Common control transactions have characteristics similar to those of a business combination, but they do not result in a change in control at the parent or shareholder level. Therefore, unlike accounting for business combinations, common control transactions are not accounted for at fair value. Common control transactions include spinoffs, reorganizations, mergers, and initial public offerings and are addressed in ASC 805-50.

Determining whether common control exists

US GAAP does not specifically define “common control.” In ASC 805, the meaning of “control” is akin to “controlling financial interest” in ASC 810, which is generally defined as ownership of more than 50% of the outstanding voting shares or interests of another entity, with certain exceptions. While majority voting interests are the most common form of control, control can also occur through variable interests or contractual and other legal arrangements. 

The SEC staff has expressed its view that common control exists in the following situations:

• An individual or enterprise holds more than 50% of the voting ownership interest of each entity.
• A group of shareholders holds more than 50% of the voting ownership interest of each entity, and an agreement to vote a majority of the entities’ shares in concert exists.
• Immediate family members hold more than 50% of the voting ownership interest of each entity.

To determine whether a common control transaction exists, the Company must evaluate all facts and circumstances surrounding the direct and indirect relationships between the parties before and after the transaction. 

If multiple shareholders hold ownership interests in multiple entities, but no single shareholder controls them, then a high degree of common ownership exists. Transfers among entities that have a high degree of common ownership are not considered common control transactions. These transfers may lack economic substance if the shareholders have identical ownership interests before and after the transaction and may be accounted for similarly to a common control transaction.

Types of common control transactions

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

1. An entity charters a newly formed entity and then transfers some or all of its net assets to that newly chartered entity.
2. 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.
3. 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.
4. 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.
5. 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.
6. A limited liability company is formed by combining entities under common control.
7. 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.

Accounting by the Receiving Entity

Determining which entity is the receiving entity

The legal receiving entity may not always be the receiving entity for accounting purposes in a common control transaction. Determination of the receiving entity is only necessary when one or more of the combining entities does not reflect the parent’s basis. When the combining entities have not been under common control for the entire period presented, the receiving entity is determined from the perspective of the parent company. The entity that first came under the control of the parent is the accounting receiving entity, regardless of the legal form of the transaction.

Measurement

The receiving entity should recognize the assets and liabilities transferred at the historical cost using the parent’s basis at the date of transfer.

Sometimes the carrying values of the transferring entity differ from the parent’s basis because pushdown accounting has not been applied. If the carrying amounts of the net assets transferred differ from the historical cost of the parent, the financial statements of the receiving entity should be adjusted to reflect the historical cost basis of the parent.  

Accounting by the Transferring Entity

ASC 805-50 is silent regarding the accounting by the transferring entity. In practice, the transferring entity’s measurement generally follows the receiving entity’s measurement, which is the historical cost basis. Therefore, the transferring entity derecognizes the net assets transferred at their carrying amounts and generally recognizes no gains or losses. Any gain or loss for the difference between the proceeds received and the carrying amounts of the net assets transferred should be recognized in equity in the transferring entity’s separate financial statements. In certain circumstances, the transferring entity will need to remeasure assets to fair value and recognize any gains or losses before they are transferred.

Transfers of financial assets

If there is a transfer of a financial asset between subsidiaries of a common parent, the transferring entity would account for this as a sale if all the conditions of ASC 860-10-40-5 are met and the transferee subsidiary is not consolidated in the transferring entity’s standalone financial statements. However, this guidance does not apply to transfers of financial assets between a parent and its subsidiaries, or transfers of nonfinancial assets between entities under common control. Those transactions should generally be recorded at historical cost by the receiving subsidiary as a common control transaction.

Routine transfers

For routine transfers of inventory (and similar recurring transactions) between entities under common control for which valuation is not in question, the transferring entity typically recognizes a gain in its separate financial statements, and the receiving entity recognizes the assets at its cost. This treatment represents an exception to the general rule requiring common control transactions to be accounted for at the carrying amount. However, if the transfer is to one of the transferring entity’s wholly owned subsidiaries, no gain or loss would be recognized, as it would be eliminated in consolidation.

Goodwill

If the net assets or equity interests transferred in a common control transaction constitute a business, the transferring entity will need to determine how much goodwill to include with the net assets transferred. If the net assets do not constitute a business, no goodwill is transferred. Determining the amount of goodwill to include involves judgment. It may be specifically identified or based on an allocation.

Other Considerations

Income Taxes

The guidance in ASC 805-50 does not specifically address the accounting for the deferred tax consequences from common control transactions. Although common control transactions are not a pooling-of-interests, the historical guidance in FAS 109 regarding the income tax accounting effects of a pooling-of-interests transaction can be applied by analogy.

Some common control transactions may result in a taxable transfer of net assets, in which case the receiving entity recognizes the tax bases of the assets and liabilities at fair value. Since new bases are not established for financial reporting purposes, changes in tax bases result in temporary differences that require deferred tax recognition. The change in tax bases is caused by a transaction among or with shareholders; therefore, the deferred taxes and valuation allowance are recognized in equity.

Goodwill reporting unit assessment

If a common control transfer results in a reorganization, the receiving entity will need to assess whether it causes a change in reportable segments and reporting units. If the transferred net assets constitute a business that is only a portion of a reporting unit of the parent, the transferring entity must test the remaining portion of the goodwill in the reporting unit for impairment at the date of transfer.

Noncontrolling interests

Some common control transactions result in changes in noncontrolling interests (NCI). Changes in NCI when the parent retains its controlling financial interest are accounted for as equity transactions. Although NCI is recorded at fair value in a business combination, in common control transactions the carrying amount of NCI is adjusted to reflect changes in ownership in the subsidiary, with any differences between the consideration and the NCI adjustment recognized in equity attributable to the parent.

Conforming accounting policies

In some instances, the receiving and transferring entities may use different accounting methods to account for similar assets and liabilities. In these instances, the carrying amounts of the assets and liabilities transferred should be adjusted to the receiving entity’s accounting basis and applied retrospectively. 

Presentation

Change in reporting entity

If two or more commonly controlled entities are combined that have historically not been presented together, there has effectively been a change in the reporting entity. The receiving entity begins reporting the net assets transferred on the transfer date and presents retrospective combination of the entities for all periods presented as if the combination had been in effect since the inception of common control, in accordance with ASC 805-50 and ASC 250-10.

A change in reporting entity is presented in a manner similar to the pooling-of-interests method discussed in Accounting Principles Board (APB) Opinion 16. Although the business combination guidance eliminated the pooling-of-interests method for business combinations, the following principles under APB Opinion 16 should be followed when preparing financial statements for a change in reporting entity:

• The receiving entity recognizes the assets and liabilities at the ultimate parent’s carrying amounts at the date of the transfer. No step-up in basis or new goodwill is recognized.
• The equity accounts of the entities are combined.
• The retained earnings or deficits are combined and reflected as retained earnings of the combined entity.
• The capital stock and APIC accounts are combined, with adjustments as needed, to reflect the capital structure of the legal entity after the merger.
• Any difference between the consideration paid by the receiving entity and the carrying amounts of the net assets received is recognized in equity.
• The results of operations of the entities are combined in the period in which the transfer occurs as if the entities had been combined as of the beginning of the period (or from the inception of common control if they were not under common control for the full period).
• Intercompany balances and transactions between the transferring and receiving entities are eliminated.
• If comparative periods are presented, they should be presented as if the entities had always been combined, beginning at the inception of common control.

If the common control transaction does not result in a change in reporting entity, the receiving entity accounts for the assets prospectively, beginning on the date of the transfer.

Financial statement presentation by the transferring entity

ASC 805-50 does not provide guidance on how a transferring entity should present a common control transfer in its separate financial statements. The transferring entity should generally recognize the transfer as a disposal transaction under ASC 360, which requires long-lived assets to be disposed of other than by sale to be classified as held and used until the disposal date. If the disposal group qualifies as a component of the transferring entity, the disposal should also be assessed to determine if it qualifies for reporting as discontinued operations at the disposal date. In most circumstances, it would not be appropriate to depool the assets and operations of the transferred net assets prior to the transfer.

Disclosures

Receiving entity

ASC 805-50 provides required disclosures for common control transactions. 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:

1. 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
2. The method of accounting for the transfer of net assets or exchange of equity interests.

Additional disclosures may be required in accordance with Section 850-10-50, which provides guidance on related party transactions and certain common control relationships.

Under ASC 250-10-50-6, when there has been a change in the reporting entity, the financial statements during the period of the change should describe the nature of the change, the reason for it, and the effect of the change on income from continuing operations, net income, other comprehensive income, and any related per-share amounts.

Transferring entity

Although ASC 805-50 does not require specific disclosures for the transferring entity, the transferring entity should provide sufficient disclosures for users of its financial statements to understand the nature of and accounting for the transfer. The transferring entity should consider providing disclosures similar to those required by the receiving entity. In addition, the transferor should provide the disclosures required by ASC 360-10 for long-lived assets that are disposed of, as well as the disclosures required by ASC 205-20 if the disposal qualifies as a discontinued operation.