The Institute issued an Exposure Draft (ED) on 26 February 2026 proposing amendments to Accounting Guideline 5 (Revised) Merger Accounting for Common Control Combinations (AG 5) and is seeking comments by 27 May 2026.
Background
The Institute’s 2016 post-implementation review of AG 5 identified several accounting issues. While limited amendments to AG 5 were made in 2020, some issues remained outstanding (Outstanding Issues) pending the outcome of the International Accounting Standards Board (IASB)’s then project on Business Combinations under Common Control (BCUCC).
Following the IASB’s discontinuation of the BCUCC project in 2023, the Financial Reporting Standards Committee (FRSC) of the Institute resumed its efforts towards addressing the Outstanding Issues. Since then, the Institute undertook research and conducted outreach to reassess the significance and pervasiveness of these issues for local entities and to evaluate possible solutions. Based on the findings, the FRSC noted that certain issues remain pervasive and could be addressed by amending AG 5.
Key proposals
Scope of AG 5
Stakeholders commented that AG 5 lacks clarity on whether merger accounting applies to common control combinations that do not involve businesses. Although this issue has become less significant following the Amendments to HKFRS 3 Definition of a Business, the FRSC believes that AG 5 could be enhanced by clarifying that such combinations fall outside its scope. Accordingly, the ED proposes adding references in AG 5 to the definitions of “business” and “business combination” in HKFRS 3.
Controlling party and carrying values
AG 5.9 requires entities to measure assets, liabilities and equity of the combining entities or businesses using existing book values from the controlling parties’ perspective. However, AG 5 does not define the term “controlling party”. In a multi-layered group, this may create ambiguity as to which perspective (e.g. immediate, intermediate or ultimate parent level) should be used for measurement.
To address this, the ED proposes adding: (i) a reference to the concept of “controlling party” in HKFRS 3; (ii) a new paragraph emphasizing the use of judgement when making this determination; and (iii) a disclosure requirement requiring entities to specify the identity of the controlling party and the basis for that determination.
Measurement of shares issued as consideration
Practice varies in how shares issued as consideration are measured, especially when the combined entity is not publicly listed. While some stakeholders supported prescribing a single measurement approach, many considered that a “one size fits all” approach would not be appropriate for all common control combinations, and could result in unintended consequences or divergence from other HKFRS Accounting Standards. After considering the feedback, the FRSC decided not to prescribe a specific measurement approach. Instead, to improve transparency and help users understand the approaches adopted by entities, the ED proposes adding a disclosure requirement for entities to describe how share consideration is measured.
Restating comparatives
Stakeholders remain concerned about the requirement to restate comparatives under AG 5. Preparers noted that obtaining reliable historical information of acquired businesses can be costly and impractical. In addition, for post-IPO and private-entity common control combinations, the usefulness of restated comparative information may be limited, as users tend to focus on future performance.
To address these concerns, the ED introduces a practical expedient that permits entities not to restate comparatives. Under this expedient, entities would present the assets, liabilities, equity, income and expenses of the acquired businesses prospectively from the combination date. Entities applying the expedient must disclose that fact and apply the accounting policy consistently to similar transactions. The ED also adds examples to illustrate the application and effects.
The FRSC proposes applying these amendments prospectively to common control combinations with a combination date on or after 1 January 2028, with early adoption permitted.
Key impact
Common control combinations are prevalent in Hong Kong. The proposed amendments are expected to impact a wide range of entities engaged in such combinations, including listed and private entities, IPO applicants, as well as users of financial statements.
Overall, the proposals primarily clarify existing requirements and enhance disclosures using readily available information, without altering the underlying principles of AG 5. The major change is the introduction of the practical expedient that allows entities not to restate comparatives. This proposal is expected to reduce the reporting burden for private entities and those undertaking post-IPO common control combinations, where the costs of restatement often outweigh the benefits.
Act now – share your views
Entities that have entered into, or expect to enter into, common control combinations are encouraged to review the ED carefully and provide feedback. Stakeholder input will be important in helping the Institute assess whether the proposed amendments appropriately address local practice issues and strike the right balance between cost and usefulness. Submit your comments by the deadline.
This article was contributed by Kennis Lee and Shiro Lam, Associate Directors of the Institute’s Standard Setting Department.
