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(b) The fair value of each ordinary share of Entity B at 30 September 2019 is €40. The quoted market price
of Entity A’s ordinary shares at that date is €16.
(c) The fair values of Entity A’s identifiable assets and liabilities at 30 September 2019 are the same as their
carrying amounts, except that the fair value of Entity A’s non-current assets at 30 September 2019 is €1,500.
Calculating the fair value of the consideration transferred
As a result of Entity A (legal parent/acquiree) issuing 150 ordinary shares, Entity B’s shareholders own
60 per cent of the issued shares of the combined entity (i.e. 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 out 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 €1,600 (i.e. 40 shares each with a fair value of €40).
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 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 €16, i.e. €1,600.
The final paragraph in the above example would appear to be based on the
requirements of paragraph 33 of the standard, i.e. ‘in a business combination in
which the acquirer and the acquiree (or its former owners) exchange only equity
interests, the acquisition-date fair value of the acquiree’s equity interests may be
more reliably measurable than the acquisition-date fair value of the acquirer’s
equity interests. If so, the acquirer shall determine the amount of goodwill by using
the acquisition-date fair value of the acquiree’s equity interests instead of the
acquisition-date fair value of the equity interests transferred.’ [IFRS 3.33]. In the above
example, this did not result in a difference as the value of the consideration
measured under both approaches was the same. However, the example above
indicates that there is a quoted market price for Entity A’s shares which is a more
reliable basis than the fair value of Entity B’s shares. Therefore, if the quoted market
price of Entity A’s shares had been, say, €14 per share, the fair value of the
consideration effectively transferred would have been measured at €1,400.
14.2 Measuring
goodwill
As there is no non-controlling interest in the accounting acquiree, and assuming that
the accounting acquirer had no previously held equity interest in the accounting
acquiree, goodwill is measured as the excess of (a) over (b) below:
(a) the consideration effectively transferred (generally measured at acquisition-date
fair value) by the accounting acquirer, i.e. the legal subsidiary;
(b) the net of the acquisition-date fair values (or other amounts recognised in
accordance with the requirements of the standard) of the identifiable assets acquired
and the liabilities assumed of the accounting acquiree, i.e. the legal parent.
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Example 9.32: Reverse acquisition – measuring goodwill (1)
Using the facts in Example 9.31 above, this results in goodwill of €300, measured as follows:
€
€
Consideration effectively transferred by Entity B
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
Example 9.33: Reverse acquisition – measuring goodwill (2)
If Example 9.32 had been based on the same facts as Example 9.31 except that the quoted market price of
Entity A’s shares had been €14 per share, the fair value of the consideration effectively transferred is €1,400,
resulting in goodwill of €100.
14.3 Preparation and presentation of consolidated financial statements
Although the accounting for the reverse acquisition reflects the legal subsidiary as being
the accounting acquirer, the consolidated financial statements are issued in the name
of the legal parent/accounting acquiree. Consequently they have to be 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. Comparative
information presented in those consolidated financial statements is therefore that of the
legal subsidiary/accounting acquirer, not that originally presented in the previous
financial statements of the legal parent/accounting acquiree as adjusted to reflect the
legal capital of the legal parent/accounting acquiree. [IFRS 3.B21].
The consolidated financial statements reflect:
(a) the assets and liabilities of the legal subsidiary/accounting acquirer recognised and
measured at their pre-combination carrying amounts, i.e. not at their acquisition-
date fair values;
(b) the assets and liabilities of the legal parent/accounting acquiree recognised and
measured in accordance with IFRS 3, i.e. generally at their acquisition-date fair values;
(c) the retained earnings and other equity balances of the legal subsidiary/accounting
acquirer before the business combination, i.e. not those of the legal
parent/accounting acquiree;
(d) the amount recognised as issued equity instruments in the consolidated financial
statements determined by adding the issued equity of the legal
subsidiary/accounting acquirer outstanding immediately before the business
combination to the fair value of the legal parent/accounting acquiree. However,
the equity structure (i.e. the number and type of equity instruments issued) reflects
the equity structure of the legal parent/accounting acquiree, including the equity
instruments issued by the legal parent to effect the combination. Accordingly, the
equity structure of the legal subsidiary/accounting acquirer is restated using the
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exchange ratio established in the acquisition agreement to reflect the number of
shares of the legal parent/accounting acquiree issued in the reverse acquisition;
(e) the non-controlling interest’s proportionate share of the legal
subsidiary’s/accounting acquirer’s pre-combination carrying amounts of retained
earnings and other equity interests (as discussed in 14.4 below); [IFRS 3.B22]
(f) the income statement for the current period reflects that
of the legal
subsidiary/accounting acquirer for the full period together with the post-acquisition
results of the legal parent/accounting acquiree based on the attributed fair values.
It is unclear why the application guidance in (d) above refers to using ‘the fair value of
the legal parent/accounting acquiree’, when, as discussed previously at 14.1 above, the
guidance for determining ‘the fair value of the consideration effectively transferred’
uses a different method of arriving at the value of the consideration given. We believe
that the amount recognised as issued equity should reflect whichever value has been
determined for the consideration effectively transferred.
Continuing with Example 9.31 above, the consolidated statement of financial position
immediately after the business combination will be as follows:
Example 9.34: Reverse acquisition – consolidated statement of financial
position immediately after the business combination
Using the facts in Example 9.31 above, the consolidated statement of financial position immediately after the date
of the business combination is as follows (the intermediate columns for Entity B (legal subsidiary/accounting
acquirer) and Entity A (legal parent/accounting acquiree) are included to show the workings):
Entity B
Entity A
Consolidated
Book values
Fair values
€
€
€
Current assets
700
500
1,200
Non-current assets
3,000
1,500
4,500
Goodwill
300
300
Total assets
3,700
2,300
6,000
Current liabilities
600
300
900
Non-current liabilities
1,100
400
1,500
Total liabilities
1,700
700
2,400
Owner’s equity
Issued equity
250 ordinary shares
600
1,600
2,200
Retained earnings
1,400
–
1,400
Total shareholders’ equity
2,000
1,600
3,600
The amount recognised as issued equity interests in the consolidated financial statements (€2,200) is
determined by adding the issued equity of the legal subsidiary immediately before the business combination
(€600) and the fair value of the consideration effectively transferred (€1,600). However, the equity structure
appearing in the consolidated financial statements (i.e. 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. As noted above, we believe that the amount recognised as issued equity should reflect
whichever value has been determined for the consideration effectively transferred.
The application guidance in IFRS 3 only deals with the reverse acquisition accounting
in the consolidated financial statements; no mention is made as to what should happen
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in the separate financial statements, if any, of the legal parent/accounting acquiree.
However, the previous version of IFRS 3 indicated that reverse acquisition accounting
applies only in the consolidated financial statements, and that in the legal parent’s
separate financial statements, the investment in the legal subsidiary is accounted for in
accordance with the requirements in IAS 27 – Consolidated and Separate Financial
Statements. [IFRS 3(2007).B8].
Example 9.35: Reverse acquisition – legal parent’s statement of financial
position in separate financial statements
Using the facts in Example 9.31 above, the statement of financial position of Entity A, the legal parent, in its
separate financial statements immediately following the business combination will be as follows:
Entity A
€
Current assets
500
Non-current assets
1,300
Investment in subsidiary (Entity B)
2,400
Total assets
4,200
Current liabilities
300
Non-current liabilities
400
Total liabilities
700
Owner’s equity
Issued equity
250 ordinary shares
2,700
Retained earnings
800
3,500
The investment in the subsidiary is included at its cost of €2,400, being the fair value of the shares issued by
Entity A (150 × €16). It can be seen that the issued equity is different from that in the consolidated financial
statements and its non-current assets remain at their carrying amounts before the business combination.
14.4 Non-controlling
interest
In a reverse acquisition, some of the owners of the legal subsidiary/accounting acquirer might
not exchange their equity instruments for equity instruments of the legal parent/accounting
acquiree. Those owners are required to be treated as a non-controlling interest in the
consolidated financial statements after the reverse acquisition. This is because the owners of
the legal subsidiary that do not exchange their equity instruments for equity instruments of
the legal parent have an interest only in the results and net assets of the legal subsidiary, and
not in the results and net assets of the combined entity. Conversely, even though the legal
parent is the acquiree for accounting purposes, the owners of the legal parent have an
interest in the results and net assets of the combined entity. [IFRS 3.B23].
As indicated at 14.3 above, the assets and liabilities of the legal subsidiary/accounting
acquirer are recognised and measured in the consolidated financial statements at their pre-
combination carrying amounts. Therefore, in a reverse acquisition the non-controlling
interest reflects the non-controlling shareholders’ proportionate interest in the pre-
combination carrying amounts of the legal subsidiary’s net assets even if the non-controlling
interests in other acquisitions are measured at fair value at the acquisition date. [IFRS 3.B24].
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These requirements are illustrated in the following example, which is based on one
included within the Illustrative Examples accompanying IFRS 3. [IFRS 3.IE11-IE15].
Example 9.36: Reverse acquisition – non-controlling interest
This example uses the same facts as in Example 9.31 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 (i.e. 140 shares out of 240 issued shares).
As in Example 9.31 above, 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
or
dinary shares to the shareholders of Entity A in exchange for their ordinary shares in Entity A. That is
because Entity B is the accounting acquirer, and IFRS 3 requires the acquirer to measure the consideration
exchanged for the accounting acquiree (see 14.1 above).
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
ownership interest, Entity B would have had to issue an additional 40 shares. The majority shareholders would
then own 56 out 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 €1,600
(i.e. 40 shares, each with a fair value of €40). That is the same amount as when all 60 of Entity B’s
shareholders tender all 60 of its ordinary shares for exchange (see Example 9.31 above). 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.
The non-controlling interest is represented by the 4 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 (i.e. €134 or 6.7 per cent of €2,000).
The consolidated statement of financial position at 30 September 2019 (the date of the business combination)
reflecting the non-controlling interest is as follows (the intermediate columns for Entity B (legal
subsidiary/accounting acquirer), non-controlling interest and Entity A (legal parent/ accounting acquiree) are
included to show the workings):
Non-
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 136
