Abstract

Mergers under common control are excluded from the scope of K-IFRS 1103 (Business Combinations), allowing firms to autonomously select accounting policies (acquisition method or book value method) based on K-IFRS 1008 (Accounting Policies, Changes in Accounting Estimates and Errors). This study empirically analyzes whether accounting choices in mergers under common control are strategic decisions reflecting management's economic incentives and contractual constraints. Using a sample of 626 mergers under common control by domestic listed companies from 2011 to 2023, we performed logistic regression analysis to examine factors influencing accounting choices, including earnings management incentives, financial constraints from debt covenants, and the intensity of monitoring by external stakeholders. The main findings are as follows: First, firms with higher levels of earnings management are significantly more likely to choose the acquisition method, suggesting that firms with a strong propensity for earnings management have greater incentives to increase assets or earnings (bargain purchase gains) through fair value measurement. Second, higher debt ratios are associated with a higher likelihood of choosing the acquisition method, consistent with the incentive to mitigate debt covenant constraints through the market valuation of net assets. Third, mergers with affiliates outside the consolidated entity show a higher likelihood of choosing the acquisition method compared to mergers with internal affiliates, indicating that fair value-based accounting may be preferred in environments with relatively stronger external stakeholder monitoring. This study contributes by empirically verifying that accounting choices in mergers under common control are part of management's strategic decision-making. Furthermore, the results provide policy implications suggesting the need for separate accounting standards for mergers under common control or enhanced disclosure requirements for applied accounting policies to limit management's discretion in accounting choices.

Keywords

• Mergers under common control
• Acquisition method
• Book value method
• Accounting choice

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