Same owner, new group
Updated: 11 hours ago
How should a company account for acquiring a business from its own controlling shareholder, and should it restate the comparatives?
A family owns two companies. To tidy things up before bringing in a bank, or passing the business on, or simply to save on audit fees, it puts one under the other. Legally it is an acquisition: one company buys the other's shares. Economically nothing has happened. The same people own the same businesses as they did the day before.
IFRS 3 does not apply, because it excludes combinations of businesses under common control. And no other IFRS Accounting Standard tells you what to do instead. That gap is real, and it is now permanent: the IASB spent years on a project to fill it, then decided in November 2023 not to develop any requirements. So every company in this position has to build its own accounting policy. Most choose merger accounting, and then face a second question the Standards never answer: do you restate the comparatives?
First, is it really common control?
A business combination under common control is one in which all the combining businesses are ultimately controlled by the same party, or parties, both before and after the combination, and that control is not transitory (IFRS 3.2(c) and B1). Three points from IFRS 3's application guidance matter in practice:
The controlling party can be a person. An individual, or a family group acting together under a contractual arrangement, can be the common controlling party (IFRS 3.B2–B3).
Non-controlling interests do not rule it out. Whether there are minority shareholders in either company is not, by itself, relevant to the assessment (IFRS 3.B4).
Transitory control does not count. If common control was arranged shortly before the deal, for example to prepare a business for sale or listing, the exemption is not available and IFRS 3 applies.
If an outside party obtains control of the business, it is an ordinary acquisition under IFRS 3, with fair values and goodwill. Everything below assumes the exclusion applies.
Filling the gap: IAS 8
Where no Standard specifically applies, management develops an accounting policy that produces relevant and reliable information (IAS 8.10). It looks first to Standards dealing with similar issues and to the Conceptual Framework (IAS 8.11), and may then consider the most recent pronouncements of other standard-setters with a similar conceptual framework, other accounting literature and accepted industry practice (IAS 8.12).
That route leads to two broad options:
The acquisition method, applied by analogy to IFRS 3: fair values, goodwill and the acquired company's results from the date of the deal. Some groups choose this where the transaction has substance, for example where there are outside shareholders whose interests change.
A book-value method, usually called merger accounting, pooling of interests or predecessor accounting: no fair values, no goodwill, and a reserve in equity for the difference. This reflects the economic reality that, for the owner, nothing has changed, and it is the more common choice for family and owner-managed groups.
Other standard-setters point the same way. In the UK and Ireland, FRS 102 Section 19 permits merger accounting for group reconstructions that meet its conditions. US GAAP accounts for transfers between entities under common control at carrying amounts (ASC 805-50). Whichever method you choose, it is an accounting policy, applied consistently to similar transactions (IAS 8.13) and disclosed.
How merger accounting works
Merger accounting combines the two companies as if they had been one all along, at their existing book values:
Book values, not fair values. Assets and liabilities come across at their carrying amounts, after aligning accounting policies. Nothing is revalued, no new intangible assets are recognised and no goodwill or bargain purchase gain arises.
Which book values? Usually the transferred company's own carrying amounts. If the controlling party had itself bought the company from an outsider, some groups use the carrying amounts in the controlling party's consolidated accounts instead, including the fair value adjustments and goodwill from that earlier acquisition. Practice varies, so choose and disclose.
A merger reserve, not goodwill. The transferred company's share capital is eliminated against the receiving company's investment. The difference between the consideration and that share capital goes to a separate reserve in equity. Cash paid to the controlling party is, in substance, a distribution to them.
Intragroup items eliminated. Balances, sales, unrealised profit in inventory and dividends between the two companies are removed in full, as on consolidation (IFRS 10.B86, by analogy).
Costs expensed. Advisers' fees for the combination are expensed (IFRS 3.53, by analogy). The costs of issuing new shares are deducted from equity (IAS 32.37).
A worked example
Ms Fernley owns 100% of two Irish companies: Fernbrook Joinery Ltd and Fernbrook Kitchen Fitters Ltd. On 1 July 2026 Joinery acquires all of Kitchen Fitters' shares from her, issuing 50,000 new €1 shares and paying her €20,000 in cash. Kitchen Fitters has share capital of €10,000 and share premium of €5,000. Merger relief applies, so Joinery records no share premium on the new shares. Both companies have a 31 December year end.
Merger reserve (€) | 31 Dec 2025 (restated) | 31 Dec 2026 |
Kitchen Fitters' share capital, eliminated | 10,000 | 10,000 |
Kitchen Fitters' share premium, eliminated | 5,000 | 5,000 |
Joinery's new shares at nominal value | (50,000) | (50,000) |
Cash paid to Ms Fernley | – | (20,000) |
Merger reserve: debit | (35,000) | (55,000) |
The new shares have a nominal value well above the share capital they replace, so the reserve is a debit, and the cash paid to Ms Fernley deepens it. The reserve sits in equity; it is not an asset and is never amortised. Joinery also incurred merger costs of €8,000, all expensed in the combined profit or loss, including €3,000 it had added to the cost of its investment in its own books.
Then the question: restate the comparatives?
Merger accounting treats the two companies as if they had always been combined. Taken to its conclusion, that means the 2025 comparatives should also show both companies together, and the 2026 figures should include Kitchen Fitters for the whole year, not just from 1 July. IFRS does not say whether to do this. Both answers are seen in practice.
Option 1: restate. Present the combined companies from the start of the earliest period shown, as if the combination had always existed, but only for periods when they were under common control. If common control began part-way through the comparative year, combine from that date. This is the traditional pooling of interests approach, and it matches what FRS 102 Section 19 does for merger accounting and what US GAAP requires for common control transfers (ASC 805-50-45-5).
Option 2: do not restate. Include the transferred company only from the date of the combination, as an acquisition would, but still at book values. This follows the legal form and is simpler to prepare. It is also the approach the IASB itself proposed in its 2020 discussion paper, which would have prohibited restating pre-combination information. That proposal never became a requirement, but it shows that prospective presentation is a respectable reading, not a shortcut.
For Fernbrook the choice changes the story the accounts tell:
2025 comparative | Restated | Not restated |
Profit for the year | €105,400 | €72,600 |
Equity at 31 December 2025 | €382,400 | €284,000 |
Kitchen Fitters in 2026 results from | 1 January 2026 | 1 July 2026 |
Merger reserve first appears | 31 December 2025 | 1 July 2026 |
Restated, the 2025 comparatives show a combined business earning €105,400. Not restated, they show Joinery alone at €72,600, and 2026 looks like a jump in profit that is really just Kitchen Fitters arriving in the numbers. Both are internally consistent. They answer different questions.
How to choose
There is no right answer in the Standards, so the choice should follow what the users of the accounts need. Factors that point towards restating:
Common control existed throughout the periods presented, and the combined business is how the group will be run and judged from now on.
Users will compare years: lenders testing covenants, a buyer doing due diligence, or investors in a prospectus. Restated figures show the real trend.
Your group already restates under merger accounting, for example because the companies used to report under FRS 102 Section 19.
Factors that point towards not restating:
The receiving company has outside shareholders, for whom the acquisition is a real change in what they own.
Common control is recent or partial, so restated figures would cover only part of the comparative period anyway.
Reliable historical information for the transferred company is not available, or the cost of producing it outweighs the benefit.
Whatever you choose, three rules apply. Apply it consistently to similar combinations (IAS 8.13). Restating here is a presentation consequence of your policy, not a correction of an error, so do not label it a prior-period adjustment. And explain it in the notes: the method, the carrying amounts used, whether comparatives are restated and why, and the judgement that the combination is under common control (IAS 1.117 and 1.122; IAS 8 from 2027 under IFRS 18). The transfer is also a related party transaction under IAS 24.
The receiving company's own accounts
Everything above concerns the combined financial statements of the receiving company and its new subsidiary. In the receiving company's separate financial statements, the investment is carried at cost (IAS 27.10). How that cost is measured when shares are issued to a controlling shareholder, for example at nominal value where merger relief applies or at fair value, is another policy choice, and company law matters here. Check it with your advisers.
Work it through with our tools
Our Merger Accounting template does this in Excel for two companies under common control. It checks the conditions, combines the companies at book value, builds the merger reserve, aligns accounting policies, eliminates intragroup balances, trading and dividends, and produces combined statements with restated comparatives, the statement of changes in equity and the journals. Fernbrook is its worked example.
Consolidation template: free; the acquisition-method side, with goodwill and non-controlling interests, for comparison.
Family Ties: our group accounts trainer, for the consolidation mechanics behind both methods.
The Tipping Point: weigh the judgements, such as whether control is transitory and whether to restate, and write them up.
Prior-Period Errors template: for genuine errors. A merger accounting restatement is not one, which is exactly why the two should not be confused.
Disclosure Review: check that the policy, judgements and related party notes are complete.
More on groups in Unaddressed!: The intercompany loan nobody will ever call and Signing for your sister's rent.
IFRS leaves common control combinations unaddressed, and the IASB has now confirmed it will stay that way. That leaves you two decisions to make and defend: the method, and whether yesterday's figures should show the group as it is today.
