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. It occurs when a firm takes part of its business and spins it off into a separate business entity (Clark-Meads 1996a). The IFRIC also commented that a reverse acquisition transaction in which the accounting acquiree is … Sec. In most business acquisitions, the purchase price includes the working capital of the business, which includes all outstanding accounts receivable and accounts payable of the business. The outcome of a reverse merger is that the privately-held entity merges into the publicly-held shell. But where should you start? The practice is contrary to the norm because the smaller company is taking over the larger company - thus, the merger is in "reverse… In a reverse acquisition, entity that issues securities (the legal acquirer) is the accounting acquiree if meets the definition of a business. How should these transactions be accounted for? 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. In a business combination, an entity that obtains control of another entity … This usually indicates that the operating company is the accounting acquirer. of reverse acquisition accounting is very similar to a pooling-type method. For this purpose, a distinction is made between the acquisition of the business and the acquisition of an asset/group of assets. The acquirer is required to apply business combination accounting. 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. 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 instruments and therefore the legal parent, in a reverse acquisition on 30 September 20X6. 12240.3 For example, assume a reverse acquisition between 2 public reporting companies occurs on July 15. 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. Services are delivered by the member firms. GTIL and the member firms are not a worldwide partnership. 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. 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. GTIL does not provide services to clients. 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. 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 transaction in which a company with substantial operations ('operating company') arranges to be acquired by a listed shell company should be analysed to determine if it is a business combination within the scope of IFRS 3. 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. 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. But when this is not clear, it will be necessary to apply judgement, taking account of all the relevant fact s and circumstances. 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] regarded as a business. Entity P has three subsidiaries, Entities X, Y and A. Reverse acquisitions sometimes occur when a private operating entity wants to become a public entity but does not want to register its equity shares. 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. "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. Transactions sometimes referred to as 'true mergers' or 'mergers of equals' are also business combinations as that term is used in this IFRS.”. A reverse acquisition occurs when there is a business combination in which the entity issuing securities is designated as the acquiree for accounting purposes. For full functionality of this site it is necessary to enable JavaScript. As a result, the executive will receive the $100,000 payment. 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. 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. © 2019. Sec. instructions how to enable JavaScript in your web browser 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. Demerger Description * * The full technique overview will be available soon. (b) determining the acquisition date; This can be the case for example in reverse mergers when the accounting acquirer is the legal acquiree. Reverse Acquisition An act where a private company purchases a publicly traded company and shifts its management into the latter. The private entity is eliminated and the shell company becomes the sole r whether or not the acquired company (ie the 'accounting acquiree' under IFRS 3) is a business. As such, it is the opposite of a merger or an acquisition. 1.1502-75(d)(3)(v)(b)), determining the group’s accounting period (Regs. In a reverse acquisition, the acquirer is the entity whose equity interests have been acquired and the issuing entity is the acquiree. 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. To accomplish that, the private entity will arrange for a public entity to acquire its equity interests in exchange for the equity interests of the public entity. (d) recognising and measuring goodwill or a gain from a bargain purchase So how can the TMT industry ride out the turbulence and thrive? If the listed company is the accounting acquiree, the next step is to determine whether it is a 'business' as defined in IFRS 3. All recognition and measurement principles in ASPE 1582, including the requirement to recognize goodwill, apply. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. © 2020 Grant Thornton International Ltd (GTIL) - All rights reserved. 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. A reverse acquisition is said to have occured when the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting purposes. IFRS 3 defines a business combination as “a transaction or other event in which an acquirer obtains control of one or more businesses. For instance, in a business combination, an entity recognizes goodwill; no goodwill is recognized for an asset acquisition. 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. Accounting consequences of the US tax reform, Financial statements on a non going concern basis. Whi le the IFRS Interpretations Committee in September 2011 noted that neither IFRSs nor the Conceptual Framework for Financial Reporting require that a 'reporting entity' be a legal entity. Review 'Reverse acquisition by a listed company [ 122 kb ]' for more analysis and examples. A closer look at the accounting for asset acquisitions Updated 10 September 2020 In certain situations, it is possible for a transaction to be a reverse asset acquisition , which would occur when the legal acquirer (not a business) is determined to be the acq uiree for accounting purposes. TMT outlook: Can tech spend buoyancy keep the industry airborne? But with businesses in other industries increasingly looking to new technologies as the path to transformation, this is also a time of opportunity. Separate financial statements for the legal parent, if required, would be prepared on a stand-alone basis. 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 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. Comparative information presented in those consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legal parent (accounting acquiree). 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. And there are many different reasons why companies pursue mergers and acquisitions (M&A), such as asset or technology acquisition.For example, a target company has a specific in-house warehouse operation that another company has been outsourcing for years. In the previous edition of Financial Reporting Matters, we discussed two of the specific issues in accounting for business combinations: - … A reverse acquisition occurs when there is a business combination in which the entity issuing securities is designated as the acquiree for accounting purposes. 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. • What is accounting pre and/or post combination? This TA alert does not discuss the requirements of IFRS 3 in detail. The legal acquirer has a July 31 year-end and the accounting acquirer has a December 31 year-end. Reverse acquisitions sometimes occur when a private operating entity wants to become a public entity but does not want to register its equity shares. Sign in with LinkedIn to save articles to your bookmarks. The management of the combined entity is drawn predominantly from the entity whose shares are acquired. 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. These examples accompany, but are not part of, IFRS 3. Reverse acquisition accounting applies the purchase method principles but requires the following step by step approach. 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 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. “But wait! A reverse takeover (RTO) is a process whereby private companies can become publicly-traded companies without going through an initial public offering (IPO). Even seemingly straightforward M&A transactions and non-controlling investments can introduce complex issues under ASC 805. An acquisition in which an operating company obtains effective control over a listed company that is not a business is not a business combination. 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 In practice, the reverse acquisition may be used as a means to secure a stock exchange listing through the “back door”. Sec. reverse merger accounting example, A demerger is the process of removing a business from the encumbrance of a conglomerate. Further analysis will be needed if the listed company undertakes other activities and holds other assets and liabilities. This example … Acquisition Method of Merger Accounting. 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. The Committee considered whether to provide guidance on how to account for reverse acquisition transactions in which the accounting acquiree is not a business. Accordingly,  IFRS 10 requires it to prepare consolidated financial statements. Compensation Arrangements – Example 3 1.1502-75(d)(3)(v)(b)), determining the group’s accounting period (Regs. (c) recognising and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; and 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. Social login not available on Microsoft Edge browser at this time. That adjustment is required to reflect the capital of the legal parent (the accounting acquiree). In our view, these consolidated financial statements should be prepared using reverse acquisition methodology, but without recognising goodwill. The postponed accounting of import VAT allows the reverse charge mechanism on import VAT amounts. differences exist between the accounting for business combinations and asset acquisitions. Merger and acquisition deals make the world go round and with time, deal values and complexities continue to increase. It is suggested that the two primary factors that may lead to the conclusion that the transaction involves a reverse acquisition are: Based on the limitation of IFRS 3 business combination  to circumstances when the acquiree is a business, it follows for reverse acquisitions, that the accounting acquiree must meet the definition of a business for the transaction to be accounted for as a reverse acquisition. 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