5.Z.7, which addresses whether an entity may present a spin-off as a change in the reporting entity and restate its historical financial statements to exclude the subsidiary, states:

Facts: A Company disposes of a business through the distribution of a subsidiary’s stock to the Company’s shareholders on a pro rata basis in a transaction that is referred to as a spin-off.

Question: May the Company elect to characterize the spin-off transaction as resulting in a change in the reporting entity and restate its historical financial statements as if the Company never had an investment in the subsidiary, in the manner specified by FASB ASC Topic 250, Accounting Changes and Error Corrections?

Interpretive Response: Not ordinarily. If the Company was required to file periodic reports under the Exchange Act within one year prior to the spin-off, the staff believes the Company should reflect the disposition in conformity with FASB ASC Topic 360. This presentation most fairly and completely depicts for investors the effects of the previous and current organization of the Company. However, in limited circumstances involving the initial registration of a company under the Exchange Act or Securities Act, the staff has not objected to financial statements that retroactively reflect the reorganization of the business as a change in the reporting entity if the spin-off transaction occurs prior to effectiveness of the registration statement. This presentation may be acceptable in an initial registration if the Company and the subsidiary are in dissimilar businesses, have been managed and financed historically as if they were autonomous, have no more than incidental common facilities and costs, will be operated and financed autonomously after the spin-off, and will not have material financial commitments, guarantees, or contingent liabilities to each other after the spin-off. This exception to the prohibition against retroactive omission of the subsidiary is intended for companies that have not distributed widely financial statements that include the spun-off subsidiary. Also, dissimilarity contemplates substantially greater differences in the nature of the businesses than those that would ordinarily distinguish reportable segments as defined by FASB ASC paragraph 280-10-50-10 (Segment Reporting Topic).

While this guidance does not specifically address common-control transactions, both SEC registrants and private companies have analogized to it in practice. All requirements in SAB Topic 5.Z.7 must be met for the transferring entity to depool the transferred net assets. Because it is often difficult to assert that all of the requirements have been met, the transferring entity typically accounts for the transfer as a disposal other than by sale in accordance with ASC 360. Therefore, the transferring entity should (1) consider whether the common-control transaction indicates that the long-lived assets (asset group) to be transferred should be tested for impairment under the held and used model before the disposal date and (2) assess, from its own perspective rather than that of the parent, whether the disposal qualifies for presentation as a discontinued operation in accordance with ASC 205-20 as of the disposal date. See Chapter 4 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations for more information.

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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.