The Accounting Standards Board (the Board) has received an enquiry, wherein, the Board’s on transaction/arrangement involving transfer of assets between public sector private limited company (which is 100% owned by Government of Pakistan) and another entity that is also under the common control of Government of Pakistan.
The enquirer has submitted following information and enquiries:
The enquirer submitted that it is a public sector private limited company (the company/Old Co.) which is 100% owned by the Government of Pakistan (GoP). The Privatization Commission (PC) has been given the task to privatize the company. The procedure adopted to privatize is to create a new company (New Co.) and transfer Core assets from Old Co. to New Co. The New Co. shares will be issued to GoP directly and the Old Co. will not get any consideration for the transfer of these assets. The GoP will subsequently sell its majority shareholding in New Co. To the private party as soon as the PC gets an offer for such shares from any investor.
The Board’s views have been requested on following enquiries:
i.The GoP will subsequently sell its majority shareholding in New Co. to the private party as soon the PC gets an offer for such shares from any investor, and the GoP holding in New Co. will be transitory only. Will this transaction still be considered Business Combination under Common Control (BCUCC)?
ii.How the Old Co. and New Co. should make accounting entries in their individual books?
iii.What would be the accounting treatment of surplus on revaluation of fixed assets, deferred tax liability, and deferred tax assets in the books of the Old Co. and New Co. when both companies 100% owned by GoP and assets are to be transferred under the scheme of arrangement.
The Accounting Standards Board comments and conclusionThe Board’s comments on the enquirer’s submission are as under:
1.The Board noted that International Financial Reporting Standards (IFRS) do not provide specific guidance on the accounting of common control transactions (i.e. for business combinations under common control and group restructurings). These common control transactions fall outside the scope of the IFRS 3, Business Combinations, as there is no change in control over the assets by the controlling party.
However, IFRS require entities to develop an accounting policy for transactions not specifically addressed by IFRS. Consequently, for a common control transaction an accounting policy must be developed and applied in accordance with the hierarchy set out in paragraphs 10-12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
2.The Board in consideration of lack of IFRS specific guidance on common control transactions, has developed the accounting standard, ‘Accounting of Common Control Transactions’.
The accounting standard ‘Accounting of Common Control Transactions’ has been notified by the Securities and Exchange Commission of Pakistan through S.R.O. 53 (1)/2022 (dated January 12, 2022), under the Companies Act, 2017.
The enquirer is required to consider the guidance provided in this accounting standard for the development and application of accounting policy for recognizing and measuring the assets, liabilities and consideration transferred (if any) between common controlled entities.
3.The Board observed that in context of the enquired matter, the accounting standard provides principle-based guidance and discusses various aspects of accounting of common control transactions, including assessing whether common control exists, transitory common control, distinction between transfer of assets and transfer of business and the measurement approach for the accounting of common control transactions.
4.The Board concluded that:
a)it provides principle-based guidance and clarification on the application of accounting and reporting standards as applicable in Pakistan.
b)in context of the enquired submission, determination of existence of common control, recognition and measurement of asset(s) and related items, and recording of the same in the books of account (through accounting entries) involve exercise of management judgement based on the specific information and circumstances pertaining to the transaction / arrangement.
c)the enquirer is required to consider the guidance provided in the accounting standard ‘Accounting of Common Control Transactions’ and apply its judgment considering the specific facts and circumstances of the transaction / arrangement to account for the assets and other related items (if any) transferred from public sector private limited company (which is 100% owned by GoP) to another GoP controlled entity under the submitted fact pattern
(Issued in February, 2022)