Related Party Combinations

The AcSB continued discussing and considered feedback from its Private Enterprise Advisory Committee and Small Practitioners Working Group on narrow-scope proposals to be included in an exposure draft. The narrow-scope proposals address an application question from practice considered under the Board’s Guidance Framework regarding the amendments issued in September 2023 to Section 3840, Related Party Transactions, in Part II of the CPA Canada Handbook – Accounting Standards for Private Enterprises (ASPE).

In September 2024, the AcSB tentatively decided on a narrow-scope amendment to paragraph 3840.44(b) proposing that when carrying values are used and the combination is accounted for prospectively, an option to account for the combined enterprise as either a new entity with no comparatives or as a continuation of one of the combining entities with comparatives of that entity would be allowed. The proposal would not amend the option to account for the combination retrospectively for the entire period in which the combination occurred and for all prior periods, and this option would continue to be available.

The AcSB considered feedback from Private Enterprise Advisory Committee and the Small Practitioners Working Group and decided to propose further edits to improve the understandability of the proposals.

The AcSB also discussed and considered feedback from Private Enterprise Advisory Committee and Small Practitioners Working Group on the proposed effective date and transition guidance. The Board decided to propose an effective date of January 1, 2026, with earlier application available. The Board discussed that a later effective date may not be needed, as the proposals are expected to make the existing guidance easier to apply and therefore enterprises may want to adopt the proposals as soon as they are available. The Board also decided to propose that the amendments be applied prospectively to be consistent with the transition guidance for the Related Party Transactions amendments issued in September 2023, and because the proposals are not expected to change how a combination was accounted for by enterprises that early adopted those amendments.

The AcSB gave permission to proceed to the final balloting stage. Once complete, the Board expects to issue the exposure draft in December 2024 with a 60-day comment period.

The Private Enterprise Advisory Committee discussed narrow-scope proposals to be included in an exposure draft to address an application question regarding the amendments issued in September 2023 to Section 3840, Related Party Transactions, in Part II of the Handbook.

These amendments added an option in paragraph 3840.44(b) to either retrospectively restate all prior periods when carrying values are used to account for a combination or prospectively account for these transactions from the date that the transfer occurred. The application question asked which comparative figures, if any, should be presented when an enterprise applies the new option to account for the combination prospectively from the date the transfer occurred.

The Committee discussed the AcSB’s tentative decision to propose a narrow-scope amendment that would allow an option in paragraph 3840.44(b)(i) to account for the combined enterprise as either a new entity or as a continuation of one of the combining entities when the combination is accounted for prospectively. The Committee discussed that this would address the application question raised, but they also provided recommendations to clarify the options available, thereby making the proposed guidance easier to understand. The Committee also recommended that the Board consider other amendments to paragraph 3840.44 to clarify when the guidance in this paragraph applies and to which types of combinations.

The Committee also discussed the proposed effective date and transition guidance. The Committee agreed with staff’s recommendation to propose an effective date of January 1, 2026, with earlier application available because the proposals are expected to make the current guidance easier to apply and therefore most enterprises would want to adopt the proposals as soon as they are available. The Committee also agreed with staff’s recommendation to apply the proposals prospectively to be consistent with the transition guidance for the Related Party Transactions amendments issued in September 2023, and because the proposals would not have changed how a combination was accounted for by enterprises that early adopted those amendments.

The AcSB will consider the Committee’s feedback, as well as feedback from its Small Practitioners Working Group at its meeting in October 2024.

The AcSB continued discussing narrow-scope proposals to be included in an exposure draft to address an application question from practice regarding the amendments issued in September 2023 to Section 3840, Related Party Transactions, in Part II of the Handbook.

These amendments added an option in paragraph 3840.44(b) to either retrospectively restate all prior periods when carrying values are used to account for a combination, or prospectively account for these transactions from the date that the transfer occurred. The application question asked which comparative figures, if any, should be presented when an enterprise applies the new option to account for the combination prospectively from the date the transfer occurred.

The AcSB tentatively decided to propose a narrow-scope amendment that would allow an option in paragraph 3840.44(b)(i) to account for the combined enterprise as either a new entity or as a continuation of one of the combining entities when the combination is accounted for prospectively. The Board discussed that this would allow preparers to consider the information needs of its financial statement users and provide information that is relevant and decision useful.

The AcSB will seek further input on the exposure draft proposals from its Private Enterprise Advisory Committee and Small Practitioners Working Group in October 2024. The Board will consider input from the Committee and the Group, and will continue discussing the proposals at its October 2024 meeting. The Board plans to issue an exposure draft in the last quarter of 2024.

Related party business combinations

The AcSB discussed and considered input from its Private Enterprise Advisory Committee on an application issue raised regarding the amendments to Section 3840 , Related Party Transactions, in Part II of the Handbook issued in September 2023. These amendments added an option in paragraph 3840.44(b) to either retrospectively restate all prior periods when carrying values are used to account for a combination or prospectively account for these transactions. The question discussed is, when the new option is applied to account for a combination prospectively from the date that the transfer occurred, what comparative figures, if any, are presented?

Committee members advised that this is a common scenario arising in practice.

The AcSB considered various options to address the issue through authoritative or non-authoritative guidance. The Board directed staff to gather further information and decided to continue discussing the question at its June 2024 meeting.

Application Question – Guidance Framework

The AcSB continued discussing an application question from practice regarding the amendments issued in September 2023 to Section 3840, Related Party Transactions, in Part II of the Handbook. These amendments added an option in paragraph 3840.44(b) to either retrospectively restate all prior periods when carrying values are used to account for a combination, or prospectively account for these transactions from the date that the transfer occurred.

The question raised is, when the new option is applied to account for a combination prospectively from the date that the transfer occurred, what comparative figures, if any, are presented?

The AcSB discussed the feedback from the Private Enterprise Advisory Committee and the following views have emerged:

• an enterprise must identify an acquirer and report comparative figures of the acquiring entity; or
• an enterprise should apply professional judgment to consider the needs of financial statement users, and, in some scenarios, there could be no comparative figures.

Given the diverse views, the Committee recommended that the AcSB issue guidance to clarify the application of the amendment.

The AcSB considered this feedback and noted that the current language in paragraph 3840.44(b) could infer that determining an acquirer is required when carrying values are used to account for the transaction prospectively from the date that the transfer occurred. The Board discussed that in some scenarios, identifying an acquirer could be complex or onerous for private enterprises.

The AcSB tentatively decided to develop an exposure draft for a narrow-scope amendment to Section 3840. The Board will discuss the exposure draft proposals at its meeting in September 2024. The Board expects to issue an exposure draft in Q4 2024.

The AcSB completed its deliberations on the Exposure Draft, “Improvements to Accounting for Common Control Combinations." The Board approved the issuance of the amendments to Section 3840, Related Party Transactions; Section 1582, Business Combinations; and Section 3856, Financial Instruments. The amendments:

• clarify the application of Section 1582 to business combinations under common control accounted for in accordance with Related Party Transactions, paragraph 3840.44(a);
• provide an option to retrospectively restate prior periods when carrying amounts are used to account for a combination or to prospectively account for these transactions; and
• clarify that financial instruments acquired or liabilities assumed when a business is transferred between two enterprises are initially measured in accordance with paragraph 3840.44.

The Board intends to issue these amendments and the accompanying Basis for Conclusions in the Handbook by September 2023.

The Private Enterprise Advisory Committee received an update on the Related Party Combinations project. The Committee discussed which issues in accounting for combinations between businesses under common control are a high priority. The Committee also discussed whether the AcSB should consider a phased approach to expedite standard setting, addressing some issues now and other issues at a later time.

Committee members supported the proposal to amend Related Party Transactions, paragraph 3840.44(a), to remove reference to the exchange amount to clarify that business combinations under common control meeting the criteria in paragraph 3840.29 would only be subject to requirements in Section 1582, Business Combinations. Committee members agreed that this proposal is unlikely to change current practice as the exchange amount in business combinations under common control approximates the fair value.

Some Committee members suggested that additional guidance regarding business combinations between related companies that are not under common control would be useful to preparers.

Several Committee members indicated that addressing the requirement in paragraph 3840.44(b) to retroactively restate comparatives is a high priority item. Providing optionality over the retroactive restatement would allow entities to meet user needs and provide relief from added reporting.

The AcSB will consider the Committee’s feedback at the July 2022 Board meeting.

The AcSB received an update on the Related Party Combinations project and discussed a preliminary staff proposal to address stakeholder concerns with the current accounting for related party business combinations under Section 3840, Related Party Transactions. The Board also discussed the feedback received from the Private Enterprise Advisory Committee on the proposal.

The AcSB directed staff to conduct further research to better understand the interactions of the staff proposals with the existing requirements. The Board will discuss the research results at its March 2022 meeting.

The Private Enterprise Advisory Committee received an update on the Related Party Combinations project and discussed a proposal to widen the scope of Related Party Transactions, paragraph 3840.44, to reference all related party business combinations.

Some Committee members supported the proposal and indicated that it would simplify the current accounting for related party combinations.

Other Committee members noted that the proposal would result in more combination transactions being captured within paragraph 3840.44(b), and that the current requirement to restate the comparatives in the financial statements of the combined enterprise may prove more burdensome. A few Committee members indicated that, in some instances, it is more cost efficient to obtain independent fair value estimates for the acquired assets and liabilities.

The Committee discussed whether relief from the requirement in paragraph 3840.44(b) to restate comparatives would address the challenges raised. The Committee also discussed whether an accounting policy choice should be explored as an option to accommodate circumstances where the carrying values of the acquired assets and liabilities are impracticable to obtain. Some members expressed concern that an accounting policy choice may lead to additional diversity in practice.

The AcSB will consider the Committee’s feedback at the February 2022 Board meeting. 

The Committee discussed how enterprises distinguish a business combination under common control from other types of related party combinations. The Committee also provided advice for the AcSB’s consideration on how to define common control.

The AcSB will discuss the Committee’s feedback later this year.

The AcSB discussed the results of its user consultations on related party combinations. The Board also considered different approaches for a potential standard-setting project. The Board directed staff to research how common control could be defined before proceeding to a project proposal.

The AcSB received an update on research activities on related party combinations. This included a summary of the input from the Related Party Combinations Working Group and feedback from the Private Enterprise Advisory Committee (PEAC).

The AcSB decided to consult with users to further understand their information needs when a related party combination occurs.

The AcSB discussed the merits of amending the guidance in Section 1582, Business Combinations, relating to the definition of a business to assist stakeholders in determining whether a related party combination involves a business or a group of assets. In particular, the Board considered whether the definition of a business should be addressed concurrently with the Related Party Combinations project or as a standalone project. The Board decided to consider the definition of a business as part of its other domestic standards priorities as these projects are not interdependent.

The AcSB further considered PEAC’s recommendation to clarify the definition of a related party. The Board decided that clarifying the definition of a related party is beyond the scope of this project and, therefore, will not be considered at this time. 

The AcSB will discuss additional research on this project at its March 2020 meeting.

The AcSB discussed a project proposal to research related party combinations. The Board approved the project and decided that the research should include business combinations under common control, business combinations not under common control and combinations not considered a business (i.e., acquisitions of assets). It also decided that the research should focus on better understanding the types and purpose for different types of related party combinations, and the challenges with accounting for these transactions.

The AcSB directed the staff to form a working group of tax and assurance practitioners from across Canada that specialize in these transactions to assist in the research activities.

The AcSB also considered the interaction between this research project and its current combinations project for not-for-profit organizations. Accordingly, the Board directed the staff to include related party combinations that occur between not-for-profit organizations within the scope of this project’s research activities.