Merger between a parent and its subsidiary in separate financial statements

[Marek Muc]

This IFRS staff paper prepared for the June IFRS IC meeting covers mergers between a parent and its subsidiary in separate financial statements.

The outreach identified that the carrying amount method is the predominant method of accounting for the merger in a parent entity’s separate financial statements. Proponents of this view say the parent obtained control of the subsidiary before the merger, and the existing parent-subsidiary relationship continues to hold even in the context of separate financial statements. Therefore, the merger does not meet the definition of a ‘business combination’ in IFRS 3. Applying this view, a parent entity - in its separate financial statements - recognises the assets and liabilities of the subsidiary at their previously recognised carrying amounts (carrying amount method).

Source: https://www.ifrs.org/content/dam/ifrs/m ... ate-fs.pdf

[Ketan Marwah]

Fantastic Marek. Many thanks for sharing!!

[Ketan Marwah]

Hi again,

Just a follow up thought: While I would support the approach of the outreach but would however be interested in the definition of “previously recognized carrying amounts”.
If the merger has followed a prior BC, I would argue that the definition should be the group carrying amounts as they were identified and measured under IFRS 3 at point of BC (of course with any adjustments following the BC until merger date).

[Ketan Marwah]

Hi again,

I got the answer after carefully reading the staff paper so kindly ignore the above query. It would indeed be the group carrying amounts as a subsidiary’s business is deemed to be compressed into its parent’s investment in the subsidiary. A subsidiary’s business is not viewed as independent of its parent’s business.

If you follow the illustrative example in the staff paper then you will note that goodwill is not remeasured at the date of the merger. Amounts of goodwill in consolidated financial statements and in separate financial statements are the same despite the change in the fair value in between the original BC date and the subsequent merger date. Had there been a different reference used for establishing the carryover amounts at the time of the merger then it would have had a direct impact on the goodwill calculation too.

[Ketan Marwah]

Hi All,

Sorry to circle back on an old thread but wanted to seek an opinion from the forum on how should "previously recognized carrying amounts" be interpreted in the below sentence - picked from the published staff paper (View 2). Should it be interpreted as similar to “book-value method accounting” wherein it was required that the receiving company measure the assets and liabilities received using the book values of the transferred company, not the controlling party’s book values OR should it be the carrying amounts at a consolidated level i.e. including fair value adjustments? I lean towards the latter as I also mentioned in my previous posts (based on the example mentioned at the end of staff paper) but it is always good to have another opinion.
"A parent entity recognizes the assets and liabilities of the subsidiary at their previously recognized carrying amounts in its separate financial statements (carrying amount method)"

[Marek Muc]

Carrying amounts at a consolidated level - it would make little sense to use amounts from separate financial statements IMO

[Tre-Lois]

Sorry to reopen an old thread.

I understand from the above that upon the merger, the Parent would recognize the carrying amounts of the merged subsidiaries net assets at a consolidated level as at the date of the merger.

Is there a view on how we would treat the difference between:

- The carrying amounts of S2's assets used in the consolidated financial statements as at the date of the legal merger
- The Parent company's carrying value of the subsidiary (prior to the merger) i.e. the amount that will be derecognized from the parent's accounts upon the merger

In the illustrative example (using approach 2) the amounts are the same (both 500).

Many thanks,
Tre

[Marek Muc]

Retained earnings of some specific merger reserve