International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards

by International GAAP 2019 (pdf)

  value of the listing status can be reliably estimated, the increase in equity should be

  measured by reference to the fair value of the shares that are deemed to have been issued.

  Indeed, even if a fair value could be attributed to the listing status, if the total identifiable

  consideration received is less than the fair value of the equity given as consideration,

  the transaction should be measured based on the fair value of the shares that are

  deemed to be issued. [IFRS 2.13A].

  This issue was considered by the Interpretations Committee between September 2012

  and March 2013. The Interpretations Committee’s conclusions, which accord with the

  analysis given above, are that for a transaction in which the former shareholders of a

  non-listed operating entity become the majority shareholders of the combined entity

  by exchanging their shares for new shares of a listed non-trading company, it is

  appropriate to apply the IFRS 3 guidance for reverse acquisitions by analogy. This

  results in the non-listed operating entity being identified as the accounting acquirer,

  and the listed non-trading entity being identified as the accounting acquiree. The

  accounting acquirer is deemed to have issued shares to obtain control of the acquiree.

  If the listed non-trading entity is not a business, the transaction is not a business

  combination, but a share-based payment transaction which should be accounted for in

  accordance with IFRS 2. Any difference in the fair value of the shares deemed to have

  been issued by the accounting acquirer and the fair value of the accounting acquiree’s

  identifiable net assets represents a service received by the accounting acquirer. The

  Interpretations Committee concluded that regardless of the level of monetary or non-

  monetary assets owned by the non-listed operating entity the entire difference should

  be considered to be payment for the service of obtaining a stock exchange listing for its

  shares and no amount should be considered a cost of raising capital.45

  Example 9.39: Reverse acquisition of a non-trading shell company

  Entity A is a non-trading public company with 10,000 ordinary shares in issue. On 31 December 2019,

  Entity A issues 190,000 ordinary shares in exchange for all of the ordinary share capital of Entity B, a private

  trading company, with 9,500 ordinary shares in issue.

  At the date of the transaction, Entity A has $85,000 of cash and the quoted market price of Entity A’s ordinary

  shares is $12.

  The fair value of Entity B has been determined by an independent professional valuer as being $2,185,000,

  giving a value per share of $230.

  Following the transaction, apart from one non-executive director, all of the directors of Entity A resign and

  four new directors from Entity B are appointed to the Board of Entity A.

  As a result of Entity A issuing 190,000 ordinary shares, Entity B’s shareholders own 95 per cent of the issued

  share capital of the combined entity (i.e. 190,000 of the 200,000 issued shares), with the remaining 5 per cent

  held by Entity A’s existing shareholders.

  How should this transaction be accounted for in the consolidated financial statements of Entity A?

  As the shareholders of Entity A only retain a 5 per cent interest in the combined entity after the transaction,

  and the Board is dominated by appointees from Entity B, this cannot be accounted for as an acquisition of

  Entity B by Entity A. Also, as Entity A is a non-trading cash shell company, and therefore not comprising a

  business (see 3.2 above), it cannot be accounted for as a reverse acquisition of Entity A by Entity B.

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  The consolidated financial statements should reflect the substance of the transaction which is that Entity B is

  the continuing entity. Entity B is deemed to have issued shares in exchange for the $85,000 cash held by

  Entity A together with the listing status of Entity A.

  However, the listing status does not qualify for recognition as an intangible asset, and therefore needs to be

  expensed in profit or loss. As the existing shareholders of Entity A have a 5 per cent interest in the combined

  entity, Entity B would have had to issue 500 shares for the ratio of ownership interest in the combined entity

  to be the same. Based on the fair value of an Entity B share of $230, the accounting for the deemed share-

  based payment transaction is:

  Dr

  Cr

  $

  $

  Cash received

  85,000

  Listing expense (income statement)

  30,000

  Issued equity (500 × $230)

  115,000

  As Entity B is a private entity, it may be that a more reliable basis for determining the fair value of the deemed

  shares issued would have been to use the quoted market price of Entity A’s shares at the date of the transaction. On

  this basis, the issued equity would have been $120,000 (10,000 × $12), giving rise to a listing expense of $35,000.

  In summary, the accounting for this transaction is similar in many respects to that which would have been

  the case if the transaction had been accounted for as a reverse acquisition; the main difference being that no

  goodwill arises on the transaction, and that any amount that would have been so recognised is accounted for

  as a listing expense. Indeed, if the transaction had been accounted for as a reverse acquisition, the overall

  effect may have been the same if an impairment loss on the ‘goodwill’ had been recognised.

  14.9 Reverse acquisitions and acquirers that are not legal entities

  In September 2011, the Interpretations Committee considered whether a business that

  is not a legal entity could be the acquirer in a reverse acquisition. The Interpretations

  Committee concluded that an acquirer that is a reporting entity, but not a legal entity,

  can be considered to be the acquirer in a reverse acquisition. The Interpretations

  Committee observed that IFRSs and the current Conceptual Framework do not require

  a ‘reporting entity’ to be a legal entity. Therefore, as long as the business that is not a

  legal entity obtains control of the acquiree and, in accordance with Appendix A of

  IFRS 3, the acquiree is ‘the business or businesses that the acquirer obtains control of

  in a business combination’ then ‘...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.’ [IFRS 3.7, Appendix A, B19]. As this issue is not widespread,

  the Interpretations Committee did not add this issue to its agenda.46

  15

  PUSH DOWN ACCOUNTING

  The term ‘push down accounting’ relates to the practice adopted in some jurisdictions of

  incorporating, or ‘pushing down’, the fair value adjustments which have been made by the

  acquirer into the financial statements of the acquiree, including the goodwill arising on the

  acquisition. It is argued that the acquisition, being an independently bargained transaction,

  provides better evidence of the values of the assets and liabilities of the acquiree than those

  previously contained within its financial statements, and therefore represents an improved

  basis of accounting. There are, however, contrary views, which hold that the transaction

  in question was one to which the reporting entity was not a party, and there is
no reason

  why an adjustment should be made to the entity’s own accounting records.

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  Whatever the theoretical arguments, it is certainly true that push down accounting

  could be an expedient practice, because it obviates the need to make extensive

  consolidation adjustments in each subsequent year, based on parallel accounting

  records. Nevertheless, if the acquiree is preparing its financial statements under IFRS,

  in our view it cannot apply push down accounting and reflect the fair value adjustments

  made by the acquirer and the goodwill that arose on its acquisition.

  All of the requirements of IFRS must be applied when an entity prepares its financial

  statements. IFRS requires assets and liabilities to be recognised initially at cost or fair

  value, depending on the nature of the assets and liabilities. The acquisition of an entity

  by another party is not a transaction undertaken by that entity itself; hence it cannot be

  a transaction to determine cost.

  Application of push down accounting would result in the recognition and

  measurement of assets and liabilities that are prohibited by some standards (such as

  internally generated intangibles and goodwill) and the recognition and measurement

  of assets and liabilities at amounts that are not permitted under IFRS. While some

  IFRS standards include an option or requirement to revalue particular assets, this is

  undertaken as part of a process of determining accounting policies rather than as

  one-off revaluations. For example:

  • IAS 2 – Inventories – requires that inventories are measured at the lower of cost

  and net realisable value (see Chapter 22 at 3).

  • IAS 16 requires that items of property, plant and equipment are initially measured

  at cost. Subsequently, property, plant and equipment can be measured at cost or

  at revalued amount. However, revaluations must be applied consistently and must

  be performed on a regular basis. Therefore a one-off revaluation is not permitted

  (see Chapter 18 at 6).

  • IAS 38 requires that intangible assets are initially measured at cost. Subsequently,

  they can be revalued only in rare circumstances where there is an active market.

  In addition, IAS 38 specifically prohibits the recognition of internally generated

  goodwill. Therefore a one-off revaluation is not permitted (see Chapter 17 at 8.2).

  16 DISCLOSURES

  The disclosure requirements of IFRS 3 are set out below. Note that, although IFRS 13

  provides guidance on how to measure fair value, IFRS 13 disclosures are not required

  for items that are recognised at fair value only at initial recognition. [IFRS 13.91(a)]. For

  example, the information about the fair value measurement of non-controlling interest

  in an acquiree if measured at fair value at the acquisition date is disclosed in accordance

  with the requirements of IFRS 3. [IFRS 3.B64(o)(i)].

  It should be noted that the disclosures to be made under IFRS 3 are explicitly required

  to be provided in the interim financial statements for business combinations occurring

  during the interim period, even if these interim financial statements are condensed.

  [IAS 34.16A(i)].

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  16.1 Nature and financial effect of business combinations

  The first disclosure objective is that the acquirer discloses information that enables

  users of its financial statements to evaluate the nature and financial effect of a business

  combination that occurs either:

  (a) during the current reporting period; or

  (b) after the end of the reporting period but before the financial statements are

  authorised for issue. [IFRS 3.59].

  Information that is required to be disclosed by the acquirer to meet the above objective

  is specified in the application guidance of the standard. [IFRS 3.60].

  16.1.1

  Business combinations during the current reporting period

  To meet the above objective, the acquirer is required to disclose the following

  information for each business combination that occurs during the reporting period:

  [IFRS 3.B64]

  (a) the name and a description of the acquiree;

  (b) the acquisition date;

  (c) the percentage of voting equity interests acquired;

  (d) the primary reasons for the business combination and a description of how the

  acquirer obtained control of the acquiree;

  (e) a qualitative description of the factors that make up the goodwill recognised,

  such as expected synergies from combining operations of the acquiree and

  the acquirer, intangible assets that do not qualify for separate recognition or

  other factors;

  (f) the acquisition-date fair value of the total consideration transferred and the

  acquisition-date fair value of each major class of consideration, such as:

  (i) cash;

  (ii) other tangible or intangible assets, including a business or subsidiary of the

  acquirer;

  (iii) liabilities incurred, for example, a liability for contingent consideration; and

  (iv) equity interests of the acquirer, including the number of instruments or

  interests issued or issuable and the method of measuring the fair value of

  those instruments or interests;

  (g) for contingent consideration arrangements and indemnification assets:

  (i) the amount recognised as of the acquisition date;

  (ii) a description of the arrangement and the basis for determining the amount of

  the payment; and

  (iii) an estimate of the range of outcomes (undiscounted) or, if a range cannot

  be estimated, that fact and the reasons why a range cannot be estimated.

  If the maximum amount of the payment is unlimited, the acquirer

  discloses that fact;

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  (h) for

  acquired

  receivables:

  (i) the fair value of the receivables;

  (ii) the gross contractual amounts receivable; and

  (iii) the best estimate at the acquisition date of the contractual cash flows not

  expected to be collected;

  The disclosures are to be provided by major class of receivable, such as loans,

  direct finance leases and any other class of receivables;

  (i) the amounts recognised as of the acquisition date for each major class of assets

  acquired and liabilities assumed;

  (j) for each contingent liability recognised in accordance with paragraph 23 of the

  standard (see 5.6.1 above), the information required in paragraph 85 of IAS 37

  (see Chapter 27 at 7.1). If a contingent liability is not recognised because its fair

  value cannot be measured reliably, the acquirer discloses:

  (i)

  the information required by paragraph 86 of IAS 37 (see Chapter 27 at 7.2); and

  (ii) the reasons why the liability cannot be measured reliably;

  (k) the total amount of goodwill that is expected to be deductible for tax purposes;

  (l) for transactions that are recognised separately from the acquisition of assets and

  assumption of liabilities in the business combination in accordance with

  paragraph 51 of the standard (see 11 above):

  (i) a description of each transaction;

  (ii) how the acquirer accounted for each transaction;

  (iii) the amounts recognised for
each transaction and the line item in the financial

  statements in which each amount is recognised; and

  (iv) if the transaction is the effective settlement of a pre-existing relationship, the

  method used to determine the settlement amount;

  (m) the disclosure of separately recognised transactions required by (l) above includes the

  amount of acquisition-related costs and, separately, the amount of those costs

  recognised as an expense and the line item or items in the statement of comprehensive

  income in which those expenses are recognised. The amount of any issue costs not

  recognised as an expense and how they were recognised are also to be disclosed;

  (n) in a bargain purchase (see 10 above):

  (i) the amount of any gain recognised and the line item in the statement of

  comprehensive income in which the gain is recognised; and

  (ii) a description of the reasons why the transaction resulted in a gain;

  (o) for each business combination in which the acquirer holds less than 100 per cent

  of the equity interests in the acquiree at the acquisition date (i.e. there is a non-

  controlling interest – see 8 above):

  (i) the amount of the non-controlling interest in the acquiree recognised at the

  acquisition date and the measurement basis for that amount; and

  (ii) for each non-controlling interest in an acquiree measured at fair value, the

  valuation techniques and significant inputs used to measure that value;

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  (p) in a business combination achieved in stages (see 9 above):

  (i) the acquisition-date fair value of the equity interest in the acquiree held by

  the acquirer immediately before the acquisition date; and

  (ii) the amount of any gain or loss recognised as a result of remeasuring to fair

  value the equity interest in the acquiree held by the acquirer before the

  business combination and the line item in the statement of comprehensive

  income in which that gain or loss is recognised;

  (q) the

  following

  information:

  (i)

  the amounts of revenue and profit or loss of the acquiree since the acquisition

  date included in the consolidated statement of comprehensive income for the

  reporting period; and

  (ii) the revenue and profit or loss of the combined entity for the current