differences exist between the accounting for business combinations and asset acquisitions. The transaction or event should be analysed by applying the definition of a business combination, and the detailed guidance set out in paragraphs B5 to B12 of the Standard. But when this is not clear, it will be necessary to apply judgement, taking account of all the relevant fact s and circumstances. A reverse merger occurs when a privately-held business buys a publicly-held shell company . Although a reverse acquisition of a 'non-business' listed company is not a business combination, the listed company becomes a legal parent and continues to have filing obligations. In the previous edition of Financial Reporting Matters, we discussed two of the specific issues in accounting for business combinations: - … Deloitte Private is exclusively dedicated to serving private companies of all sizes including local entrepreneurs, small and medium-sized enterprises (SME), startups, family businesses, large private companies, private equity funds including portfolio companies, and individuals. Compensation Arrangements – Example 3 example, a “shell company” is generally limited in its use of certain communications (it cannot use free writing prospectuses), limited in its ability to rely on Rule 144, etc. In 2016, the company flexed its acquisition muscle yet again, merging with its rival SABMiller in a deal worth $104.3 billion, one of the biggest … A reverse acquisition is an acquisition that results in the legal subsidiary becoming the acquirer and the legal parent (issuer of shares) becoming the subsidiary for accounting purposes. The management of the combined entity is drawn predominantly from the entity whose shares are acquired. Entity P acquired 100% of Entity X for In our view, these consolidated financial statements should be prepared using reverse acquisition methodology, but without recognising goodwill. Consequently, a business that is a reporting entity, but not a legal entity, can be considered to be the acquirer in a reverse acquisition. Reverse acquisition accounting applies the purchase method principles but requires the following step by step approach. The guidance on identifying the acquirer (see IFRS 3:6, 3:7 and IFRS 3:B14 to B18) is relevant in a reverse acquisition transaction. The postponed accounting of import VAT allows the reverse charge mechanism on import VAT amounts. Answering this question involves determining: In these transactions, the pre-combination shareholders of the operating company typically obtain a majority (controlling) interest, with the pre-combination shareholders of the listed shell company retaining a minority (non-controlling) interest. acquisitions during this period, whether a direct acquisition or a reverse acquisition is expected to be accounted for using the guidelines provided by IFRS 3. Examples The following example illustrates the application of a pooling-of-interests type method. (b) determining the acquisition date; The question put to the Committee was whether IFRS 3 should apply, IFRS 2 should apply or wether neither IFRS 3 nor IFRS 2 apply and an accounting policy should be applied by analogy. But when this is not clear, it will be necessary to apply judgement, taking account of al l the relevant fac t s and circumstances. 1.1502-75(d)(3)(v)(b)), determining the group’s accounting period (Regs. Sign in with LinkedIn to save articles to your bookmarks. instructions how to enable JavaScript in your web browser, Reverse acquisition by a listed company [ 122 kb ], which company is the 'accounting acquirer' under IFRS 3, ie the company that obtains effective control over the other. Please see www.deloitte.com/about for a detailed description of DTTL and its member firms. whether or not the acquired company (ie the 'accounting acquiree' under IFRS 3) is a business. Also, the entity whose equity interests are acquired (the legal acquiree) must be the acquirer for accounting purposes for the transaction to be considered a reverse acquisition. Reverse charge on postponed import VAT and suspensive regimes. Reverse acquisition accounting applies the purchase method principles but requires the following step by step approach. In a reverse acquisition, the acquirer is the entity whose equity interests have been acquired and the issuing entity is the acquiree. In a reverse acquisition, entity that issues securities (the legal acquirer) is the accounting acquiree if meets the definition of a business. The IFRS Viewpoint gives you our views. IE1 This example illustrates the accounti ng for a reverse acquisition in which Entity B, the legal subsidiary, acquires Entity A, the entity issuing equity For example, HKAS 8 requires accounting policies to be applied consistently for similar transactions, HKAS 27 Consolidated and Separate Financial Statements addresses consolidation principles and ... for by applying a principle similar to that for a reverse acquisition. This example … In addition to determining whether a transaction or other event is a business combination (IFRS 3:3), four stages in the application of the acquisition method are listed: [IFRS 3:5] Reverse acquisitions sometimes occur when a private operating entity wants to become a public entity but does not want to register its equity shares. A reverse acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting.• The entity whose equity interests are acquired (the legal acquiree) must be the acquirer for accounting purposes for the transaction to be considered a reverse acquisition. . A step acquisition (also called piecemeal acquisition) in a business combination in which an investor obtains control over an investee through multiple transactions. When the entity was formed shortly before the combination, its separate financial statements should cover only its actual accounting period. It also normally involves renaming the publicly traded company. For example, if a reverse acquisition took place whereby a private company was acquired by a publicly traded entity, the private company would be the acquirer for accounting purposes and the public company would be the acquiree for accounting purposes. Private operating companies seeking a 'fast track' stock exchange listing sometimes arrange to be acquired by a smaller listed company (sometimes described as a 'shell' company). Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. 12240.3 For example, assume a reverse acquisition between 2 public reporting companies occurs on July 15. Accordingly, IFRS 10 requires it … Although some of the deemed acquisition cost might in substance relate to the cost of obtaining a listing, this amount is subsumed into goodwill. The importance of this topic in our environment is highlighted by the relatively increased frequency with which mergers and acquisitions have occurred in the last couple of years. It exchanges shares with 8i enterprises Acquisitions Corp, a publicly listed company. But with businesses in other industries increasingly looking to new technologies as the path to transformation, this is also a time of opportunity. The IFRIC observed that IFRS 3’s guidance on identifying the accounting acquirer and on reverse acquisitions would be applied by analogy based on the IAS 8 hierarchy. It occurs when a firm takes part of its business and spins it off into a separate business entity (Clark-Meads 1996a). Merger and acquisition deals make the world go round and with time, deal values and complexities continue to increase. Accounting for reverse acquisition (Part1) has been saved, Accounting for reverse acquisition (Part1) has been removed, An Article Titled Accounting for reverse acquisition (Part1) already exists in Saved items. The private entity is eliminated and the shell company becomes the sole r The guidelines ensure that we consider aspects of the transaction that include assessing if the acquirer obtains control of a business (which means there must be a triggering economic event or transaction) and the possible resulting structures. The reverse acquisition rules provide guidance on identifying the group that continues to exist for purposes of filing a consolidated return (Regs. As such, it is the opposite of a merger or an acquisition. In a business combination, an entity that obtains control of another entity … This arrangement usually takes place so that a privately-held company can be acquired by a smaller shell company that is publicly-held, resulting in a combined entity that is publicly-held. The legal acquirer has a July 31 year-end and the accounting acquirer has a December 31 year-end. 1.1502-75(d)(3)(i)), carrying over a loss (Regs. For example, a private entity arranges to have itself “acquired” by a smaller public entity as a means of obtaining a stock exchange listing. © 2020 Grant Thornton International Ltd (GTIL) - All rights reserved. For example: Determining whether the listed company is a business in these more complex situations typically requires judgement. reverse merger accounting example, A demerger is the process of removing a business from the encumbrance of a conglomerate. Those are my sales and my receivables,” we often hear. Uncertainty is mounting for technology, media and telecommunications (TMT) businesses amidst a turbulent economic and political backdrop, according to the latest research from Grant Thornton. Please enable JavaScript to view the site. of reverse acquisition accounting is very similar to a pooling-type method. •A merger into a public biotech company can be distinguished from a reverse merger into a shell company. Sec. IFRS 3 also expressly indicates its nonapplicability to the following transactions: The first stage in accounting for an acquisition is to determine whether a transaction or other event is a business combination, this requires that we assess the assets acquired and liabilities assumed if the transactions constitute a business. IFRS 3 defines a business as “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.” In most cases, it will be obvious whether an integrated set of activities and assets should be regarded as a business. By virtue of the FRC Act of 2010, almost all entities in Nigeria are expected to be reporting based on IFRS by the end of the year and any acquisitions during this period, whether a direct acquisition or a reverse acquisition is expected to be accounted for using the guidelines provided by IFRS 3. The importance of this topic in our environment is highlighted by the relatively increased frequency with which mergers and acquisitions have occurred in the last couple of years. Reverse acquisitions Illustrating the consequences of recognising a reverse acquisition by applying paragraphs B19–B27 of IFRS 3. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. (d) recognising and measuring goodwill or a gain from a bargain purchase These examples accompany, but are not part of, IFRS 3. Business combinations are to account for using the ‘Acquisition Method’ of accounting as specified in IFRS 3. Sec. • What is accounting pre and/or post combination? Please see, Telecommunications, Media & Entertainment, The acquisition of a group of assets that does not constitute a business; and, A combination between entities or businesses under common control, The former shareholders of the entity whose shares are acquired own the majority of shares, and control the majority of votes, in the combined entity; and. As a general rule, import VAT must be paid when the goods enter the European Union, but some countries allow simplifications deferring the payment of import VAT. Some examples include accounting and financial reporting for common control (or "put-together") transactions, assessing the necessity for push-down accounting and distinguishing between equity and cost method investments. Sec. reverse merger accounting example, A demerger is the process of removing a business from the encumbrance of a conglomerate. We also introduce draft international interpretations that will affect entities applying IAS 11 Construction Contracts in recognising revenue. IFRS 3 defines a business IFRS 3 defines a business combination as “a transaction or other event in which an acquirer obtains control of one or more businesses. The legal acquirer changed its year end to December 31 in conjunction with a reverse acquisition. In practice, the reverse acquisition may be used as a means to secure a stock exchange listing through the “back door”. As another example, in a business combination, transaction costs are expensed as incurred. For example, HKAS 8 requires accounting policies to be applied consistently for similar transactions, HKAS 27 Consolidated and Separate Financial Statements addresses consolidation principles and ... for by applying a principle similar to that for a reverse acquisition. A Reverse Takeover (RTO), often known as a reverse IPO, is the process in which a small private company goes public by acquiring a larger, already publicly listed company. What is a Reverse Merger? Consequently, it is appropriate to apply by analogy, in accordance with paragraphs 10–12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the guidance in paragraphs B19–B27 of IFRS 3 for reverse acquisitions. The outcome of a reverse merger is that the privately-held entity merges into the publicly-held shell. Accounting when the transaction is not a business combination. This can be the case for example in reverse mergers when the accounting acquirer is the legal acquiree. [IFRS 3:4]. Step 1: Determine the percentage holdings The percentages owned by the respective former shareholders of the combining entities in the new group must be calculated. Social login not available on Microsoft Edge browser at this time. Sec. Entities must carefully consider their unique circumstances and risk exposures and consider the impact the outbreak may have on their financial reporting. After a slow and tentative start, the OECD’s push for a solution on how to allocate and tax the profits from digital business is gathering momentum. GTIL does not provide services to clients. Subsequent to the reverse acquisition, the … Services are delivered by the member firms. "Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. This TA alert does not discuss the requirements of IFRS 3 in detail. Goodwill is then recognised to the extent the deemed acquisition cost exceeds the fair value of the listed company's identifiable assets and liabilities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. It occurs when a firm takes part of its business and spins it off into a separate business entity (Clark-Meads 1996a). Similarly, if a new company is created to effect an acquisition, the new company may need to be identified as the accounting acquirer. This allows private companies to become publicly traded while avoiding the regulatory and financial requirements associated with an IPO. An acquisition in which an operating company obtains effective control over a listed company that is not a business is not a business combination. Consolidated financial statements prepared following a reverse acquisition are issued under the name of the legal parent (accounting acquiree) but described in the notes as a continuation of the financial statements of the legal subsidiary (accounting acquirer), with one adjustment, which is to adjust retroactively the accounting acquirer's legal capital to reflect the legal capital of the accounting acquiree. 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