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. "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. As a result, the executive will receive the $100,000 payment. whether or not the acquired company (ie the 'accounting acquiree' under IFRS 3) is a business. Even seemingly straightforward M&A transactions and non-controlling investments can introduce complex issues under ASC 805. For example, a private entity arranges to have itself “acquired” by a smaller public entity as a means of obtaining a stock exchange listing. 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 regarded as a business. 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. (a) identifying the acquirer; It occurs when a firm takes part of its business and spins it off into a separate business entity (Clark-Meads 1996a). In practice, the reverse acquisition may be used as a means to secure a stock exchange listing through the “back door”. 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. Are you ready for IFRS 16? 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. For example: instructions how to enable JavaScript in your web browser 12240.3 For example, assume a reverse acquisition between 2 public reporting companies occurs on July 15. Reverse charge on postponed import VAT and suspensive regimes. Accounting consequences of the US tax reform, Financial statements on a non going concern basis. © 2020 Grant Thornton International Ltd (GTIL) - All rights reserved. In the previous edition of Financial Reporting Matters, we discussed two of the specific issues in accounting for business combinations: - … 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. A step acquisition (also called piecemeal acquisition) in a business combination in which an investor obtains control over an investee through multiple transactions. When the listed company is the accounting acquiree and is also a business for IFRS 3 purposes, IFRS 3's reverse acquisition approach applies in full. IFRS 3 Business combinations prescribes accounting and disclosure requirements for the acquiring entity in a business combination scenario. When the listed company is identified as the accounting acquirer, the normal IFRS 3 acquisition accounting principles apply. This can be the case for example in reverse mergers when the accounting acquirer is the legal acquiree. 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. Social login not available on Microsoft Edge browser at this time. The guidance on identifying the acquirer (see IFRS 3:6, 3:7 and IFRS 3:B14 to B18) is relevant in a reverse acquisition transaction. 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. Please see www.deloitte.com/about for a detailed description of DTTL and its member firms. Sec. The practice is contrary to the norm because the smaller company is taking over the larger company - thus, the merger is in "reverse… • What is accounting pre and/or post combination? Reverse Acquisition An act where a private company purchases a publicly traded company and shifts its management into the latter. The management of the combined entity is drawn predominantly from the entity whose shares are acquired. Accordingly, IFRS 10 requires it … DTTL and each of its member firms are legally separate and independent entities. Sec. 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. and on the acquisition date, enters into a new employment contract with the executive which significantly reduces the executive’s salary. But with businesses in other industries increasingly looking to new technologies as the path to transformation, this is also a time of opportunity. 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. 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. (c) recognising and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; and IFRS 3 defines a business Here are the 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 The postponed accounting of import VAT allows the reverse charge mechanism on import VAT amounts. Consequently, it is appropriate to apply by analogy, in accordance with paragraphs 10–12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the guidance in paragraphs B19–B27 of IFRS 3 for reverse acquisitions. For instance, in a business combination, an entity recognizes goodwill; no goodwill is recognized for an asset acquisition. The private entity is eliminated and the shell company becomes the sole r 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. In 2016, the company flexed its acquisition muscle yet again, merging with its rival SABMiller in a deal worth $104.3 billion, one of the biggest … The legal acquirer has a July 31 year-end and the accounting acquirer has a December 31 year-end. As such, it is the opposite of a merger or an acquisition. 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. Subsequent to the reverse acquisition, the … Goodwill is then recognised to the extent the deemed acquisition cost exceeds the fair value of the listed company's identifiable assets and liabilities. the acquirer for accounting purposes for the transaction to be considered a reverse acquisition. The principles . This example … 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. Although some of the deemed acquisition cost might in substance relate to the cost of obtaining a listing, this amount is subsumed into goodwill. Consequently, a business that is a reporting entity, but not a legal entity, can be considered to be the acquirer in a reverse acquisition. 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 legal acquirer changed its year end to December 31 in conjunction with a reverse acquisition. Accounting for reverse acquisitions have always constituted an interesting topic for accountants both in theory and in practice. GTIL and each member firm is a separate legal entity. It exchanges shares with 8i enterprises Acquisitions Corp, a publicly listed company. IFRS 3 defines a business combination as “a transaction or other event in which an acquirer obtains control of one or more businesses. Cyber threats continue to soar. Further analysis will be needed if the listed company undertakes other activities and holds other assets and liabilities. The reverse acquisition rules provide guidance on identifying the group that continues to exist for purposes of filing a consolidated return (Regs. 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. 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 source: cfo.com Diginex is a Hong Kong-based cryptocurrency firm that became a public company by closing a reverse merger deal. Reverse acquisitions Illustrating the consequences of recognising a reverse acquisition by applying paragraphs B19–B27 of IFRS 3. © 2019. 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. Transaction costs are For full functionality of this site it is necessary to enable JavaScript. So how can the TMT industry ride out the turbulence and thrive? Merger and acquisition deals make the world go round and with time, deal values and complexities continue to increase. 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. Demerger Description * * The full technique overview will be available soon. 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. GTIL and the member firms are not a worldwide partnership. In a reverse acquisition, the acquirer is the entity whose equity interests have been acquired and the issuing entity is the acquiree. 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. That adjustment is required to reflect the capital of the legal parent (the accounting acquiree). Entities must carefully consider their unique circumstances and risk exposures and consider the impact the outbreak may have on their financial reporting. The acquirer is required to apply business combination accounting. •A merger into a public biotech company can be distinguished from a reverse merger into a shell company. As another example, in a business combination, transaction costs are expensed as incurred. Sec. The Deloitte Center for Corporate Governance offers a number of resources for executives, directors, and others who are active in governance. Demerger Description * * The full technique overview will be available soon. Accordingly,  IFRS 10 requires it to prepare consolidated financial statements. “But wait! Services are delivered by the member firms. 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. 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. Consolidated financial statements prepared following a reverse acquisition are issued under the name of the legal parent (accounting acquiree) but 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. 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. Examples The following example illustrates the application of a pooling-of-interests type method. Acquisition accounting has always been a challenge for analysts and associates. 1.1502-75(d)(3)(v)(b)), determining the group’s accounting period (Regs. Those are my sales and my receivables,” we often hear. 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 al l the relevant fac t s and circumstances. (b) determining the acquisition date; 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. Comparative information presented in those consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legal parent (accounting acquiree). [IFRS 3:4]. This usually involves the listed company issuing its shares to the private company shareholders in exchange for their shares. In a business combination, an entity that obtains control of another entity … GTIL does not provide services to clients. It is therefore outside the scope of IFRS 3. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In addition to determining  whether a transaction or other event is a business combination (IFRS 3:3), four stages in the application of the acquisition method are listed: [IFRS 3:5] Acquisition Method of Merger Accounting. This allows private companies to become publicly traded while avoiding the regulatory and financial requirements associated with an IPO. When the investor obtains control of the investee, it remeasures any investment previously held to fair value and consolidates the investee going forward. (d) recognising and measuring goodwill or a gain from a bargain purchase A reverse merger occurs when a privately-held business buys a publicly-held shell company . Reverse acquisitions sometimes occur when a private operating entity wants to become a public entity but does not want to register its equity shares. It also normally involves renaming the publicly traded company. Entity P has three subsidiaries, Entities X, Y and A. Entity P acquired 100% of Entity X for Reverse acquisition accounting applies the purchase method principles but requires the following step by step approach. But where should you start? 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