The "Control Concept" and the "Economic Substance" in Business Combinations—A Theoretical and Empirical Evaluation of FASB/IASB Concepts for Business Combinations

This study analyses the consistency between the 'control concept' of accounting which is used to identify the acquirer in business combinations and the 'economic substance over form concept' as overriding principle in international accounting standards. The 'economic substance' of transactions is measured by using similar methods as takeover target prediction which has been very successful in prior studies; a set of firm characteristics, most of them financial ratios is compared to the control assessment in over 8'000 business combinations of the last decade. The results suggest a good consistency when the control assessment in business combinations is rather simple, since primarily determined by voting rights. If the control assessment is more complex, as in business combinations where equity instruments are exchanged, or especially in reverse acquisitions, then the relations of firm characteristics deviate from expectations and suggest that the control judgment is not entirely corresponding to the 'economic substance' as indicated by firm characteristics.