M and A

M and A or Mergers and Acquisitions

in IFRS language Business Combinations.

1 Identifying a business combination

IFRS 3 refers to a ‘business combination’ rather than more commonly used phrases such as takeover, acquisition or merger because the objective is to encompass all the transactions in which an acquirer obtains control over an acquiree no matter how the transaction is structured. A business combination is defined as a transaction or other event in which an acquirer (an investor entity) obtains control of one or more businesses.

An entity’s purchase of a controlling interest in another unrelated operating entity will usually be a business combination (see Simple case – Straightforward business combination below). However, a business combination (M and A) may be structured, and an entity may obtain control of that structure, in a variety of ways.

Examples of business combinations structurings

Examples of ways an entity may obtain control

A business becomes the subsidiary of an acquirer

The entity transfers cash, cash equivalents or other assets(including net assets that constitute a business)

Net assets of one or more businesses are legally merged with an acquirer

The entity incurs liabilities

One combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners

The entity issues shares

The entity transfers more than one type of consideration, or

Two or more entities transfer their net assets, or the owners of those entities transfer their equity interests to a newly created entity, which in exchange issues shares, or

The entity does not transfer consideration and obtains control for example by contract alone Some examples of this:

  • ‘dual listed companies’ or ‘stapled entity structures’
  • acquiree repurchases a sufficient number of its own shares for an existing shareholder to obtain control
  • a condition in the shareholder agreement that prevents the majority shareholder exercising control of the entity has expired, or
  • a call option over a controlling interest that becomes exercisable.

A group of former owners of one of the combining entities obtains control of the combined entity, i.e. former owners, as a group, retain control of the entity they previously owned.

Therefore, identifying a business combination transaction requires the determination of whether:

  • what is acquired constitutes a ‘business’ as defined in IFRS3, and
  • control has been obtained.

If an entity acquires an interest in a business entity but does not obtain control, it should apply IAS 28 ‘Investments in Associates and Joint Ventures’, IFRS 11 ‘Joint Arrangements’ or IFRS 9 ‘Financial Instruments’ (here is a summary for these three standards), depending on the nature of the relationship that the interest creates and the level of influence the entity can exert over the investee’s financial and operating policies.

Simple case – Straightforward business combination

Entity T is a clothing manufacturer and has traded for a number of years. Entity T is deemed to be a business.

On 1 January 2020, Entity A pays CU 2,000 to acquire 100% of the ordinary voting shares of Entity T. No other type of shares has been issued by Entity T. On the same day, the three main executive directors of Entity A take on the same roles in Entity T.

Analysis

Entity A obtains control on 1 January 2020 by acquiring 100% of the voting rights. As Entity T is a business, this is a business combination in accordance with IFRS 3.

Is the investee a “Business”

IFRS 3 requires the entity determine whether assets acquired and any liabilities assumed constitute a business. If the assets and liabilities are not considered to be a business, then the transaction should be accounted for as an asset acquisition.

A business is by IFRS 3 (amended Oct 2018) definition – ‘An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.

The changes narrow the definition by:

  • focusing on providing goods and services to customers
  • removing the emphasis from providing a return to shareholders
  • removing the reference to ‘lower costs or other economics benefits’.

The last change mentioned above reflects the fact that many asset acquisitions are made with the motive of lowering costs but may not involve acquiring a substantive process.

The table below explains the steps described in the amended Standard to determine if the acquired set of activities and assets is a business:

Step 1

Consider whether to apply the concentration test

Does the entity want to apply the concentration test?

Yes > Step 2

No > Step 4

Step 2

Consider what assets have been acquired

Has a single identifiable asset or a group of similar identifiable assets been acquired?

M and A M and A M and A M and A M and A M and A M and A M and A

Yes > Step 3

No > Step 4

Step 3

Consider how the fair value of gross assets acquired is concentrated

Is substantially all of the fair value of the gross assets acquired concentrated in a single identifiable asset or a group of similar identifiable assets?

Yes > Transaction is no business

No > Step 4

Step 4

Consider whether the acquired set of activities and assets has outputs

Does the acquired set of activities and assets have outputs?

M and A M and A M and A M and A M and A M and A M and A M and A M and A M and A

Go to Step 5

Step 5

Consider if the acquired process is substantive

  • If there are no outputs when is the acquired process considered substantive?

  • If there are outputs when is the acquired process considered substantive?

Yes > Transaction is a business

What is the optional concentration test?

The amendments introduce an optional test (‘the concentration test’) that allows the acquirer to carry out a simple assessment to determine whether the acquired set of activities and assets is not a business. The entity can choose whether or not to apply the concentration test for each transaction it makes.

If the test is successful, then the acquired set of activities and assets is not a business and no further assessment is required. If the test is not met or the entity does not carry out the test, then the entity needs to assess whether or not the acquired set of assets and activities meets the definition of a business in the normal way.

The test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The meaning of gross assets is defined (there are some assets specifically excluded) and the Standard also explains how to calculate the fair value.

Liabilities are not taken into account because nearly all businesses have liabilities, but they do not need to in order to be a business. Similarly, an acquired set of activities and assets that is not a business may have liabilities. The amendments also provide guidance on what a single identifiable asset or a group of similar identifiable assets would be.

M and A

Calculation of the concentration test

The Standard explains that the concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. Here are the different parts of this test:

Is a single identifiable asset or a group of similar identifiable assets acquired?

The different types of identifiable assets acquired are described in the following table:

Type of identifiable asset

Examples

Single identifiable asset

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Includes any asset or group of assets that would be recognised and measured as a single identifiable asset in a business combination.

Includes assets that are attached or cannot be removed from other assets without incurring significant cost or loss of value of either asset.

  • land and buildings
  • customer lists
  • trademarks
  • outsourcing contracts
  • product rights
  • equipment

Group of similar identifiable assets

Assets are grouped when they have a similar nature and have similar risks associated with managing and creating outputs from the assets.

Examples of combinations not considered to be similar assets:

  • tangible assets and intangible assets
  • tangible assets that are recognised under different Standards (eg IAS 2 ‘Inventories’ and IAS 16 ‘Property, Plant and Equipment’)
  • different classes of assets under IAS 16 (unless considered a single identifiable asset)
  • financial assets and non-financial assets
  • different classes of financial assets under IFRS 9 ’Financial Instruments’
  • assets within the same class but which have significantly different risk characteristics.

How is the fair value of gross assets acquired calculated?

M and A

Below a case (Establishing the fair value of the gross assets acquired) for calculations using these methods is provided.

Gross assets exclude cash and cash equivalents, deferred tax assets and goodwill resulting from the effects of deferred tax liabilities.

If the concentration test fails, or the entity opts not to apply the concentration test, then the entity needs to consider the minimum requirements to meet the definition of a business and if the acquired process is substantive. This is explained further in the following paragraphs.

What are the minimum requirements to meet the definition of a business?

The amendments acknowledge that despite most businesses having outputs, outputs are not necessary for an integrated set of assets and activities to qualify as a business. In order to meet the definition of a business, the acquired set of activities and assets must have inputs and substantive processes that can collectively significantly contribute to the creation of outputs.

The three elements of a business

Explanation

Examples

Inputs

An economic resource that creates outputs or can contribute to the creation of outputs when processes are applied to it.

  • tangible fixed assets
  • right-of-use assets
  • intangible assets
  • intellectual property

Processes

A system, standard, protocol, convention or rule that when applied to an input, creates outputs or can contribute to the creation of outputs.

  • strategic management processes
  • operational processes
  • resource management processes

Outputs

The result of inputs and processes applied to those inputs that provide goods or services to customers, generate investment income (such as dividends or interest) or generate other income from ordinary activities.

  • revenue

Is the acquired process substantive?

The Standard requires entities to assess whether the acquired process is substantive. Guidance and illustrative examples have been added to assist entities in making this assessment. The Standard has a different analysis depending on whether the acquired set of activities and assets has outputs or not.

An example of an acquired set of activities and assets that does not have outputs is a new entity that has not yet generated revenue. If the acquired set of activities and assets is generating revenue at the acquisition date it is considered to have outputs.

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For activities and assets that do not have outputs at the acquisition date, the acquired process is substantive only if:

  • it is critical to being able to develop or convert an acquired input into outputs, and
  • the inputs acquired include both:
    • an organised workforce that has the skills, knowledge or experience to perform the process
    • other inputs that the organised workforce could develop or convert into outputs (eg. technology, in-process research and development projects, real estate and mineral interests).

For activities and assets that have outputs at the acquisition date, the acquired process is substantive if, when applied to an acquired input or inputs:

  • it is critical to being able to continue to produce outputs, and the acquired inputs include an organised workforce with the necessary skills, knowledge or experience to perform the process, or
  • it significantly contributes to being able to continue producing outputs and is deemed to be unique or scarce or it cannot be replaced without significant cost, effort or delay in producing outputs.

Does the acquired set of activities and assets have outputs at the acquisition date?

Yes

No

The acquired process is considered substantive if:

It is critical to the ability to continue producing outputs, and the inputs acquired include an organised workforce with the necessary skills, knowledge, or experience to perform that process

OR

It significantly contributes to the ability to continue producing outputs and is considered unique or scarce or cannot be replaced without significant cost, effort, or delay in the ability to continue producing outputs.

The acquired process is considered substantive only if:

It is critical to the ability to develop or convert an acquired input or inputs into outputs

AND

The inputs acquired include BOTH an organised workforce that has the necessary skills, knowledge, or experience to perform that process (or group of processes) AND other inputs that the organised workforce could develop or convert into outputs.

Worked examples

Case – Acquisition of a radio station

An entity (Entity S) sells its radio broadcasting assets to another entity (Entity R). The acquired set of activities and assets sold comprise the broadcasting licence, the broadcasting equipment and a broadcasting studio.

At the acquisition date, the fair value for each of the assets sold is considered similar. No processes needed to broadcast the radio shows are sold, and there are no employees or other assets, activities or processes included. Entity S has stopped using the acquired set of activities and assets before the date they are sold to Entity R.

Analysis

Entity R decides to apply the optional concentration test and determines that:

  • the broadcasting equipment and the studio are not a single identifiable asset because the equipment is not attached to the studio and can be separated without being costly or causing a loss of use or fair value of either asset.
  • the licence is an intangible asset, and the broadcasting equipment and studio are both tangible assets belonging in different classes. As a result, the assets are not considered similar to each other.
  • there is a similar fair value for each of the single identifiable assets. Thus, the fair value of the gross assets acquired is not substantially all concentrated in a single identifiable asset or group of similar identifiable assets.

Therefore, the concentration test is failed. Entity R therefore assesses whether the acquired set of activities and assets meets the minimum requirements to be considered a business.

The acquired set of activities and assets does not have outputs, because Entity S has stopped broadcasting. Thus, Entity R applies the relevant criteria in IFRS 3 to determine whether the process is substantive. As the set does not include an organised workforce, the relevant criteria have not been met.

Therefore, Entity R concludes that the acquired set of activities and assets is not a business.

Case – Acquisition of a research entity

An entity (Entity A) purchases another legal entity (Entity SolarCell). Entity SolarCell carries out research and development activities on several solar projects that it is involved in and are currently in progress.

It has scientists who possess the skills knowledge and experience needed to perform these activities. It also has tangible assets which include lab equipment and a factory and laboratory to perform such activities. Currently the product is not ready to be marketed and no sales have been made. All of the assets acquired are deemed to individually have a similar fair value.

Analysis

Entity A elects to apply the concentration test and concludes that the fair value of the gross assets acquired is not substantially all concentrated in a single identifiable asset or group of similar identifiable assets.

Therefore, Entity A assesses whether the set meets the minimum requirements to be considered a business.

Entity A determines that no processes have been documented for Entity SolarCell. However, the organised workforce that has been purchased has proprietary knowledge of the ongoing projects.

Therefore, Entity A believes that the workforce provides intellectual capacity which provides the processes needed that can be used as inputs to create outputs.

Entity A then determines whether the acquired processes are substantive. There are no outputs derived from the acquired set of activities and assets.

So Entity A applies the relevant criteria in IFRS 3 and concludes that the processes are substantive because:

  • the processes purchased are essential to be able to develop or convert the acquired inputs into outputs; and
  • the acquired inputs include:
    • an organised workforce that has the necessary skills, knowledge, or experience to perform the necessary duties associated with the processes acquired; and
    • other inputs that the organised workforce could develop or convert into outputs. Those inputs include the research and development projects that are in progress.

Finally, Entity A determines that the substantive processes and inputs it has acquired significantly contribute to the ability to create outputs.

Therefore, Entity A concludes that the acquired set of activities and assets is a business.

Case – Acquisition of a drug development entity

An entity (Entity D) acquires a legal entity that has:

  • the rights to a research and development project that is in progress of its final testing phase to develop a drug to treat pneumonia (Project X). Project X includes the underlying knowledge, formula procedures, designs and protocols expected to be needed to complete this phase.
  • a contract that provides the outsourcing of clinical trials. The contract does not state which vendor, should be used, there are several vendors that could provide these services, and the contract uses current market prices. Therefore, the contract has a zero-fair value. There is no option for Entity D to renew the contract.

Entity D has not acquired any employees, other assets, other processes or other activities.

Analysis

Entity D elects to apply the optional concentration test and determines that:

  • Project X is a single identifiable asset because it would be recognised and measured as a single identifiable intangible asset in a business combination.
  • Because the acquired contract has a zero-fair value, substantially all of the fair value of the gross assets acquired is concentrated in Project X.

As a result, Entity D concludes that the acquired set of activities and assets is not a business.

Case – Purchase of a brand

An entity (Entity B) purchases from another entity (Entity S) the worldwide rights to Product 123, including all related intellectual property. In addition, Entity B also purchases all the existing customer contracts and customer relationships, inventories of finished goods, customer incentive programmes, raw material supply contracts, specialised equipment specific to manufacturing Product 123 and documented manufacturing processes and protocols to produce Product 123.

Entity B does not acquire any employees, other assets, other processes or other activities. None of the identifiable assets purchased has a fair value that comprises substantially all of the fair value of the gross assets acquired.

Analysis

As the fair value of the gross assets acquired is not substantially all concentrated in a single identifiable asset or group of similar identifiable assets, the optional concentration test would not be met. As a result, Entity B assesses whether the acquired set of activities and assets meets the minimum requirements to be considered a business.

Entity B considers whether the acquired process is substantive. The acquired set of activities and assets has outputs, and so Entity B considers the relevant criteria in IFRS 3.

The acquired set of activities and assets does not include an organised workforce, however Entity B concludes that the manufacturing processes acquired significantly contribute to the ability to continue producing outputs and are unique to Product 123.

Therefore, Entity B concludes that the acquired processes are substantive.

In addition, Entity B determines the substantive processes and inputs together significantly contribute to the ability to create outputs. As a result, Entity B concludes that the acquired set of activities and assets is a business.

Case – Establishing the fair value of the gross assets acquired

An entity (Entity P) holds a 30% interest in another entity (Entity C). At a subsequent date (the acquisition date), Entity P acquires a further 45% interest in Entity C and obtains control of it. Entity C’s assets and liabilities on the acquisition date are the following:

  1. a building with a fair value of CU600
  2. an identifiable intangible asset with a fair value of CU350
  3. cash and cash equivalents with a fair value of CU150
  4. deferred tax assets of CU200
  5. financial liabilities with a fair value of CU750
  6. deferred tax liabilities of CU200 arising from temporary differences associated with the building and the intangible asset.

Entity P pays CU225 for the additional 45% interest in Entity C. Entity P determines that at the acquisition date the fair value of Entity C is CU500, that the fair value of the non-controlling interest in Entity C is CU125 (25% x CU500) and that the fair value of the previously held interest is CU150 (30% x CU500).

Analysis

When performing the optional concentration test, Entity P needs to determine the fair value of the gross assets acquired.

Using the following calculation, Entity P determines that the fair value of the gross assets acquired is CU1,000, calculated as follows:

  • the total (CU1,250) obtained by adding:
    • the consideration paid (CU225), plus the fair value of the non-controlling interest (CU125) plus the fair value of the previously held interest (CU150); to
    • the fair value of the liabilities assumed (other than deferred tax liabilities) (CU750); less
  • the cash and cash equivalents acquired (CU150); less
  • deferred tax assets acquired (CU100) (in practice, it would be necessary to determine the amount
  • of deferred tax assets to be excluded only if including the deferred tax assets could lead to the concentration test not being met).

Alternatively, the fair value of the gross assets acquired (CU1,000) is also determined by:

  • the fair value of the building (CU600); plus
  • the fair value of the identifiable intangible asset (CU350); plus
  • the excess (CU50) of:
    • the sum (CU500) of the consideration transferred (CU225), plus the fair value of the non-controlling interest (CU125), plus the fair value of the previously held interest (CU150); over
    • the fair value of the net identifiable assets acquired (CU450 = CU600 + CU350 + CU150 + CU100 – CU750).

The excess referred to above is determined in a manner similar to the initial measurement of goodwill as stated in the Standard. Including this amount in determining the fair value of the gross assets acquired means that the concentration test is based on an amount that is affected by the value of any substantive processes acquired.

The fair value of the gross assets acquired is determined after making the following exclusions for items that are independent of whether any substantive process was acquired:

  • the fair value of the gross assets acquired does not include the fair value of the cash and cash equivalents acquired (CU150) and does not include deferred tax assets (CU100) and
  • the deferred tax liability is not deducted in determining the fair value of the net assets acquired (CU450) and does not need to be determined. As a result, the excess (CU50) calculated above does not include goodwill resulting from the effects of deferred tax liabilities.
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2. Identifying the acquirer

The acquisition method set out in IFRS 3 is applied from the point of view of the acquirer – the entity that obtains control over an acquiree which meets the definition of a business. An acquirer must therefore be identified whenever there is a business combination. This article explains how to identify the acquirer.

A critical point to note is the acquirer for IFRS 3 purposes (the accounting acquirer) may not always be the legal acquirer (the entity that becomes the legal parent, typically through ownership of majority voting power in the other combining entity).

What is IFRS 3’s approach to identifying the acquirer?

IFRS 3 initially directs an entity to IFRS 10 ‘Consolidated Financial Statements’ to identify the acquirer, and to consider which entity controls the other (ie the acquiree).

In most Business Combinations/M and A identifying the acquirer is straightforward and is consistent with the transfer of legal ownership. However, the identification can be more complex for Business Combinations/M and A when:

  • businesses are brought together by contract alone such that neither entity has legal ownership of the other
  • a combination is affected by legal merger of two or more entities or through acquisition by a newly created parent entity
  • there is no consideration transferred (combination by contract), or
  • a smaller entity arranges to be acquired by a larger one.

In these more complex situations, IFRS 3 takes an in-substance approach to identifying the acquirer rather than relying solely on the legal form of the transaction. This in-substance approach looks beyond the rights of the combining entities themselves. It also considers the relative rights of the combining entities’ owners before and after the transaction. Combinations where the acquirer of a business is the acquiree rather than the acquirer are reverse acquisitions and IFRS 3 provides specific guidance on how to account for these (see link).

This means if, when applying the control guidance in IFRS 10, it is not clear which of the entities being combined is the acquirer, entities should revert back to IFRS 3 which provides the following additional indicators to consider:

Considerations

Who is actually the acquirer?

Combination effected primarily by transferring cash, other assets or incurring liabilities

The entity that transfers cash or other assets or incurs the liabilities.

Combination effected primarily by exchanging equity interests

The entity that issues the equity interests. However, see more considerations in the table in the section Business combination effected by exchanging equity interests below.

Relative size or more than two entities involved

The entity whose size is significantly greater than that of the other combining entity or entities.

A new entity is formed to effect a business combination

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If the new entity is formed to issue equity interests, one of the existing combining entities is usually the acquirer. See more considerations in the table in the section Examples involving the creation of a new entity below.

If the new entity transfers cash or other assets or incurs liabilities, the new entity may be the acquirer.

Business Combinations/M and A involving the creation of a new entity

In practice, one of the most common situations where the process of identifying the acquirer requires a more in-depth analysis is when a new entity is formed to bring about a business combination. This can be done in many ways and sometimes can result in a ‘reverse acquisition’ which is explained in the link. Below are situations of when a new entity might be formed to bring about a business combination:

In-depth analysis when a new entity is formed to bring about a business combination

New parent pays cash to bring about a business combination (Case 1)

New entity is created to acquire a business by issuing shares (Case 2)

New entity is created by the existing shareholders to hold their subsidiaries – in this situation there is no acquirer as it is a business combination under common control.

Case 1 – New parent pays cash to bring about a business combination

New unrelated investors are wishing to take control of Entity X, and it uses a newly formed entity (NewCo) to effect this transaction. The new investors have invested cash in NewCo in exchange for shares in NewCo. NewCo then acquires all the shares in Entity X using the cash it has obtained from its new shareholders.

M and A

Analysis

In this situation, Newco uses the cash it has obtained from its new shareholders to effect the acquisition of Entity X.

Although NewCo is a newly formed entity, NewCo is identified as the acquirer not only because it paid cash but also because with the help of new investors, NewCo has been able to obtain control of Entity X from its previous shareholders. NewCo is effectively considered an extension of the new investors, which ultimately used NewCo to gain control over Entity X.

This analysis would be similar when evaluating special purpose acquisition companies (SPACs) which are new companies created by investors (including managers or experienced business executives) with the objective to raise significant funds through an IPO to effect an acquisition of a target in a specific sector and/or area.

Case 2 – New entity is created to acquire a business by issuing shares

Entity S, a company with its own retail division, plans to expand its operations by acquiring another retailer, Entity T. Entity T’s retail operations are smaller and less valuable than Entity S. To effect the acquisition, S and T Shareholders (who which are unrelated), agree to form a new entity, Entity R, and to transfer their shares in each respective entity to Entity R in exchange for Entity R shares.

After the transfer, Entity R owns 100 % of Entity S and Entity T equity interests. The former shareholders of Entity S collectively hold the majority of the equity shares of Entity R. In addition, former S Shareholders, as a group, have the right to appoint four of the six directors of Entity R. The remaining two directors are appointed by former T Shareholders, as a group. Entity R will prepare its own IFRS consolidated financial statements.

M and A

Analysis

Based on the legal form of the transactions, it appears that Entity R acquired two retail businesses (the retail company Entity S and the smaller retailer Entity T) in exchange for its own shares.

However, when a new entity is formed to issue shares to effect a business combination between two businesses, IFRS 3 requires that one of the businesses being combined be identified as the acquirer. The identification of the acquirer in this situation requires management to determine which of the former shareholders of each entity being combined, as a group, has retained control of its entity.

In this case, Entity S is deemed to be the acquirer because it is the entity whose former shareholders collectively retain or receive the largest portion of the voting rights in the new combined entity, and they are able to appoint four out of six directors of Entity R.

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Business combination effected by exchanging equity interests

When considering a combination effected primarily by exchanging equity interests, other factors and circumstances shall also be considered such as:

Considerations

Who is actually the acquirer?

Relative voting rights in the combined entity

The entity whose owners as a group retain or receive the largest portion of the voting rights in the combined entity (see Example 3 below).

Existence of a single large minority interest in the combined entity

The entity whose single owner or organised group of owners holds the largest minority voting interest in the combined entity, if no other owner or organised group of owners has a significant voting interest.

Composition of the governing body of the combined entity

The entity whose owners have the ability to elect or appoint or remove a majority of the members of the governing body of the combined entity.

Senior management of the combined entity

The entity whose (former) management dominates the combined management.

Terms of the exchange of equity interest

The entity that pays a premium over the pre-combination fair value of the equity interest of the other combining entity or entities.

It is important to note there is only ever one acquirer in a business combination. In those that involve more than two entities, it is important to consider which entity initiated the combination and the relative size of the combining entities.

Case 3 – Merger of four companies and their relative voting rights

Four companies decide to group their businesses and to do so, they decided to merge together and form NewCo. This is to create economies of scale. Each company has agreed to contribute their business to NewCo in exchange for shares in NewCo. The characteristics of the four companies are as follows:

  • all 4 companies run independent cafés all in the same region
  • Company A runs 3 café’s and Company’s B, C and D have one each
  • Company A is given 40% of the voting rights, and B, C and D are given 20% each, and
  • there are no other factors to indicate who the acquirer is.

In this situation, Company A is the acquirer. Usually, the entity whose owners obtain the largest portion of the capital of the combined entity generally also has the ability to elect the majority of the members to the governing body.

3. How does IFRS 3 define the acquisition date?

IFRS 3 defines the acquisition date as the date the acquirer obtains control of the acquiree. In a combination effected by a sale and purchase agreement, this is generally the specified closing or completion date (the date when the consideration is transferred and acquiree shares or underlying net assets are acquired).

The acquisition date is critical because it determines when the acquirer recognises and measures the consideration transferred, the assets acquired, and liabilities assumed.

The acquiree’s results are consolidated from this date. The acquisition date materially impacts the overall acquisition accounting, including post-combination earnings.

The acquisition date is often readily apparent from the structure of the business combination and the terms of the sale and purchase agreement (if applicable) but this is not always the case. Complications can arise because of the many ways, both contractual and non-contractual, that Business Combinations/M and A can be put together.

The period between the start of negotiations and final settlement of all aspects of a combination can be protracted. Applicable corporate laws, shareholder approval requirements, competition rules and stock market regulations also vary and may affect the analysis and the date at which control is transferred to the acquirer.

Because no two business combination transactions are identical, there are few (if any) ‘rules of thumb’ to assist in identifying the acquisition date. Instead, the definition of control should be applied to the specific facts and circumstances of each situation. Judgement will often be required, and disclosure of the assessment made will need to be fully disclosed under the requirements of IAS 1 ‘Presentation of Financial Statements’ (IAS 1.122).

The following are some examples of situations which require analysis and their relevant considerations when determining the date of when an acquisition of a business has taken place:

The purchase agreement specifies that control is transferred on an effective date different from the closing date

Consider whether the provisional effective date actually changes the acquisition date. In practice, many of these types of provisions are simply mechanisms to adjust the price but may not affect the date when control is obtained.

An agreement that artificially backdates the date of acquisition cannot justify the acquisition date (from an accounting perspective) being the earlier date. In other words, it cannot be subsequently decided that control took place at a date when the acquirer and the acquiree were unlikely having any relationship.

Control cannot be decided afterwards on the basis of a contractual term that artificially places the acquisition date before the terms of the contract provided the acquirer with the benefits associated of returns from that date.

The purchase is complete subject to shareholder approval

Consider the date when the acquirer can effect change in the board of directors of the acquiree.

Until the approval is obtained it would be difficult to consider that control has been transferred.

The purchase is complete subject to regulatory approval

Consider whether the date of regulatory approval is merely a formality.

For example, a target company operates in a market and jurisdiction where the acquirer is already a significant competitor.

Where this transaction requires the approval of the competition authority in that jurisdiction, it would be difficult to conclude this regulatory approval is just a formality. Therefore, until the approval is obtained, control cannot have been transferred to the acquirer.

No closing date specified

Consider, for example, when an investee repurchases own shares held by other investors resulting in an existing shareholder becoming a majority shareholder. In this case, the starting point is to identify the date when the shareholder’s proportionate voting rights amounted to a controlling interest.

Made by public offer

Consider the date a public offer becomes unconditional (with a controlling interest acquired).

The purchase is complete subject to other conditions

Consider the date when the acquirer starts directing the acquiree’s operating and financing policies.

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