Huaneng Power International: Acquisition Or the Predecessor Method? A Decision on a Business Combination Under Common Control by Pearl Tan, Tracey Chunqi Zhang, Chu-Yeong Lim Discipline:Accounting procedures and policies

Description

Business combinations under common control (BCUCC) are common restructuring arrangements carried out within groups of companies. However, an accounting policy choice exists. In the absence of an International Financial Reporting Standard (IFRS) on BCUCC, the receiving entity that acquired control of entities from its ultimate parent typically applies either the acquisition method or the predecessor method (also known as ‘pooling of interests’ in US GAAP or the ‘book value’ method). Accounting for such arrangements in IFRS reporting is subject to the judgement of the reporting entity and is an accounting policy choice.

This case is noteworthy as Huaneng Power International Inc (HPI), one of Asia’s largest listed power producers, a company incorporated in the People’s Republic of China (PRC) and listed on the Shanghai Stock Exchange, the Hong Kong Stock Exchange, and the New York Stock Exchange, applied the acquisition method voluntarily in its IFRS reporting. For the PRC reporting, HPI used the predecessor method to account for the BCUCC according to the PRC GAAP requirements. This was an unusual accounting choice as most internationally-listed Chinese companies use the predecessor method for IFRS reporting, consistent with their reporting under PRC GAAP.

The case presents a rich level of detail on the motivations for the BCUCC set against the backdrop of the privatisation of the utility market in China. Through discussion of this case, students can analyse the strategic motivations of a BCUCC and evaluate its impact on and benefits for the transferring entities and the receiving entity. They can evaluate the acquisition and predecessor methods conceptually and opine which method provides more relevant information to the external investors of the receiving entity. They can also apply the acquisition and predecessor methods to determine the accounting impact of the BCUCC on the receiving entity’s consolidated financial statements.

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