Appendix B — Accounting for Common-Control Transactions
Appendix B — Accounting for Common-Control Transactions
B.1 Overview and Scope
B.1.1 Overview of Common-Control Transactions
A common-control transaction is typically a transfer of net assets or an
exchange of equity interests between entities under the control of the same
parent. While a common-control transaction is similar to a business combination
for the entity that receives the net assets or equity interests, such a
transaction does not meet the definition of a business combination because there
is no change in control over the net assets. Therefore, the accounting and
reporting for a transaction between entities under common control is outside the
scope of the business combinations guidance in ASC 805-10, ASC 805-20, and ASC
805-30 and is addressed in the “Transactions Between Entities Under Common
Control“ subsections of ASC 805-50. Since there is no change in control over the
net assets from the parent’s perspective, there is no change in basis in the net
assets. ASC 805-50 requires that the receiving entity recognize the net assets
received at their historical carrying amounts, as reflected in the ultimate
parent’s financial statements. ASC 805-50 does not specifically address the
accounting by the transferring entity. In the absence of guidance, certain
practices have developed regarding the reporting by the transferring entity in
its separate financial statements.
A common-control transaction has no effect on the parent’s consolidated
financial statements. The net assets are derecognized by the transferring entity
and recognized by the receiving entity at their historical carrying amounts in
the ultimate parent’s or controlling shareholder’s financial statements. Any
difference between the proceeds transferred or received and the carrying amounts
of the net assets is recognized in equity in the transferring and receiving
entities’ separate financial statements and eliminated in consolidation.
Therefore, the guidance in the “Transactions Between Entities Under Common
Control“ subsections of ASC 805-50 and the following sections of this appendix
applies only to the separate financial statements of an entity that engages in a
common-control transaction.
ASC 805-50 also provides guidance addressing whether the receiving entity should report the net assets
received prospectively from the date of the transfer or retrospectively for all periods presented. If the
recognition of the net assets results in a “change in the reporting entity,“ the receiving entity presents
the transfer in its separate financial statements retrospectively, similarly to a pooling of interests. If not,
the receiving entity presents the transfer in its separate financial statements prospectively from the
date of the transfer. ASC 805-50 does not specifically address the reporting by the transferring entity;
however, the transferring entity usually presents the transfer as a disposal on the date of the transfer in
its separate financial statements.
B.1.2 Scope
ASC 805-50
05-4 As noted in paragraph 805-10-15-4(c), the guidance related to business combinations does not apply to
combinations between entities or businesses under common control.
15-5 The guidance in the Transactions Between Entities Under Common Control Subsections applies to all
entities.
15-6A The guidance in the Transactions between Entities under Common Control Subsections does not apply
to the initial measurement by a primary beneficiary of the assets, liabilities, and noncontrolling interests of a VIE
if the primary beneficiary of a VIE and the VIE are under common control. Guidance for such a VIE is provided in
Section 810-10-30.
15-6B Mergers and acquisitions between or among two or more NFPs, all of which benefit a particular group of
citizens, shall not be considered common control transactions solely because those entities benefit a particular
group. The mission, operations, and historical sources of support of two or more NFPs may be closely linked to
benefiting a particular group of citizens. However, that group neither owns nor controls the NFPs.
The guidance in the “Transactions Between Entities Under Common Control”
subsections of ASC 805-50 applies to the separate financial statements of an
entity that engages in a common-control transaction. However, ASC 810-10-30-1
addresses how a primary beneficiary of a VIE should initially measure the VIE’s
assets, liabilities, and noncontrolling interests when the primary beneficiary
and the VIE are under common control. That guidance, which states as follows, is
similar to that in ASC 805-50:
If the primary beneficiary of
a variable interest entity (VIE) and the VIE are under common control, the
primary beneficiary shall initially measure the assets, liabilities, and
noncontrolling interests of the VIE at amounts at which they are carried in
the accounts of the reporting entity that controls the VIE (or would be
carried if the reporting entity issued financial statements prepared in
conformity with generally accepted accounting principles [GAAP]).
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).
- Immediate family members include a married couple and their children, but not the married couple’s grandchildren.
- 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.
B.3 Measurement
B.3.1 Measurement by the Receiving Entity
ASC 805-50
Transfer Date Recognition
25-2 When accounting for a transfer of assets or exchange of shares between entities under common control,
the entity that receives the net assets or the equity interests shall initially recognize the assets and liabilities
transferred at the date of transfer. See the Transactions Between Entities Under Common Control Subsection
of Section 805-50-45 for guidance on the presentation of financial statements for the period of transfer and
comparative financial statements for prior years.
Transfer Date Measurement
30-5 When accounting for a transfer of assets or exchange of shares between entities under common control,
the entity that receives the net assets or the equity interests shall initially measure the recognized assets and
liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer.
If the carrying amounts of the assets and liabilities transferred differ from the historical cost of the parent of
the entities under common control, for example, because pushdown accounting had not been applied, then
the financial statements of the receiving entity shall reflect the transferred assets and liabilities at the historical
cost of the parent of the entities under common control.
Under ASC 805-50-30-5, there is no change in basis for the net assets received because there is no
change in control over the net asset or equity interests from the parent’s perspective. A difference
between any proceeds transferred and the carrying amounts of the net assets received is recognized in
equity (generally APIC) in the receiving entity’s separate financial statements.
B.3.1.1 Difference in Carrying Amounts Between the Parent and Transferring Entity
Sometimes, the carrying amounts of the net assets in the transferring entity’s
financial statements differ from those in the
parent’s consolidated financial statements. This
can occur, for example, if the net assets being
transferred were acquired in a business
combination but the transferring entity did not
apply pushdown accounting at the time of their
acquisition. Under ASC 805-50-30-5, “the financial
statements of the receiving entity shall reflect
the transferred assets and liabilities at the
historical cost of the parent of the entities
under common control.“ As a result, the receiving
entity effectively applies pushdown accounting in
its separate financial statements. We believe that
the historical cost of the parent refers to the
historical cost of the ultimate parent or
controlling shareholder. (See Appendix
A for more information about the
application of pushdown accounting.) Therefore,
the amounts of the net assets derecognized by the
transferring entity will not be consistent with
the amounts of the net assets recognized by the
receiving entity.
Example B-4
Common-Control Transfer That Triggers Pushdown Accounting
Parent transfers its ownership interest in one of its subsidiaries, Subsidiary B, to another of its subsidiaries,
Subsidiary A, in exchange for additional shares of A. The carrying value of B’s net assets in Parent’s consolidated
financial statements is $1,000, and the carrying value of B’s net assets in its separate financial statements
is $500. The carrying value of B’s net assets differs in Parent’s consolidated financial statements and in
B’s separate financial statements because B did not apply pushdown accounting in its separate financial
statements when Parent acquired control of B.
Before transfer:
After transfer:
Subsidiary A’s separate financial statements should reflect B’s net assets at their carrying values, as presented
in Parent’s consolidated financial statements. The nature of the transfer is that Parent is transferring its
investment in B to A.
B.3.1.2 Conforming Accounting Principles
ASC 805-50
30-6 In some instances, the entity that receives the net assets or equity interests (the receiving entity) and the
entity that transferred the net assets or equity interests (the transferring entity) may account for similar assets
and liabilities using different accounting methods. In such circumstances, the carrying amounts of the assets
and liabilities transferred may be adjusted to the basis of accounting used by the receiving entity if the change
would be preferable. Any such change in accounting method shall be applied retrospectively, and financial
statements presented for prior periods shall be adjusted unless it is impracticable to do so. Section 250-10-45
provides guidance if retrospective application is impracticable.
While we generally expect subsidiaries of a common parent to apply the same
accounting principles to similar assets or
liabilities, in limited circumstances it is
acceptable for the accounting policies of
subsidiaries of a common parent to differ. For
example, one subsidiary of a parent may apply the
LIFO method to account for inventory while another
of its subsidiaries may use a different method for
similar inventories. Therefore, in some cases, the
receiving entity and the transferring entity may
use different accounting methods to account for
certain assets or liabilities. ASC 805-50-30-6
states that in a common-control transaction, “the
carrying amounts of the assets and liabilities
transferred may be adjusted to the basis of
accounting used by the receiving entity if the
change would be preferable.“ Thus, if the
receiving entity applies a different accounting
principle and elects to adopt that accounting
principle for the assets or liabilities received,
it must determine that the method it applies is
preferable to the method applied by the
transferring entity and must apply the change in
accounting principle retrospectively in all
periods presented, unless it is impracticable to
do so, in accordance with the guidance in ASC 250.
We believe that, in situations in which the
accounting principle applied by the receiving
entity is not preferable, the receiving entity has
two options: (1) to continue to account for the
transferred assets and liabilities using the
accounting principle applied by the transferring
entity or (2) to voluntarily adopt for its assets
or liabilities the preferable accounting principle
the transferring entity applies in accordance with
ASC 250.
B.3.2 Measurement by the Transferring Entity
ASC 805-50 provides measurement guidance for the receiving entity but not for the transferring entity.
Because of this lack of authoritative guidance, practice has developed such that the transferring entity’s
measurement generally follows the receiving entity’s. That is, the transferring entity derecognizes the net
assets transferred at their carrying amounts and generally recognizes no gains or losses. A difference
between any proceeds received and the carrying amounts of the net assets transferred is recognized in
equity (generally APIC) in the transferring entity’s separate financial statements.
However, in certain circumstances, the transferring entity must remeasure certain assets to fair value
and recognize any gains or losses before they are transferred to the receiving entity. As discussed
below, such circumstances represent exceptions to the principle that assets and liabilities should be
transferred at their historical carrying amounts.
B.3.2.1 Exception for Transfers of Financial Assets
ASC 860-10-55-78 states, in part, that “a transfer [of financial assets] from one subsidiary (the transferor) to another subsidiary (the transferee) of a common parent would be accounted for as a sale in each subsidiary’s separate-entity financial statements” if (1) all the conditions in ASC 860-10-40-5 are met and (2) the receiving entity is not consolidated by the transferring entity. ASC 860-10-40-4 also indicates that “[i]n a transfer between two subsidiaries of a common parent, the [transferring entity] shall not consider parent involvements with the transferred financial assets in applying paragraph 860-10-40-5.“ Therefore, if those conditions are met, the transferring entity recognizes a gain or loss on a sale of financial assets to the receiving entity in its separate financial statements. However, any gain or loss would be eliminated in the parent’s consolidated financial statements.
The guidance in ASC 860-10-40-5 does not apply to transfers of financial assets between a parent and its subsidiaries, only to transfers between subsidiaries of a common parent. Entities should consider the guidance in ASC 860-10-55-17D if the transfer of financial assets is between a parent and its subsidiary.
We believe that the guidance in ASC 860-10 applies to transfers of financial
assets regardless of whether the nature of such transfers is recurring or
nonrecurring. That is, if a transfer’s nature is consistent with that of a
transfer of financial assets, entities should apply the guidance in ASC
860-10 rather than the guidance in the “Transactions Between Entities Under
Common Control“ subsections of ASC 805-50 or the exception for recurring
transactions discussed in the next section. In addition, the guidance in ASC
860-10 does not apply to a transfer of shares or an interest in a subsidiary
unless the subsidiary primarily consists of financial assets (i.e., the
transfer is essentially a transfer of financial assets). In some cases, an
entity may need to use judgment to determine the nature of the transfer
(i.e., financial assets or net assets).
B.3.2.2 Exception for Recurring Transactions for Which Valuation Is Not in Question, Such as Those Involving Inventory
A transfer of net assets between entities under common control is typically nonrecurring. However, for recurring transfers of assets (rather than net assets) whose valuation is not in question, such as routine inventory transfers in the ordinary course of business, the transferring entity typically recognizes a gain in its separate financial statements, and the receiving entity recognizes the assets at their stepped-up values in its separate financial statements. The accounting for routine transfers between entities under common control was addressed in EITF Issue 85-21, which states, in part:
The SEC Observer stated that the SEC staff’s views on carrying over historical cost to record, in the separate
financial statements of each entity, transfers between companies under common control or between a parent
and its subsidiary run primarily to transfers of net assets (as in a business combination) or long-lived assets.
Those views would not normally apply to recurring transactions for which valuation is not in
question (such as routine transfers of inventory) in the separate financial statements of each entity
that is a party to the transaction. [Emphasis added]
Although the EITF did not reach a consensus on this Issue, the above guidance continues to be
applied in practice. Any gain recognized in the transferring entity’s separate financial statements is eliminated in the
parent’s consolidated financial statements unless the sale is to a regulated affiliate and the criteria in
ASC 980-810-45-1 and 45-2 are met.
As described in the SEC Observer’s comments on EITF Issue 85-21, the SEC staff’s views apply to routine transfers of assets rather than transfers of “net assets (as in a business combination) or long-lived assets.” In some cases, an entity may need to use judgment to determine whether a transfer represents a transfer of net assets.
B.3.2.3 Goodwill
If the net assets or equity interest transferred in a common-control transaction constitute a business in
accordance with ASC 805-10 (see Section 2.4), the transferring entity will need to determine how much
goodwill to include with the net assets transferred. If the net assets or equity interest transferred do not
constitute a business, no goodwill would be transferred to the receiving entity.
An entity must often use judgment in determining the amount of goodwill to include with the net assets
transferred. Sometimes this goodwill amount may be specifically identified, while other times it may
be based fully or partially on a relative fair value allocation, in which case the entity would be expected
to consider the guidance in ASC 350-20-40-1 through 40-7. For example, an entity may specifically
identify the goodwill to be included in the net assets transferred when the net assets consist entirely
of a subsidiary previously acquired in a business combination. In this scenario, an entity typically would
identify the goodwill related to the prior acquisition as included in the net assets transferred, regardless
of whether the subsidiary had previously applied pushdown accounting. However, an entity may need
to use greater judgment when assessing transferred assets that do not entirely constitute a subsidiary
previously acquired in a business combination. For example, an entity may transfer a subsidiary that
was acquired in a prior business combination and other businesses that were not. In this scenario, the
entity may specifically identify the goodwill for the subsidiary that was previously acquired and may use
a relative fair value allocation for the rest of the transferred businesses. Alternatively, the entity may
determine that using a relative fair value allocation for the entire transfer is appropriate.
A common-control transfer may also result in a reorganization of reporting structure in the receiving
entity’s, transferring entity’s, or parent’s financial statements. Such a reorganization could result in
changes in operating segments and reporting units (see Section B.3.3.2).
B.3.3 Other Issues That May Affect the Receiving or Transferring Entities
B.3.3.1 Income Taxes
Paragraphs 270–272 of FASB Statement 109 had provided guidance on accounting for income taxes in a business combination accounted for as a pooling of interests. Because FASB Statement 141 eliminated the pooling-of-interests method, the guidance in Statement 109 was nullified and was not codified. However, we believe it is appropriate to continue to apply that guidance to a common-control transfer. That guidance stated:
270. The separate financial statements of combining enterprises for prior periods are restated on a combined
basis when a business combination is accounted for by the pooling-of-interests method. [Footnote omitted]
For restatement of periods prior to the combination date, a combining enterprise’s operating loss carryforward
does not offset the other enterprise’s taxable income because consolidated tax returns cannot be filed for
those periods. However, provisions in the tax law may permit an operating loss carryforward of either of the
combining enterprises to offset combined taxable income subsequent to the combination date.
271. If the combined enterprise expects to file consolidated tax returns, a deferred tax asset is recognized for
either combining enterprise’s operating loss carryforward in a prior period. A valuation allowance is necessary
to the extent it is more likely than not that a tax benefit will not be realized for that loss carryforward through
offset of either (a) the other enterprise’s deferred tax liability for taxable temporary differences that will reverse
subsequent to the combination date or (b) combined taxable income subsequent to the combination date.
Determined in that manner, the valuation allowance may be less than the sum of the valuation allowances in
the separate financial statements of the combining enterprises prior to the combination date. That tax benefit
is recognized as part of the adjustment to restate financial statements on a combined basis for prior periods.
The same requirements apply to deductible temporary differences and tax credit carryforwards.
272. A taxable business combination may sometimes be accounted for by the pooling-of-interests method.
The increase in the tax basis of the net assets acquired results in temporary differences. The deferred tax
consequences of those temporary differences are recognized and measured the same as for other temporary
differences. As of the combination date, recognizable tax benefits attributable to the increase in tax basis are
allocated to contributed capital. Tax benefits attributable to the increase in tax basis that become recognizable
after the combination date (that is, by elimination of a valuation allowance) are reported as a reduction of
income tax expense.
For more information about income tax issues related to common-control
transactions, see Deloitte’s Roadmap Income Taxes.
B.3.3.2 Reorganization of Reporting Structure and Goodwill Impairment Testing
A common-control transfer may result in a reorganization of the reporting structure in the receiving
entity’s, the transferring entity’s, or the parent’s financial statements. Thus, if any of the entities involved
(i.e., the receiving entity, the transferring entity, or the parent) in the common-control transfer is an SEC
registrant, it must assess whether the common-control transfer causes a change in the composition
of its reportable segments. Under ASC 280-10-50-34, “[i]f a public entity changes the structure of its
internal organization in a manner that causes the composition of its reportable segments to change, the
corresponding information for earlier periods, including interim periods, shall be restated unless it is
impracticable to do so.”
Similarly, entities must also assess whether the common-control transfer results in a change in reporting
units. ASC 350-20-35-45 states that “[w]hen an entity reorganizes its reporting structure in a manner
that changes the composition of one or more of its reporting units, the guidance in paragraphs 350-20-35-39 through 35-40 shall be used to reassign assets and liabilities to the reporting units affected [but]
goodwill shall be reassigned to the reporting units affected using a relative fair value allocation approach
similar to that used when a portion of a reporting unit is to be disposed of (see paragraphs 350-20-40-1
through 40-7).” ASC 350-20-40-1 through 40-7 provide guidance on allocating goodwill when a portion of
a reporting unit is disposed of.
We do not believe that the receiving entity, the transferring entity, or the parent needs to retrospectively
test goodwill for impairment in the historical periods before the date of the transfer. However,
ASC 350-20-40-7 requires that when a portion of a reporting unit is disposed of, an entity must test for
impairment any “goodwill remaining in the portion of the reporting unit to be retained.” Therefore, if the
transferred net assets represent a business and only a portion of a reporting unit of the transferring
entity, the transferring entity must test the remaining portion of the goodwill in the reporting unit for
impairment as of the date of the transfer. Similarly, if the transferred net assets represent a business
and only a portion of a reporting unit of the parent, the parent must test the remaining portion of the
goodwill in the reporting unit for impairment as of the date of the transfer. In addition, we believe that
the receiving entity should consider whether, as of the date of the transfer, it is more likely than not that
the fair value of any of its reporting units is below its carrying amount as a result of the transfer. If so, the
receiving entity should test the reporting unit for impairment on the date of the transfer in accordance
with ASC 350-20.
B.3.3.3 Noncontrolling Interests in a Common-Control Transaction
The ASC master glossary defines a noncontrolling interest (which is sometimes called a “minority
interest”) as “[t]he portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a
parent.”
If there is an outstanding noncontrolling interest in either the receiving
entity or the transferring entity, the effect of the transfer on the
noncontrolling interest should be accounted for in accordance with ASC
810-10. Any changes in the parent’s ownership interest in a subsidiary while
it maintains control of the subsidiary are accounted for as an equity
transaction. The carrying amount of the noncontrolling interest is adjusted
to reflect its change in ownership in the subsidiary. See the implementation
guidance in ASC 810-10-55 for examples illustrating how to account for a
change in the parent’s ownership interest in a subsidiary. Also see
Deloitte’s Roadmap Noncontrolling Interests.
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.
B.5 Disclosures
B.5.1 Disclosures by the Receiving Entity
ASC 805-50
50-3 The notes to financial statements of the receiving entity shall disclose the following for the period in which the transfer of assets and liabilities or exchange of equity interests occurred:
- The name and brief description of the entity included in the reporting entity as a result of the net asset transfer or exchange of equity interests
- The method of accounting for the transfer of net assets or exchange of equity interests.
50-4 The receiving entity also shall consider whether additional disclosures are required in accordance with Section 850-10-50, which provides guidance on related party transactions and certain common control relationships.
In addition to the disclosures required by ASC 805-50-50-3 and ASC 850-10-50, if the net assets
transferred result in a change in the reporting entity (see Section B.4.1), the receiving entity must
provide the disclosures required by ASC 250-10-50-6, which states, in part:
When there has been a change in the reporting entity, the financial statements of the period of the change shall
describe the nature of the change and the reason for it. In addition, the effect of the change on income from
continuing operations, net income (or other appropriate captions of changes in the applicable net assets or
performance indicator), other comprehensive income, and any related per-share amounts shall be disclosed
for all periods presented. Financial statements of subsequent periods need not repeat the disclosures required
by this paragraph. If a change in reporting entity does not have a material effect in the period of change but is
reasonably certain to have a material effect in later periods, the nature of and reason for the change shall be
disclosed whenever the financial statements of the period of change are presented.
B.5.1.1 Earnings per Share
ASC 805-50
50-2 The nature of and effects on earnings per share (EPS) of nonrecurring intra-entity transactions involving long-term assets and liabilities is not required to be eliminated under the guidance in paragraph 805-50-45-3 but shall be disclosed.
If the receiving entity is required to disclose EPS in its separate financial
statements and presents the common-control transfer as a change in the
reporting entity (see Section B.4.1), earnings-per-share amounts must be recast to
include the earnings (or losses) of the transferred net assets.
B.5.2 Disclosures by the Transferring Entity
ASC 805-50-50 does not include any specific disclosure requirements for the transferring entity. If
the transferring entity accounts for the transferred net assets as a disposal, it should provide the
disclosures required by ASC 360-10-50 for long-lived assets that are disposed of. If the disposal qualifies
for presentation as a discontinued operation from the perspective of the transferring entity, it should
provide the disclosures required by ASC 205-20-50 in its separate financial statements. In addition,
we believe that the transferring entity should provide disclosures sufficient for users of its separate
financial statements to understand the nature of and accounting for the transfer (to the extent that such
disclosures are not required by other GAAP). We believe that the transferring entity should analogize
to the disclosure requirements for the receiving entity in ASC 805-50-50-3, ASC 850-10-50, and
ASC 250-10-50-6.
B.6 Transactions Involving Master Limited Partnerships
ASC 805-50
Master Limited Partnership Transactions
05-7 Master limited partnerships are partnerships in which interests are publicly traded. Most master limited partnerships are formed from assets in existing businesses. Typically, the general partner of the master limited partnership is affiliated with the existing business (that is, the master limited partnership is usually operated as an extension of or complementary to the business of the general partner). The purposes for forming a master limited partnership vary. They can be formed to realize the value of undervalued assets, to pass income and tax-deductible losses directly through to owners, to raise capital, to combine several existing partnerships, or as a vehicle to enable entities to sell, spin off, or liquidate existing operations. A master limited partnership may be created in a variety of ways. Whether a particular transaction is a business combination that should be accounted for using the acquisition method or a transaction between entities under common control can be determined only after a careful analysis of all facts and circumstances. The Formation of a Master Limited Partnership Subsections identify specific transactions involving master limited partnerships and provide guidance on whether a new basis of accounting is appropriate.
Formation of a Master Limited Partnership
30-7 Because of such factors as the consideration of common ownership and changes in control, a new basis
of accounting is not appropriate for any of the following transactions that create a master limited partnership:
- A rollup in which the general partner of the new master limited partnership was also the general partner in some or all of the predecessor limited partnerships and no cash is involved in the transaction. Transaction costs in a rollup shall be charged to expense.
- A dropdown in which the sponsor receives 1 percent of the units in the master limited partnership as the general partner and 24 percent of the units as a limited partner, the remaining 75 percent of the units are sold to the public, and a two-thirds vote of the limited partners is required to replace the general partner.
- A rollout.
- A reorganization.
30-8 In other situations, it is possible that a new basis of accounting would be appropriate.
30-9 The issuance of master limited partnership units to a general partner of a predecessor limited
partnership who will not be the general partner of the new master limited partnership in settlement of
management contracts or for other services that will not carry over to the new master limited partnership has
characteristics of compensation rather than of equity and shall be accounted for accordingly by the new master
limited partnership.
A master limited partnership (MLP) is a publicly traded partnership that combines the tax benefits of
a limited partnership with the liquidity of publicly traded securities. For the MLP to qualify for the tax
benefits, 90 percent of its income must come from activities related to natural resources, real estate,
or commodities. MLPs commonly engage in petroleum and natural gas extraction and transportation.
There are two classes of MLP owners: (1) the “sponsor“ or the general partner and (2) the limited
partners. The general partner manages the MLP’s day-to-day operations. The MLP technically has no
employees, so all services are provided or managed by the general partner. All other investors are
limited partners and have no involvement in the MLP’s operations. The limited partner units are publicly
traded much like shares in a corporation, while the general partner units usually are not. The general
partner stake is often 2 percent of the partnership, though the general partner can also own limited
partner units to increase its overall ownership percentage.
Example B-6
Illustration of Typical MLP Structure
An MLP may be formed in various ways. ASC 805-50-30-7 contains terms describing some of the ways in
which MLPs may be formed. The ASC master glossary defines these terms as follows:
- Dropdown — “A transfer of certain net assets from a sponsor or general partner to [an MLP] in exchange for consideration.“
- Reorganization — “A way to create [an MLP] in which all of the assets of an entity are placed into [an MLP] and that entity ceases to exist.“
- Rollout — “A way to create [an MLP] in which certain assets of a sponsor are placed into a limited partnership and units are distributed to the shareholders.“
- Rollup — “A way to create [an MLP] in which two or more legally separate limited partnerships are combined into one [MLP].“
Before the adoption of ASU
2015-02, the transfer of assets or net assets to form an MLP and
any subsequent transfers of assets or net assets to the MLP were often accounted for
as common-control transactions because the general partner typically controlled the
net assets before and after the transfer. After the adoption of ASU 2015-02, a
general partner with a 2 percent interest in an MLP may not control the MLP.
Entities should consider all facts and circumstances in determining whether the
formation of an MLP and any subsequent transfers to the MLP should be accounted for
as a common-control transaction in accordance with ASC 805-50 or as a business
combination in accordance with ASC 805-10, ASC 805-20, and ASC 805-30. See
Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial
Interest for more information. In addition, an entity should
consider all facts and circumstances in determining whether the receiving entity
should present the transfer as a change in the reporting entity (see Section B.4.1).