IFRS 3 Definition of acquisition date: The date on which the acquirer obtains control of the acquiree. Accounting for the correct acquisition date is a crucial step in IFRS 3 Business Combinations. The recognition of income from a business acquired by the new owner should be the same as the derecognition of income from that business by the previous owner.
The second step in applying the acquisition method, subsequent to identifying the acquirer, is to determine the acquisition date. Simply put, the acquisition date is the date on which the acquirer obtains control of the acquiree. In general, the date on which the acquirer obtains control of the acquiree is the date on which the acquirer legally transfers the consideration, acquires the assets, and assumes the liabilities of the acquiree. In other words, this is generally considered the closing date of the transaction.
For example, if control is obtained by contract, the acquisition date would be the date the contract is executed or, if control is obtained by an investor as a result of an investee share buy-back, the acquisition date is the date the investor obtains a majority voting interest.
However, there may be certain instances whereby control is obtained either earlier or later than the closing date of the transaction. As a result, there may be situations when the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquiree before the actual closing date. Given the variability in business combination transactions across one entity to the next, entity should always consider all the relevant facts and circumstances when concluding on the acquisition date.
Obtaining control before the actual closing date
This is the not-normal situation, in most cases an acquirer will favour accounting for obtaining control in a business combination at an earlier date, so users of financial statements are focussed on the supposed fact of obtaining control before the actual closing date.
In the market it is assumed that the acquisition date can precede the closing date only if a written agreement is in place as of the designated date that provides for transfer of control of the acquired entity to the acquirer on that date.
The written agreement should provide the acquirer with the ability to make decisions about the operations and financing of the acquired entity without impediment. That is, the selling shareholders should not have continuing rights, as it relates to the operation of the target, other than protective rights or blocking actions. If the acquisition date occurs prior to the consummation date, a liability is recognized, at fair value, for the consideration to be transferred to the selling shareholders. That liability is accreted to the date that the consideration is transferred to an amount equal to the consideration transferred.
If the business combination requires regulatory or shareholder approval (or shareholder approval is sought) by either the acquirer or the acquiree, control transfers until such approval is obtained.
However, in the case of shareholder approval and after considering all the relevant facts, if management and the board of directors control sufficient votes to approve the transaction, and thus shareholder approval is considered perfunctory, a transfer of control might be deemed to occur prior to the date of shareholder approval and prior to the closing date, but only if a written agreement as described above exists.
Date of business combination
Business combination should be accounted for as of the acquisition date. Acquisition date is the date on which the acquirer takes control of the acquiree. Usually this date is specified in the agreement as date on which the acquirer transfers purchase consideration and takes over assets and liabilities. In some circumstances, assuming control may occur before or after the legal acquisition date. It is not always easy to define acquisition date. In many cases, all facts and circumstances concerning the transaction need to be analyzed.
Company A acquires 100% shares of company B. The parties agreed that one off consideration will be paid to previous owners of the company B via bank transfer on 20 April 2013. On that date the company obtains the right to appoint members of company B’s management board.
What is the acquisition date?
Since on 20 April Company A may control the financial and operating policy of Company B, control is assumed on 20 April 2013. This date should be applied as acquisition date for accounting purposes.
Company A acquires 100% of shares in company B. The parties agreed that one off consideration will be paid to previous owners of the company B via bank transfer on 20 April 2013. This date is defined by the agreement as acquisition date. However, as per the agreement, company A obtains the right to appoint the management board of company B on 1 May 2013.
What is the combination date?
Combination date is 1 May 2013, as on this day Company A takes control of financial and operating policy of Company B (it is assumed, that that before May 1, despite the former management being in place, A has no possibility of controlling the company’s policies). Consideration transfer date does not influence the acquisition date (unless it is specifically regulated in the agreement). Acquisition date defined in the agreement is not binding for accounting purposes. According to IFRS 3, the most important date is the date on which the acquirer obtains control and it may differ from the consideration transfer date.
Date of acquisition for the business combinations without consideration
In some business combinations acquisition date is not connected with the purchase of shares but with different transaction or event. In such cases the acquisition date is the date of obtaining control through such transactions or events.
Company A takes over company B. There are four shareholders of company B: company A, individual 1, individual 2, individual 3. Company A possesses 10% of shares in B. Other shareholders have 30% of voting rights each. Company A purchases shares from the individual shareholders in order to redeem them. As a result of redemption, company A obtains 65% of voting rights in company B.
Table below presents the structure of shareholders of company B before and after redemption of shares
What is the combination date of companies A and B?
Combination date is the date of sale of rights stemming from owned shares. Shareholders lose the rights stemming from shares upon sale of those shares. Therefore, the day shares are sold is the day company A assumes control over company B. From that moment it holds the majority of rights stemming from shares.
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