© 2020 Grant Thornton International Ltd (GTIL) - All rights reserved. Our advice is to build a wider ‘digital risk’ function which integrates data privacy and cyber security. All recognition and measurement principles in ASPE 1582, including the requirement to recognize goodwill, apply. For this purpose, a distinction is made between the acquisition of the business and the acquisition of an asset/group of assets. This series of insights will help you prepare. Sec. 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. IFRS 3 Business combinations prescribes accounting and disclosure requirements for the acquiring entity in a business combination scenario. In our view, the listed company is not a business if its activities are limited to managing cash balances and filing obligations. Review 'Reverse acquisition by a listed company [ 122 kb ]' for more analysis and examples. Consequently, a business that is a reporting entity, but not a legal entity, can be considered to be the acquirer in a reverse acquisition. 12240.3 For example, assume a reverse acquisition between 2 public reporting companies occurs on July 15. For full functionality of this site it is necessary to enable JavaScript. GTIL and the member firms are not a worldwide partnership. Sec. 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. A step acquisition (also called piecemeal acquisition) in a business combination in which an investor obtains control over an investee through multiple transactions. Sec. Examples The following example illustrates the application of a pooling-of-interests type method. . 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. It occurs when a firm takes part of its business and spins it off into a separate business entity (Clark-Meads 1996a). 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. These examples accompany, but are not part of, IFRS 3. GTIL does not provide services to clients. A reverse takeover (RTO) is a process whereby private companies can become publicly-traded companies without going through an initial public offering (IPO). "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. Reverse acquisitions sometimes occur when a private operating entity wants to become a public entity but does not want to register its equity shares. IFRS 3 Business combinations prescribes accounting and disclosure requirements for the acquiring entity in a business combination scenario. In the previous edition of Financial Reporting Matters, we discussed two of the specific issues in accounting for business combinations: - … Sign in with LinkedIn to save articles to your bookmarks. Accounting for reverse acquisitions have always constituted an interesting topic for accountants both in theory and in practice. Although some of the deemed acquisition cost might in substance relate to the cost of obtaining a listing, this amount is subsumed into goodwill. Even seemingly straightforward M&A transactions and non-controlling investments can introduce complex issues under ASC 805. 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. The Deloitte Center for Corporate Governance offers a number of resources for executives, directors, and others who are active in governance. Accordingly, IFRS 10 requires it to prepare consolidated financial statements. TMT outlook: Can tech spend buoyancy keep the industry airborne? 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. Compensation Arrangements – Example 3 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. 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) identifying the acquirer; When the entity was formed shortly before the combination, its separate financial statements should cover only its actual accounting period. 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. For example: This usually involves the listed company issuing its shares to the private company shareholders in exchange for their shares. This example … instructions how to enable JavaScript in your web browser 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. The postponed accounting of import VAT allows the reverse charge mechanism on import VAT amounts. 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. How should these transactions be accounted for? 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. A reverse acquisition occurs when there is a business combination in which the entity issuing securities is designated as the acquiree for accounting purposes. DTTL and each of its member firms are legally separate and independent entities. The Committee considered whether to provide guidance on how to account for reverse acquisition transactions in which the accounting acquiree is not a business. Merger and acquisition deals make the world go round and with time, deal values and complexities continue to increase. Demerger Description * * The full technique overview will be available soon. 1.1502-75(d)(3)(i)), carrying over a loss (Regs. 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. regarded as a business. It also normally involves renaming the publicly traded company. When the listed company is identified as the accounting acquirer, the normal IFRS 3 acquisition accounting principles apply. Contents IFRS 3 Business Combinations – Illustrative examples Reverse acquisitions IE1 - IE3Calculating the fair value of the consideration transferred IE4 - IE5Measuring goodwill IE6 Illustrative Examples and Comparison with SFAS 141(R) | Croner-i Tax and Accounting Say goodbye to the arm’s length principle. 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. © 2019. 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. Separate financial statements for the legal parent, if required, would be prepared on a stand-alone basis. Comparative information presented in those consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legal parent (accounting acquiree). Further analysis will be needed if the listed company undertakes other activities and holds other assets and liabilities. Entity P acquired 100% of Entity X for Transactions sometimes referred to as 'true mergers' or 'mergers of equals' are also business combinations as that term is used in this IFRS.”. IFRS 3 requires that all business combinations be accounted for by applying the acquisition method. 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. Accordingly, IFRS 10 requires it … In practice, the reverse acquisition may be used as a means to secure a stock exchange listing through the “back door”. and on the acquisition date, enters into a new employment contract with the executive which significantly reduces the executive’s salary. [IFRS 3:4]. This usually indicates that the operating company is the accounting acquirer. 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. As a result, the executive will receive the $100,000 payment. But with businesses in other industries increasingly looking to new technologies as the path to transformation, this is also a time of opportunity. Reverse acquisition accounting applies the purchase method principles but requires the following step by step approach. The acquirer is required to apply business combination accounting. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Acquisition accounting has always been a challenge for analysts and associates. The legal acquirer changed its year end to December 31 in conjunction with a reverse acquisition. Sec. The IFRS Viewpoint gives you our views. The reverse acquisition rules provide guidance on identifying the group that continues to exist for purposes of filing a consolidated return (Regs. 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. For example, a private entity arranges to have itself “acquired” by a smaller public entity as a means of obtaining a stock exchange listing. Sec. 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. An acquisition in which an operating company obtains effective control over a listed company that is not a business is not a business combination. 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. 1.1502-75(d)(3)(i)), carrying over a loss (Regs. The management of the combined entity is drawn predominantly from the entity whose shares are acquired. Those are my sales and my receivables,” we often hear. As such, it is the opposite of a merger or an acquisition. Subsequent to the reverse acquisition, the … 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. But when this is not clear, it will be necessary to apply judgement, taking account of all the relevant fact s and circumstances. This allows private companies to become publicly traded while avoiding the regulatory and financial requirements associated with an IPO. 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. A reverse merger occurs when a privately-held business buys a publicly-held shell company . 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. 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. A reverse acquisition occurs when there is a business combination in which the entity issuing securities is designated as the acquiree for accounting purposes. Social login not available on Microsoft Edge browser at this time. “But wait! 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. 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. 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. In a business combination, an entity that obtains control of another entity … 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 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. What is a Reverse Merger? The legal acquirer has a July 31 year-end and the accounting acquirer has a December 31 year-end. The Committee considered whether to provide guidance on how to account for reverse acquisition transactions in which the accounting acquiree is not a business. In a reverse acquisition, entity that issues securities (the legal acquirer) is the accounting acquiree if meets the definition of a business. of reverse acquisition accounting is very similar to a pooling-type method. 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. IFRS 3 defines a business Please enable JavaScript to view the site. 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. In our view, these consolidated financial statements should be prepared using reverse acquisition methodology, but without recognising goodwill. 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. Reverse Acquisition An act where a private company purchases a publicly traded company and shifts its management into the latter. Reverse acquisitions Illustrating the consequences of recognising a reverse acquisition by applying paragraphs B19–B27 of IFRS 3. 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 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. 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. 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. It occurs when a firm takes part of its business and spins it off into a separate business entity (Clark-Meads 1996a). Entity P has three subsidiaries, Entities X, Y and A. 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. Demerger Description * * The full technique overview will be available soon. 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. whether or not the acquired company (ie the 'accounting acquiree' under IFRS 3) is a business. In a reverse acquisition, the acquirer is the entity whose equity interests have been acquired and the issuing entity is the acquiree. Are you ready for IFRS 16? As another example, in a business combination, transaction costs are expensed as incurred. The IFRIC also commented that a reverse acquisition transaction in which the accounting acquiree is … When the investor obtains control of the investee, it remeasures any investment previously held to fair value and consolidates the investee going forward. 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. Accounting consequences of the US tax reform, Financial statements on a non going concern basis. Entities must carefully consider their unique circumstances and risk exposures and consider the impact the outbreak may have on their financial reporting. 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. 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. Business combinations are to account for using the ‘Acquisition Method’ of accounting as specified in IFRS 3. So what’s the solution? source: cfo.com Diginex is a Hong Kong-based cryptocurrency firm that became a public company by closing a reverse merger deal. If the listed company is the accounting acquiree, the next step is to determine whether it is a 'business' as defined in IFRS 3. So how can the TMT industry ride out the turbulence and thrive? 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. (b) determining the acquisition date; DTTL and each of its member firms are legally separate and independent entities. •A merger into a public biotech company can be distinguished from a reverse merger into a shell company. For instance, in a business combination, an entity recognizes goodwill; no goodwill is recognized for an asset acquisition. 1.1502-75(d)(3)(v)(b)), determining the group’s accounting period (Regs. reverse merger accounting example, A demerger is the process of removing a business from the encumbrance of a conglomerate. 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 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 outcome of a reverse merger is that the privately-held entity merges into the publicly-held shell. 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