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30.6 Change in a reporting entity and common control transactions
Publication date: 28 Feb 2022
us Financial statement presentation guide
A change in reporting entity is a change that results in financial statements that, in effect, are those of a different reporting entity. Examples include presenting consolidated or combined financial statements in place of financial statements of individual entities, changing subsidiaries within a consolidated group for which consolidated financial statements are presented, or changing the entities included in a set of combined financial statements.
Business combinations accounted for by the acquisition method and consolidation of variable interest entities pursuant to Topic 810, Consolidation, are not considered changes in a reporting entity.
Excerpt from ASC 250-10-50-6
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.
Transfers between entities that are under common control are included within the Transactions Between Entities Under Common Control subsections of ASC 805-50. Common control transactions occur frequently, particularly in the context of reorganizations, spin-offs, and initial public offerings. In certain scenarios, common control transactions may result in a change in reporting entity, requiring that the guidance of ASC 250-10-50-6 be applied. See BCG 7.1.2 for further information in assessing the nature of common control transactions, including whether such transactions result in a change in reporting entity.
30.6.1 Change in reporting entity – receiving entity (common control)
If a transaction combines two or more entities under common control that historically have not been presented together, the resulting financial statements may be considered to be those of a different reporting entity. The change in reporting entity requires retrospective combination of the entities for all periods presented as if the combination had been in effect since inception of common control in accordance with ASC 250-10-45-21. See BCG 7.1.2 for further information on presenting a change in reporting entity resulting from a common control transaction.
30.6.2 Change in reporting entity – transferring entity (common control)
ASC 805-50-05-5 indicates that certain common control transactions are changes in the reporting entity and provides accounting guidance for the reporting entity that receives the net assets in a common control transaction. However, ASC 805 is silent regarding the accounting by the reporting entity that contributes the net assets or equity interests.
Some infer from the receiving entity guidance that the same financial reporting should be applied to the transferring entity. This method is often referred to as a “de-pooling.” In a de-pooling, the assets, liabilities, and related operations of the transferred business are retrospectively removed from the financial statements of the transferring entity at their historical carrying values.
Alternatively, some believe the transferring entity should report the transfer as a disposal pursuant to ASC 360-10.The guidance in ASC 360-10-45-15 indicates that the disposal group of long-lived assets that are to be disposed of other than by sale should continue to be classified as held and used until the disposal date. If the disposal group qualifies as a component of the transferring entity, it should be assessed for discontinued operations reporting on the disposal date.
For public companies, the SEC staff has issued SAB Topic 5-Z.7, Miscellaneous Accounting, Accounting and Disclosure Regarding Discontinued Operations, Accounting for the Spin-off of a Subsidiary, which addresses accounting for the spin-off of a subsidiary. While this topic is not written in the context of a change in reporting entity that results from a common control transaction, reporting entities should consider this guidance in determining the appropriate accounting by the transferring entity in a common control transaction. The topic provides a number of stringent criteria, all of which must be met to “de-pool” a transferred business retroactively from its historical financial reporting periods. The SEC staff often challenges a reporting entity’s assertion that all the requirements of the SAB have been met. Therefore, the more frequently applied accounting by the transferring entity has been to reflect the contribution as a disposal under ASC 360-10. Although this guidance is specific to public companies, we believe the underlying concepts are applicable to private companies as well.
See BCG 7.1.4 for further information on presenting a common control transaction in the financial statements of the transferring entity.
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