Common Control Business Combinations under Ind AS 103: Practical Issues and Correct Accounting Approach

Introduction – Why Common Control Creates Maximum Confusion

Group restructurings are increasingly common, particularly in organisations with multiple subsidiaries, cross-border holding structures and private equity investors. While such transactions are often driven by commercial or strategic considerations, their accounting treatment under Ind AS frequently becomes contentious. One of the most debated areas is the identification of common control business combinations under Ind AS 103. In practice, differing conclusions are often reached because common control is assessed mechanically through ownership charts rather than through a proper analysis of control, continuity of control and substance of the transaction. The involvement of investment funds, newly incorporated holding companies and changes in jurisdiction further adds to the complexity. In several cases, the pooling of interest method is applied without adequately considering whether it faithfully represents economic reality, resulting in distorted comparatives or artificial equity structures. This article examines the core principles underlying common control, with a focus on the meaning of control under Ind AS 110, practical application of pooling of interest, and key consolidation issues, supported by a simple illustrative case study.

Meaning of “Control” – The Starting Point under Ind AS 110

The assessment of common control under Ind AS 103 cannot be done in isolation and must necessarily begin with an understanding of the concept of control as defined under Ind AS 110. This is because common control presupposes the existence of control, and without establishing who controls an entity, it is not possible to determine whether two or more entities are controlled by the same party. Ind AS 110 explains control through a principle-based framework rather than a mechanical ownership test, and the emphasis is on substance rather than legal form.

Under Ind AS 110, control exists only when all the following three elements are present simultaneously:

• Power over the investee
  Power refers to existing rights that give the current ability to direct the relevant activities of the investee, that is, the activities that significantly affect its returns. These rights may arise from shareholding, contractual arrangements or other mechanisms, but they must be substantive in nature and exercisable in practice.
• Exposure, or rights, to variable returns
  The investor must be exposed to, or have rights to, returns that vary based on the performance of the investee. Such returns may be positive, negative or both, and may include dividends, changes in the value of the investment, management fees or other economic benefits.
• Ability to use power to affect returns
  There must be a clear linkage between power and returns, meaning the investor should have the ability to use its power over the investee to influence the amount of returns it receives. If an investor has power but cannot use it to affect returns, control does not exist.

Ind AS 110 also makes an important distinction between substantive rights and protective rights:

• Substantive rights are rights that give the holder the practical ability to direct the relevant activities and therefore contribute to control.
• Protective rights, such as veto rights over fundamental matters or approval of exceptional transactions, are designed to protect the interests of the holder and do not, by themselves, result in control.

It is also important to note that the right to appoint or remove directors does not automatically result in control unless those directors, in substance, have the authority to direct the relevant activities of the entity. This aspect becomes particularly relevant in structures involving private equity or investment funds, where the investor may have extensive governance rights but may not be involved in operational decision-making.

In summary, control under Ind AS 110 is not determined solely by ownership percentage or contractual rights on paper. It requires a holistic assessment of who directs the relevant activities, who is exposed to variable returns, and whether the power to influence those returns exists in substance. This understanding forms the foundation for analysing whether a transaction qualifies as a common control business combination under Ind AS 103.

What Is “Common Control” under Ind AS 103

Ind AS 103 defines a common control business combination as a transaction in which all the combining entities are ultimately controlled by the same party or parties, both before and after the business combination, and such control is not transitory. This definition appears in Appendix C to Ind AS 103 and forms the basis for applying the pooling of interest method. However, despite the seemingly simple wording, the application of this concept requires careful judgment.

The key aspects of common control can be summarised as follows:

• Ultimate control is the focus
  Common control refers to control exercised at the highest level, not merely at the immediate parent level. The assessment must identify who ultimately controls the combining entities.
• Control must exist both before and after the combination
  The same controlling party must have control prior to the restructuring and must continue to have control after the transaction. If control changes as a result of the transaction, common control does not exist.
• Control should not be transitory
  Temporary or short-term control arrangements do not qualify as common control. The control must be enduring in nature.
• Legal restructuring alone is not decisive
  The creation of new intermediate holding companies or transfer of shares within the group does not automatically result in common control. Substance of control is more important than legal form.

“The ‘ultimate controlling party’ refers to the party or parties that exercise control in substance over the combining entities in accordance with Ind AS 110, and such party may be an individual, a group of individuals, or an entity. Where the controlling party is an entity, it is often the ultimate parent that prepares consolidated financial statements at the highest level; however, the preparation of consolidated financial statements is an indicator of control and not a defining criterion, and the assessment must always be based on substance rather than form.”

In practice, common control is often assumed simply because the ownership ultimately traces back to the same investor or fund. However, Ind AS 103 requires a deeper analysis of who actually controls the entities, using the principles of Ind AS 110. Without this analysis, the pooling of interest method may be applied incorrectly, leading to misleading financial statements.

Pooling of Interest Method – When It Applies

The pooling of interest method prescribed in Appendix C to Ind AS 103 is applicable only when a business combination qualifies as a common control transaction. It is important to note that pooling is not an accounting policy choice, nor is it a method that can be applied for convenience. Its application is conditional upon satisfying the definition of common control, including the continuity of control before and after the combination.

The key conditions for applying the pooling of interest method are as follows:

• Common control must exist
  All the combining entities must be ultimately controlled by the same party or parties, and such control must exist both before and after the business combination.
• Control should not be transitory
  Temporary or short-term control arrangements do not qualify. The control must be enduring in nature.
• No remeasurement of assets and liabilities
  Under pooling, the assets and liabilities of the combining entities are recognised at their existing carrying amounts, and no fair value adjustments are made.
• Equity continuity is assumed
  The method assumes that the combining entities have always been part of the same group, which is why comparatives are often restated.

In practice, difficulties arise when pooling is applied mechanically, particularly in restructurings involving newly incorporated holding companies or a change in the operating parent. In such cases, retrospective application of pooling may result in artificial equity structures or comparatives that do not reflect economic reality. Therefore, the pooling of interest method should be applied only after a careful and well-documented assessment of common control, and not merely because the transaction occurs within a group.

Practical Case Study – ABC Group Restructuring

Background

ABC Group is a multinational infrastructure group operating through multiple project subsidiaries. Prior to restructuring, all operating subsidiaries were directly held by ABC HoldCo-A, incorporated in Country X. ABC HoldCo-A prepared consolidated financial statements and exercised control over the operating entities. The group was backed by a private equity investor, which held its investment through ABC HoldCo-A.

As part of a global restructuring, a new holding company, ABC HoldCo-B, was incorporated in Country Y. Subsequently, the shares of all operating subsidiaries were transferred from ABC HoldCo-A to ABC HoldCo-B. Following the transfer, ABC HoldCo-A exited the group structure, and ABC HoldCo-B became the immediate and ultimate holding company responsible for preparing consolidated financial statements.

Key Accounting Question

Does the transfer of subsidiaries from ABC HoldCo-A to ABC HoldCo-B qualify as a common control business combination under Ind AS 103, merely because the ultimate investor remains the same?

Key Observations

• ABC HoldCo-B is a newly incorporated entity and did not exist prior to the restructuring.
• The operating parent entity changed, along with jurisdiction and governance framework.
• ABC HoldCo-A, which previously exercised control and prepared consolidated financial statements, no longer exists in the post-restructuring structure.
• While the private equity investor remains the same, its role is primarily that of an investor, and control must be assessed based on substance under Ind AS 110.

Practical Insight

This case highlights that continuity of ownership alone may not be sufficient to establish common control. Where the operating parent entity changes and a new holding company is introduced, a careful assessment of control in substance is required before applying the pooling of interest method.

In my view, where a restructuring results in a change in the operating parent entity and involves the incorporation of a new holding company that did not exist in prior periods, mere continuity of ultimate party may not, by itself, establish common control under Ind AS 103. In such circumstances, the pooling of interest method may lead to artificial comparatives and equity structures that do not reflect economic substance. Applying the acquisition method, with consolidation commencing from the date of transfer, may provide more reliable and relevant financial information to users.

n the present case, applying the pooling of interest method without retrospective comparatives would be inconsistent with the fundamental principles of Appendix C to Ind AS 103. Since the restructuring involves the exit of the existing operating parent and the incorporation of a new holding company, the assumption of historical continuity does not hold. Accordingly, the acquisition method should be applied, with consolidation commencing from the date on which control is transferred.

Pooling of interest cannot be applied prospectively; since comparatives cannot be meaningfully restated, the acquisition method must be applied with consolidation from the transfer date.

Comparative Financial Statements under Pooling of Interest – Law and Practical Approach

Under the pooling of interest method prescribed in Appendix C to Ind AS 103, a common control business combination is accounted for as if the combining entities had always been part of the same group. As a consequence, assets, liabilities and reserves are recognised at their existing carrying amounts, and the method assumes historical continuity of the group structure. Based on this principle, comparative financial information is generally restated retrospectively, as though the business combination had occurred from the beginning of the earliest period presented.

This retrospective presentation is intended to ensure comparability and consistency of information across periods. Accordingly, where pooling of interest is appropriately applied, the consolidated financial statements typically include comparatives that reflect the combined results and financial position of the entities for all periods presented.

However, practical challenges arise when the transferee entity is a newly incorporated holding company or where the operating parent entity itself changes as part of the restructuring. In such cases, strict retrospective application of pooling may lead to artificial equity structures, including the recognition of share capital or reserves for periods during which the holding company did not legally exist. Such presentation may impair, rather than enhance, the usefulness of financial information.

Therefore, even under pooling of interest, entities should assess whether retrospective comparatives faithfully represent economic substance. Where retrospective presentation would be misleading, a more pragmatic approach—supported by appropriate disclosures—may be warranted to ensure that financial statements remain relevant and reliable for users.

Capital Reserve under Common Control – Timing and Measurement

The recognition of capital reserve is a distinctive feature of the pooling of interest method prescribed under Appendix C to Ind AS 103. Capital reserve arises when the consideration paid for the transfer of a business is lower than the net assets acquired, measured at their existing carrying amounts. However, the timing and manner of recognising such reserve are often misunderstood in practice.

Under the pooling of interest method, the following principles apply:

• Capital reserve arises only on the date of the business combination
  The reserve is recognised at the time the transfer takes place. There is no concept of recognising capital reserve retrospectively for periods prior to the combination.
• Measurement is based on carrying amounts
  The net assets of the transferred entity are taken at book values, without any fair value adjustments. The difference between these net assets and the consideration paid is credited to capital reserve.
• No opening capital reserve
  Since the reserve arises only on the date of combination, it does not form part of opening equity balances in earlier periods.

In practice, difficulties arise when pooling is applied retrospectively for newly incorporated holding companies. In such cases, recognising capital reserve for periods during which the transferee entity did not exist leads to artificial equity movements and undermines the reliability of financial statements. This further reinforces the need to apply pooling of interest only when the assumption of historical continuity is valid. Where such continuity does not exist, applying the acquisition method avoids inappropriate recognition of capital reserve and results in more faithful financial reporting.

Consolidation Mechanics – Elimination of Equity and Balancing Entries

The most complex and error-prone area in business combinations—particularly under common control—is the mechanics of consolidation, specifically the elimination of subsidiary equity and the treatment of the balancing figure. Errors at this stage often lead to mismatched balance sheets or artificial reserves.

Under consolidation principles, the following mechanics apply:

• Line-by-line aggregation
  Assets and liabilities of the parent and subsidiaries are aggregated on a line-by-line basis at the consolidated level.
• Elimination of subsidiary equity
  The share capital and other equity of subsidiaries are eliminated against the parent’s investment. At the consolidated level, only the equity of the parent entity should remain.
• Balancing figure is unavoidable
  Eliminating subsidiary equity without recognising a corresponding balancing entry will result in a mismatch between assets and liabilities plus equity. The balancing figure represents either goodwill, capital reserve, or consideration payable, depending on the accounting method applied.

Under the pooling of interest method, the difference between the consideration paid and the carrying amount of net assets acquired is adjusted against capital reserve. Under the acquisition method, the difference is recognised as goodwill or capital reserve after fair value adjustments.

In practice, significant challenges arise where the parent entity is newly incorporated. Eliminating subsidiary equity retrospectively in such cases necessitates recognising artificial balancing entries, such as notional purchase consideration or dummy equity, which did not exist in reality. This highlights why consolidation mechanics cannot be divorced from the underlying assessment of common control. If the accounting method chosen does not align with the economic substance of the transaction, consolidation entries themselves will expose the inconsistency.

Pooling of Interest vs Acquisition Method – A Practical Comparison

The choice between the pooling of interest method and the acquisition method has a significant impact on how a restructuring is reflected in the financial statements. While both methods are prescribed under Ind AS 103 for different circumstances, their underlying assumptions and outcomes are fundamentally different.

The key differences may be summarised as follows:

• Underlying assumption
  Pooling of interest assumes that the combining entities have always been under common control, and therefore no new economic event has occurred. In contrast, the acquisition method treats the transaction as a change in control, recognising it as a new economic event.
• Measurement basis
  Under pooling, assets and liabilities are carried at existing book values, with no fair value adjustments. Under the acquisition method, assets and liabilities are measured at fair value on the acquisition date.
• Treatment of equity
  Pooling preserves historical reserves and results in capital reserve where consideration differs from net assets. The acquisition method eliminates pre-acquisition reserves of subsidiaries and recognises goodwill or capital reserve based on fair value differences.
• Comparative information
  Pooling generally results in retrospective restatement of comparatives, whereas the acquisition method applies prospectively from the date of acquisition.

From a practical perspective, the acquisition method often provides more reliable and understandable information where a new holding company is introduced or where the operating parent changes. Applying pooling in such cases may lead to artificial comparatives and equity structures that do not reflect economic reality. Therefore, the accounting method should be selected based on substance, not convenience.

Key Red Flags for Finance Leaders

Business restructurings under Ind AS often appear straightforward at a structural level but may conceal significant accounting risks if common control is assumed without adequate analysis. Finance leaders should be alert to certain warning signs that indicate the need for deeper scrutiny before applying the pooling of interest method.

Some key red flags include:

• New holding company with no historical existence
  If the transferee entity is newly incorporated, retrospective application of pooling may lead to artificial equity balances that did not exist in prior periods.
• Change in the operating parent entity
  Where the entity that previously exercised control and prepared consolidated financial statements exits the structure, continuity of control should not be presumed.
• Reliance solely on ownership continuity
  The fact that the ultimate investor remains the same does not automatically establish common control. Control must be assessed in substance under Ind AS 110.
• Artificial comparatives or “dummy” equity
  Restated comparatives that introduce notional share capital, reserves or capital reserve for periods before the parent existed are a strong indicator of inappropriate pooling.
• Complex consolidation adjustments with no economic basis
  The need for notional purchase consideration or balancing entries merely to make the balance sheet tally often signals that the chosen accounting method is inconsistent with the transaction’s substance.

Identifying these red flags early enables finance leaders to challenge assumptions, seek robust technical analysis, and ensure that financial statements faithfully represent economic reality rather than legal form.

Conclusion – Substance Over Form Must Prevail

Common control business combinations under Ind AS 103 require careful judgment and cannot be assessed merely by tracing ownership to a common investor. The determination hinges on who exercises control in substance, whether such control continues before and after the restructuring, and whether the assumption of historical continuity genuinely holds. Where a restructuring involves the exit of an existing operating parent and the introduction of a newly incorporated holding company, mechanical application of the pooling of interest method may result in artificial comparatives and equity structures. In such cases, applying the acquisition method with consolidation from the date of transfer may provide more reliable and decision-useful information. Ultimately, the objective of financial reporting should be to reflect economic reality rather than legal form.