Accounting areas in focus

Groups in the aviation industry may undertake a reorganisation of their legal entities for a variety of reasons. Following the IASB’s decision to end its project on businesses under common control without developing any new recognition and measurement requirements, our accounting advisory practice continues to assist clients in dealing with the complexities surrounding group reorganisations. 

While each group reorganisation is unique, most involve the same considerations from an accounting perspective – some of which we have set out below. Whether the group reorganisation involves setting up new entities, merging/dissolving existing legal entities, and/or transferring assets and businesses between group entities, determining the appropriate accounting treatment at each step can be difficult.

We advise our clients to consider the accounting for each step in the step plan at the outset, to avoid undesirable accounting outcomes or complications at a later stage. 

A key judgement in a group reorganisation is whether an asset/group of assets or a business is being transferred between entities within a group.

If a business combination has occurred, the acquirer may not have to apply the full requirements of IFRS 3 Business Combinations (IFRS 3) in its consolidated financial statements if both the acquirer and the acquiree are businesses under common control. In which case there may be an accounting policy choice to apply book value accounting or IFRS 3 in full. It is important to note that a business combination which is determined to be under common control in accordance with IFRS will not always be considered under common control under FRS 102 and vice versa, due to different definitions within each framework.

Common control transactions may also provide accounting choices to entities within their separate financial statements, regarding the measurement of the acquired investment in subsidiary i.e., being measured at book value, fair value or (less commonly) exchange value.

It is worth noting that if a company has made an accounting policy choice for a similar transaction in the past, it should apply that same policy to such transactions going-forward.

The form of consideration transferred between group entities to affect an acquisition under common control can impact the accounting treatment. If shares are issued as consideration, the acquirer must consider the different reliefs available under Irish and UK Company Law when determining how to account for the transaction in the equity section of the balance sheet of its separate financial statements.

To make a lawful distribution, an entity must have sufficient distributable reserves. Distributable reserves are an entity’s accumulated realised profits less its accumulated realised losses. A careful assessment is required to determine the profits available for distribution, particularly for entities that have received capital contributions (which may or may not constitute realised profits).

For example, if an entity received a capital contribution in the form of an aircraft, initially the capital contribution would not constitute a realised profit. However, over time the capital contribution would incrementally become a realised profit, in line with the depreciation of the aircraft (or in the event that the aircraft is subsequently sold).

Groups should review the distributable reserves of all entities that are impacted by the reorganisation, including those entities on whom the impact is transitory. For example, if a business is being transferred to an intermediate entity before being further transferred upstream, it is crucial that the intermediate entity has sufficient distributable reserves to affect the transaction, even if it is only serving as a passthrough entity. 

Neither IFRS nor FRS 102 include comprehensive guidance on accounting for common control transactions. Being aware of the rules and reliefs available ensures that pitfalls are avoided and opportunities to simplify the accounting treatment are not overlooked.