Common control transaction guidance: PwC

Highlights

While common control transactions are not new, we have seen an increase in activity spurred by current economic conditions and regulatory changes such as the Pillar Two rules.
Common control transactions can have many benefits to an organization, but they also require careful consideration to avoid tax and financial reporting issues that can become a significant organizational or future deal issue.
Assemble an experienced, cross-functional team to proactively address and balance business, tax and financial reporting considerations arising from these transactions.

Overview

A common control transaction is a transfer of assets or an exchange of equity interests among entities under the same parent’s control. Control can be established through a majority voting interest, variable interests and contractual arrangements. Entities that are consolidated by the same parent — or that would be consolidated, if consolidated financial statements were required to be prepared by the parent or controlling party — are considered under common control. Determining whether common control exists requires judgment and could have broad implications for financial reporting, deals, tax and asset and entity valuations. Addressing these issues can be challenging and require cross-functional coordination across business functions/management.

Examples of common control transactions

Common control transactions frequently occur in the context of reorganizations, spin-offs, or initial public offerings (IPOs) including certain umbrella partnership C corporation (Up-C) transactions. They are also commonly used in tax planning strategies or navigating new regulatory requirements. Some examples of common control transactions:

A reporting entity charters a newly formed entity to affect a transaction.
A UK-domiciled company transfers assets to a subsidiary domiciled in a different jurisdiction.
Two companies under common control combine to form an LLC.
Prior to a spin-off of a subsidiary by a parent entity, another wholly owned subsidiary transfers net assets to the “SpinCo.”
As part of a reorganization, a parent entity merges with and into a wholly owned subsidiary.

The basics

Common control transactions fall outside the scope of the guidance for business combinations (ASC 805) because there is no change in control over the assets held by the ultimate parent. These transactions are generally recorded at book value or historical cost of the ultimate parent entity. Exceptions to this general rule include the transfer of financial assets between entities under common control (ASC 860) or recurring transactions (intercompany sales/transfers of inventory). More information on these exceptions is available in our business combination guide.

A transaction that combines two or more commonly controlled entities that historically have not been presented together often results in a change in the reporting entity. In effect, the resulting financial statements of the receiving entity or transferee are considered to be those of a different reporting entity.

If a transaction results in a change in reporting entity, retrospective presentation of the entities on a combined basis is required (i.e., as if the entities had always been under common control of the ultimate parent). For further discussion of the guidance on a change in the reporting entity, please refer to our financial statement presentation guide.

Changes like these can create financial reporting challenges. For example, it may be challenging to determine the parent’s basis in assets transferred if the ultimate parent entity does not apply generally accepted accounting principles (GAAP) financial statements (e.g., in a private equity structure) or in cases where the parent’s basis is not pushed down to a subsidiary. Accounting and data challenges may also arise given the retrospective presentation requirement. The change in reporting entity guidance is judgmental. It can sometimes result in nonintuitive results — and has been an area of regulatory scrutiny.

Deals impact

The current business environment has prompted an increasing number of common control transactions. Many transactions are being done in contemplation of future deals including reorganizations, spin-offs and IPOs. Important considerations from a deal perspective include:

Planning
Tax impact
Asset and entity valuations

Planning

Capital structure, valuation and exit strategy should be carefully considered during the planning stage, which can include:

Developing a clear roadmap of the economic objectives driving the transaction to align goals internally and with advisors
Determining the appropriate commercial, legal, tax, financial reporting, valuation and regulatory skills needed to complete the transaction
Considering the post-acquisition financial reporting implications, including how the transaction should be communicated to stakeholders and the likely impacts on existing debt covenants or other agreements

Tax impact

Common control transactions are often an important component of an effective tax planning strategy. Organizations should consider:

Whether the transaction is taxable on a current or deferred basis to the controlled entities
Whether an operating loss carryforward or other tax attribute can be applied
The corresponding establishment of a deferred tax asset (if tax basis exceeds financial reporting basis) and valuation allowances thereon

In a common control transaction, the tax basis of net assets acquired in taxable transactions may result in temporary differences that impact the recognition of tax benefits.

As part of implementing and complying with Pillar Two, companies are reconsidering where they do business and exploring whether potential reorganizations may result in a more desirable Pillar Two outcome. Note that many aspects of Pillar Two were effective for tax years beginning in January 2024, with certain remaining impacts to be effective in 2025.

Asset and entity valuations

In considering both the financial statement and tax impacts of common control transactions, there are a variety of valuation considerations:

Many transactions require entities to be transferred at fair market value for tax purposes, which can be significantly different than the historical basis or net book value. This estimate of fair market value can be highly subjective and certain jurisdictions require third-party valuations to be prepared.
Impairment testing carries complexities for both the transferor and receiving entity, depending on the form of the transaction.
Accounting policy elections and alignment should be considered across various entities.

Operational impacts

Operational areas that may need to be considered as a result of common control transactions include:

Operational entanglements across assets, people and systems
Potential intercompany and commercial agreement modifications
Legal entity operationalization
Business process and system changes
Contract modifications
People, communications and change management

Key takeaway

Current market dynamics are likely to spur more common control transactions. Many of the issues we’ve highlighted can create business disruption. Careful planning and the involvement of stakeholders across disciplines (i.e., accounting, tax, legal, M&A, strategy) is important to help mitigate risks and avoid organizational disruption.

We would like to thank Brandon Campbell, Jon Moulden and Brian Geiger for contributing to this article.