IFRS 3IE Reverse acquisitions

Last Updated on 21/04/2021 by 75385885

IFRS 3 Business CombinationsIFRS 3IE Identifiable intangible assets

These examples accompany, but are not part of, IFRS 3.

IFRS 3IE Reverse acquisitions

IE1 This example illustrates the accounting 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. This example ignores the accounting for any income tax effects.

IE2 The statements of financial position of Entity A and Entity B immediately before the
business combination are:

Entity A

(legal parent,
accounting
acquiree)

CU1

Entity B

(legal subsidiary,
accounting
acquirer)

CU

Current assets 500
700
Non-current assets 1,300 3,000
TOTAL ASSETS 1,800 3,700
IFRS 3IE Reverse acquisitions IFRS 3IE Reverse acquisitions
Current liabilities 300 600
Non-current liabilities 400 1,100
TOTAL LIABILITIES 700 1,700
IFRS 3IE Reverse acquisitions IFRS 3IE Reverse acquisitions
Shareholders’ equity
– Retained earnings 800 1,400
– Issued equity

— 100 ordinary shares

— 60 ordinary shares

 

300

 

 

 

600

Total shareholders’ equity 1,100 2,000
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 1,800 3,700

IE3 This example also uses the following information:

  1. On 30 September 20X6 Entity A issues 2.5 shares in exchange for each ordinary share of Entity B. All of Entity B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues 150 ordinary shares in exchange for all 60 ordinary shares of Entity B.
  2. The fair value of each ordinary share of Entity B at 30 September 20X6 is CU40. The quoted market price of Entity A’s ordinary shares at that date is CU16.
  3. The fair values of Entity A’s identifiable assets and liabilities at 30 September 20X6 are the same as their carrying amounts, except that the fair value of Entity A’s non-current assets at 30 September 20X6 is CU1,500.

Calculating the fair value of the consideration transferred

IE4 As a result of Entity A (legal parent, accounting acquiree) issuing 150 ordinary shares, Entity B’s shareholders own 60 per cent of the issued shares of the combined entity (ie 150 of 250 issued shares). The remaining 40 per cent are owned by Entity A’s shareholders.

If the business combination had taken the form of Entity B issuing additional ordinary shares to Entity A’s shareholders in exchange for their ordinary shares in Entity A, Entity B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same.

Entity B’s shareholders would then own 60 of the 100 issued shares of Entity B—60 per cent of the combined entity. As a result, the fair value of the consideration effectively transferred by Entity B and the group’s interest in Entity A is CU1,600 (40 shares with a fair value per share of CU40).

IE5 The fair value of the consideration effectively transferred should be based on the most reliable measure. In this example, the quoted market price of Entity A’s shares in the principal (or most advantageous) market for the shares provides a more reliable basis for measuring the consideration effectively transferred than the estimated fair value of the shares in Entity B, and the consideration is measured using the market price of Entity A’s shares—100 shares with a fair value per share of CU16.

Measuring goodwill

IE6 Goodwill is measured as the excess of the fair value of the consideration effectively transferred (the group’s interest in Entity A) over the net amount of Entity A’s recognised identifiable assets and liabilities, as follows:

CU CU
Consideration effectively transferred 1,600
Net recognised values of Entity A’s identifiable assets and liabilities
– Current assets 500
– Non-current assets 1,500
– Current liabilities -300
– Non-current liabilities -400 -1,300
Goodwill 300

Consolidated statement of financial position at 30 September 20X6

IE7 The consolidated statement of financial position immediately after the business combination is:

CU
Current assets [CU700 + CU500] 1,200
Non-current assets [CU3,000 + CU1,500] 4,500
Goodwill 300
Total assets 6,000
Current liabilities [CU600 + CU300] 900
Non-current liabilities [CU1,100 + CU400] 1,500
– Total liabilities 2,400
Shareholders’ equity
Retained earnings 1,400
Issued equity
250 ordinary shares [CU600 + CU1,600]
2,200
– Total shareholders’ equity 3,600
Total liabilities and shareholders’ equity 6,000

IE8 The amount recognised as issued equity interests in the consolidated financial statements (CU2,200) is determined by adding the issued equity of the legal subsidiary immediately before the business combination (CU600) and the fair value of the consideration effectively transferred (CU1,600). However, the equity structure appearing in the consolidated financial statements (ie the number and type of equity interests issued) must reflect the equity structure of the legal parent, including the equity interests issued by the legal parent to effect the combination.

Earnings per share

IE9 Assume that Entity B’s earnings for the annual period ended 31 December 20X5 were CU600 and that the consolidated earnings for the annual period ended 31 December 20X6 were CU800. Assume also that there was no change in the number of ordinary shares issued by Entity B during the annual period ended 31 December 20X5 and during the period from 1 January 20X6 to the date of the reverse acquisition on 30 September 20X6. Earnings per share for the annual period ended 31 December 20X6 is calculated as follows:

Number of shares deemed to be outstanding for the period from 1 January 20X6 to the acquisition date (ie the number of ordinary shares issued by Entity A (legal parent, accounting acquiree) in the reverse acquisition) 150
Number of shares outstanding from the acquisition date to 31 December 20X6 250
Weighted average number of ordinary shares outstanding [(150 x 9/12) + (250 x 3/12)] 175
Earnings per share [800/175] IFRS 3IE Reverse acquisitions IFRS 3IE Reverse acquisitions CU4.57

IE10 Restated earnings per share for the annual period ended 31 December 20X5 is CU4.00 (calculated as the earnings of Entity B of 600 divided by the number of ordinary shares Entity A issued in the reverse acquisition (150)).

Non-controlling interest

IE11 Assume the same facts as above, except that only 56 of Entity B’s 60 ordinary shares are exchanged. Because Entity A issues 2.5 shares in exchange for each ordinary share of Entity B, Entity A issues only 140 (rather than 150) shares. As a result, Entity B’s shareholders own 58.3 per cent of the issued shares of the combined entity (140 of 240 issued shares).

The fair value of the consideration transferred for Entity A, the accounting acquiree, is calculated by assuming that the combination had been effected by Entity B issuing additional ordinary shares to the shareholders of Entity A in exchange for their ordinary shares in Entity A. That is because Entity A is the accounting acquirer, and paragraphs 37 and 38 B20 of IFRS 3 requires the acquirer to measure the consideration exchanged for the accounting acquiree.

IE12 In calculating the number of shares that Entity B would have had to issue, the non-controlling interest is excluded from the calculation. The majority shareholders own 56 shares of Entity B. For that to represent a 58.3 per cent equity interest, Entity B would have had to issue an additional 40 shares.

The majority shareholders would then own 56 of the 96 issued shares of Entity B and, therefore, 58.3 per cent of the combined entity. As a result, the fair value of the consideration transferred for Entity A, the accounting acquiree, is CU1,600 (ie 40 shares, each with a fair value of CU40).

That is the same amount as when all 60 of Entity B’s shareholders tender all 60 of its ordinary shares for exchange. The recognised amount of the group’s interest in Entity A, the accounting acquiree, does not change if some of Entity B’s shareholders do not participate in the exchange.

IE13 The non-controlling interest is represented by the four shares of the total 60 shares of Entity B that are not exchanged for shares of Entity A. Therefore, the non-controlling interest is 6.7 per cent. The non-controlling interest reflects the proportionate interest of the non-controlling shareholders in the pre-combination carrying amounts of the net assets of Entity B, the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a non-controlling interest of 6.7 per cent of the pre-combination carrying amounts of Entity B’s net assets (ie CU134 or 6.7 per cent of CU2,000).

IE14 The consolidated statement of financial position at 30 September 20X6, reflecting the non-controlling interest is as follows:

IFRS 3IE Reverse acquisitions IFRS 3IE Reverse acquisitions IFRS 3IE Reverse acquisitions CU
Current assets [CU700 + CU500] 1,200
Non-current assets [CU3,000 + CU1,500] 4,500
Goodwill 300
Total assets 6,000
IFRS 3IE Reverse acquisitions IFRS 3IE Reverse acquisitions IFRS 3IE Reverse acquisitions
Current liabilities [CU600 + CU300] 900
Non-current liabilities [CU1,100 + CU400] 1,500
– Total liabilities 2,400
IFRS 3IE Reverse acquisitions IFRS 3IE Reverse acquisitions IFRS 3IE Reverse acquisitions
Shareholders’ equity
Retained earnings [CU1,400 x 93.3 per cent] 1,306
Issued equity
240 ordinary shares [CU560 + CU1,600]
2,160
Non-controlling interest 134
– Total shareholders’ equity 3,600
Total liabilities and shareholders’ equity 6,000

IE15 The non-controlling interest of CU134 has two components. The first component is the reclassification of the non-controlling interest’s share of the accounting acquirer’s retained earnings immediately before the acquisition (CU1,400 × 6.7 per cent or CU93.80). The second component represents the reclassification of the non-controlling interest’s share of the accounting acquirer’s issued equity (CU600 × 6.7 per cent or CU40.20).

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Source EU rules on financial information disclosed by companies

 

Last Updated on 21/04/2021 by 75385885

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