Huaneng Power International: Acquisition or the predecessor method? A decision on a business combination under common control

• Main Authors: TAN, Pearl, ZHANG, Tracey Chunqi, LIM, Chu-Yeong
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: Financial accounting; Financial Ratios; International Financial Reporting Standards; Regulatory compliance; Stock exchanges; Firm value; Accounting; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/cases_coll_all/483; https://cmp.smu.edu.sg/case/6066
• Institution: Singapore Management University

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.