Accounting
Advisory
Insights into IFRS 3 Global
Reverse acquisitions in the scope of IFRS 3
Acquisitions of businesses can take many forms and can have a
fundamental impact of the acquirer’s operations, resources and
strategies. These acquisitions are described in many ways depending on
the underlying facts and circumstances: mergers, takeovers and business
combinations are all terms that are used, and the accounting and disclosure
requirements for all of them are set out in IFRS 3 ‘Business Combinations’.
Our ‘Insights into IFRS 3’ series summarises the key areas of This article focuses on reverse acquisitions within the scope of
the Standard, highlighting aspects that are difficult to interpret IFRS 3. When a reverse acquisition falls outside of the scope of
and revisiting relevant features that could impact reporting IFRS 3, further details on how to account for it can be found in
entities. This article follows on from our published articles on our IFRS Viewpoint – ‘Reverse acquisitions outside the scope
‘Insights into IFRS 3 – Identifying the acquirer’ and ‘Insights of IFRS 3’.
into IFRS 3 – Reverse acquisitions explained’ and presents
guidance for an area which is challenging in practice – reverse
acquisitions.
When is a reverse acquisition in the scope of IFRS 3?
Reverse acquisitions are within the scope of IFRS 3 provided the accounting acquiree is a business under IFRS 3. This Standard
provides detailed guidance on what constitutes a business and what does not, and this guidance has been considered in our
article ‘Insights into IFRS 3 – Definition of a business’.
How do you measure the consideration transferred in a
reverse acquisition?
In a reverse acquisition, no consideration is normally issued by the accounting acquirer for the accounting acquiree. Rather, the
accounting acquiree usually issues its own equity shares to the shareholders of the accounting acquirer.
In this specific situation, the fair value of the deemed consideration transferred by the accounting acquirer needs to be
determined. This fair value should be determined based on the number of equity interests the legal subsidiary (accounting
acquirer) would have had to issue to give the owners of the legal parent (accounting acquiree) the same percentage of equity
interest in the combined entity that results from the reverse acquisition.
In certain cases, at the time of the reverse acquisition, the legal parent (accounting acquiree) may have outstanding stock options
issued in share-based payment transactions. In this case, the rationale applied for determining the consideration transferred
according to the guidance set out above should also be followed for the existing share-based payment award granted by the legal
parent. When doing this, the guidance provided in IFRS 3 on equity-settled share-based payment transactions of the accounting
acquiree should be applied, with the legal subsidiary being identified as the accounting acquirer and the legal parent the
accounting acquiree. This means the vested portion of the outstanding stock options of the legal parent (accounting acquiree),
although they may not be changed as a result of the reverse acquisition, will be included in the deemed consideration transferred
by the accounting acquirer as if these awards had been exchanged for a share-based payment award of the accounting acquirer.
The accounting for outstanding stock options issued in share-based payment transactions of the legal parent (accounting
acquiree) is explained in more detail in our separate article ‘Insights into IFRS 3 – Adjustments for transactions not part of the
business combination’.
2 Reverse acquisitions in the scope of IFRS 3
Example 1 – Measuring the consideration transferred in a reverse acquisition
Entity H, an operating entity looking to become public, arranges to be acquired by Entity S, a public listed company which
is also an operating entity. On 30 June 20XX, Entity S, acquires all the equity instruments of Entity H in consideration of the
issuance of 2.5 shares for each ordinary share of Entity H. All of Entity H’s shareholders exchange their shares in Entity H
for the shares issued by Entity S.
The statements of financial position for both Entity S and Entity H before the reverse acquisition are as follows:
Entity S Entity H
(legal parent, (legal subsidiary,
accounting acquiree) accounting acquirer)
Current assets 800 900
Non-current assets 1,200 3,500
Total assets 2,000 4,400
Current liabilities 400 800
Non-current liabilities 500 1,200
Total liabilities 900 2,000
Shareholders’ equity
Retained earnings 500 1,200
Issued equity
200 ordinary shares 600 –
120 ordinary shares – 1,200
Total shareholders’ equity 1,100 2,400
Total liabilities and shareholders’ equity 2,000 4,400
In addition:
• The fair value of each ordinary share of Entity H at 30 June 20XX is CU30.
• The fair values of Entity S’s identifiable assets and liabilities at 30 June 20XX are the same as their carrying amounts,
except that the fair value of Entity S’s non‑current assets at 30 June 20XX is CU1,400.
Analysis
Entity S issues 300 ordinary shares and therefore H’s shareholders now own 300/500 of the ordinary shares – 60% of
the combined entity. The remaining 40% is owned by Entity S shareholders.
In order to calculate the deemed consideration transferred, Entity H needs to calculate how many shares it would have
issued if it had been an acquisition made in a regular way. Entity H would have needed to have issued 80 ordinary
shares to Entity S shareholders in order for Entity H’s shareholders to own 60% of the combined entity (120 out of the
now 200 issued ordinary shares) and for the shareholders of Entity S to own 40% of the combined entity (80 out of the
now 200 ordinary shares).
Therefore, the fair value of the deemed consideration transferred by Entity H, the accounting acquirer, is CU2,400
(which is 80 shares at CU30).
It should also be noted IFRS 3 requires the effective measurement of the consideration transferred to be based on the most reliable
measure available. Therefore, if a quoted market price was available for the valuation of the legal parent’s shares, this would meet
the criteria set out in the Standard and this should be used in the calculation.
Reverse acquisitions in the scope of IFRS 3 3
How do you measure goodwill arising from a reverse acquisition?
In a reverse acquisition in the scope of IFRS 3, the acquisition method should be applied even if the legal parent is the accounting
acquiree. This means that goodwill is measured as the excess of the fair value of the deemed consideration transferred over the
fair value of the accounting acquiree’s identifiable assets acquired and liabilities assumed.
Fair value of deemed Fair value of the accounting
consideration transferred acquiree’s identifiable assets
Goodwill
by the legal subsidiary acquired and liabilities
(accounting acquirer) assumed
Example 2 – Measuring goodwill
Continuing with the previous example, goodwill would be calculated as follows (accounting for income tax effects are
ignored):
CU CU
Fair value of the deemed consideration
2,400
transferred by Entity H (refer to example 1)
Entity S’s assets and liabilities recognised
Current assets 800
Non-current assets 1,400
Current liabilities (400)
Non-current liabilities (500)
(1,300)
Goodwill 1,100
How is a reverse acquisition presented in consolidated
financial statements?
Consolidated financial statements for a reverse acquisition
Issued under the name of The legal parent (accounting acquiree)
Disclosed in the notes as A continuation of the financial statements of the legal subsidiary
(accounting acquirer)
Retroactive adjustments of The legal subsidiary’s (accounting acquirer) legal capital to reflect
the legal capital of the legal parent (accounting acquiree)
The comparatives of these consolidated financial statements to
reflect the legal capital of the legal parent (accounting acquiree).
4 Reverse acquisitions in the scope of IFRS 3
Therefore, the elements of the consolidated financial statements reflect:
Consolidated Financial statement elements Are
Assets and liabilities of legal subsidiary (accounting Recognised and measured at their pre‑combination carrying
acquirer) amounts
Assets and liabilities of the legal parent (accounting Recognised and measured in accordance with IFRS 3
acquiree)
Retained earnings and other equity balances Reflective of the balances of the legal subsidiary
(accounting acquirer) before the business combination
Amount recognised as issued equity interests in the Determined in accordance with the formula below
consolidated financial statements
Owners of the legal subsidiary (accounting acquirer) Reflected at their proportionate interest in the legal
that did not exchange their equity interests in the subsidiary’s (accounting acquirer’s) carrying amounts of
legal subsidiary for equity interests in the legal retained earnings and other equity interests before the
parent (non-controlling interest) – refer to page 6 business combination (ie net assets).
for how to account for non-controlling interest in a
reverse acquisition)
Amount recognised as issued equity interests in the consolidated financial statements
the issued equity interest of the
the fair value of the
legal subsidiary (accounting the amount recognised as
legal parent (accounting
acquirer) outstanding immediately issued equity interests
acquiree)
before the business combination
An important aspect to be mindful of is the equity structure (ie the number and type of equity interests issued) should reflect
the equity structure of the legal parent (accounting acquiree), including equity interests the legal parent issued to carry out
the business combination. This will have the effect that the equity structure of the legal subsidiary (accounting acquirer) should
be restated using the exchange ratio established in the acquisition agreement to reflect the number of shares the legal parent
(the accounting acquiree) issued in the reverse acquisition. Even though the equity structure should be retrospectively adjusted,
any shares issued or cash transferred as a result of the reverse acquisition should only be reported in the consolidated financial
statements at the time transactions occur.
The fair value of the legal parent (accounting acquiree) could be determined either by measuring the fair value of the equity
interest the accounting acquirer would have issued to effect the business combination; or by measuring the fair value of the listed
shares issued by the legal parent. The method used would be based on the most reliable measure available.
Reverse acquisitions in the scope of IFRS 3 5
Example 3 – Consolidated financial statements
Continuing with the example, the consolidated financial position at 30 June 20XX is:
Consolidated
CU
Current assets (CU800 + CU900) 1,700
Goodwill 1,100
Non-current assets (CU1,400 + CU3,500) 4,900
Total assets 7,700
Current liabilities (CU400 + CU800) 1,200
Non-current liabilities (CU500 + CU1,200) 1,700
Total liabilities 2,900
Shareholders’ equity
Retained earnings (Entity H) 1,200
500 Ordinary shares (CU1,200 + CU2,400) 3,600
Total shareholders’ equity 4,800
Total liabilities and shareholders’ equity 7,700
The issued equity balance in the consolidated statement of financial position is made up of Entity H’s (legal subsidiary,
accounting acquirer) issued equity immediately prior to the business combination (CU1,200) plus the fair value of the
deemed consideration transferred (CU2,400). Also, as shown, the issued equity of the accounting acquirer may need to
be restated if it does not reflect the equity structure of the legal parent. In this case, the equity structure reflected in the
consolidated financial statements would be 500 ordinary shares. This is calculated by adding 200 (Entity S’s (legal parent)
capital structure before the business combination) to 300 (the number of equity instruments effectively issued by Entity S).
How is non‑controlling interest in a reverse acquisition
accounted for?
In a reverse acquisition, some of the owners of the legal subsidiary (accounting acquirer) may decide not to exchange their equity
interests for equity interests of the legal parent (accounting acquiree). Those owners are treated as a non‑controlling interest in
the consolidated financial statements after the reverse acquisition.
This is because the owners of the legal subsidiary (accounting acquirer) that do not exchange their equity interests for equity
interests of the legal parent have an interest in only the results and net assets of the legal subsidiary and not in those of the
combined entity. However, 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.
6 Reverse acquisitions in the scope of IFRS 3
As noted above, the assets and liabilities of the legal subsidiary (accounting acquirer) are measured and recognised in the
consolidated financial statements at their carrying amounts immediately prior to the business combination. Therefore, in a reverse
acquisition the non‑controlling interest reflects the non‑controlling shareholders’ proportionate interest in the carrying amounts
of the legal subsidiary’s net assets prior to the business combination even if non‑controlling interests in other acquisitions are
measured based on the fair value at the acquisition date of these assets and liabilities.
Example 4 – Non-controlling interest
In the example previously presented, if only the shareholders owning 110 shares out of the total 120 outstanding shares
chose to exchange their shares non-controlling interest would need to be recognised. Entity S would issue 2.5 shares for
every Entity H share so it would issue 275 shares instead of 300 shares (110 shares x 2.5). So H’s shareholders who agree
to proceed with the exchange would own 275 out of the 475 shares now issued, which is 57.9%.
Similar to the previous example presented, Entity H would need to calculate how many shares it would have issued if the
business combination had been effected in a more regular way by giving the owners of Entity H the same percentage of S
equity interest. Entity H would have issued 80 shares to Entity S’s shareholders in order for Entity H’s shareholders to own
57.9% as Entity H’s shareholders would own 110 out of the now 190 issued shares.
Therefore, as the number of shares that would have been issued and the price have not changed, the fair value of the
consideration transferred does not change compared to the previous example provided. It remains at CU2,400 which
represents 80 shares at CU30.
The non-controlling interest is represented by the 10 out of the 120 shares that have not been exchanged by Entity H
shareholders into Entity S shares. Therefore, the non-controlling interest is calculated to be 8.3% (10/120). This amount of
controlling interest needs to be adjusted in the consolidated statement of financial position to reflect the pre-combination
amounts of Entity H.
This is demonstrated as follows:
Previous Adjustment for Revised
Example Non-Controlling Consolidated
Interest
Current assets (800 + 900) 1,700 – 1,700
Goodwill 1,100 – 1,100
Non-current assets (1,400 + 3,500) 4,900 – 4,900
Total assets 7,700 – 7,700
Current liabilities (400 + 800) 1,200 – 1,200
Non-current liabilities (500 + 1,200) 1,700 – 1,700
Total liabilities 2,900 – 2,900
Shareholders’ equity
Retained earnings 1,200 (100) 1,100
475 Ordinary shares (1,200 +2,400) 3,600 (100) 3,500
Non-controlling interest (see below) 200 200
Total shareholders’ equity 4,800 – 4,800
Total liabilities and shareholders’ equity 7,700 – 7,700
Reverse acquisitions in the scope of IFRS 3 7
The non-controlling interest is calculated as follows:
Pre-combination equity of Entity H Pre-combination Non-controlling Non-controlling
balances interest percentage interest
Retained earnings 1,200 X 8.3% = 100
Issued capital 1,200 X 8.3% = 100
Total shareholders’ equity 2,400 X 8.3% = 200
How do you calculate earnings per share after a reverse
acquisition?
As previously indicated on page 4, the equity structure in the consolidated financial statements following a reverse acquisition
should reflect the equity structure of the legal parent (the accounting acquiree), including the equity interests issued by the legal
parent to carry out the business combination. However, whereas the number of shares taken into account for the period after the
reverse acquisition is based on the legal parent capital structure, the historical number of shares of the legal parent should not
be used in calculating the earnings per share before the reverse acquisition. As the legal subsidiary is the accounting acquirer,
the number of shares to use in the earnings per share calculations for the period before the reverse acquisition should be based
on the weighted average number of outstanding shares of the accounting acquirer before the business combination adjusted to
reflect the exchange ratio applied in the reverse acquisition.
Profit or loss amounts (numerator of the earnings per share calculation)
The profit or loss of the accounting acquirer (legal subsidiary) should be used for comparative period and the current period
between the beginning of the period and the date of the transaction. The consolidated profit or loss of the legal parent
(accounting acquiree) is only included from the date of the reverse acquisition.
Weighted average number of ordinary shares (the denominator of the earnings per share calculation)
The weighted average number of ordinary shares outstanding during the period in which the reverse acquisition occurs should be
calculated as follows:
weighted average number of
number of ordinary shares
ordinary shares of the legal exchange ratio
outstanding from the beginning
subsidiary (accounting acquirer) applied in the
of that period to the reverse
outstanding during the period reverse acquisition
acquisition date
before the reverse acquisition
number of ordinary shares
weighted average number of actual ordinary shares of the legal
outstanding from the reverse
parent (the accounting acquiree) outstanding after the reverse
acquisition date to the
acquisition
reporting date
weighted average number of ordinary shares outstanding for the period
8 Reverse acquisitions in the scope of IFRS 3
The weighted average number of ordinary shares outstanding for the comparative period(s) presented should be calculated as
follows:
weighted average number of ordinary shares
outstanding of the legal subsidiary (accounting exchange ratio applied in the reverse acquisition
acquirer) for the comparative period
Example 5 – Earnings per share
Continuing with the previous example, assume Entity H’s net profits were CU1,250 and CU800 for 20XX and 20X0
respectively and that Entity S generated a net profit of CU50 after the date of the reverse acquisition.
Also assume Entity H’s outstanding share capital for the current and previous periods was as follows:
20XX 20X0
Beginning of annual period 100 80
Issuance of shares 30 April 20
30 June 20
End of annual period 120 100
Calculation of basic earnings per share (EPS):
20XX 20X0
Net profit CU1,250 CU800
Weighted average number of shares (a) 383 (b) 225
Basic EPS CU3.26 CU3.56
Calculation of the weighted average number of shares:
(a) 20XX
Period Calculation CU
6 months to 30 June 20XX 100 X 6/12 months + 20 x 2/12 months 53
X exchange ratio 2.5
133
6 months to 31 December 20XX (300 + 200) X 6/12 months 250
Total weighted average number of shares 383
(b) 20X0
Period Calculation CU
Year to 31 December 20X0 80 X 12/12 months + 20 X 6/12 months 90
X exchange ratio 2.5
Total weighted average number of shares 225
Reverse acquisitions in the scope of IFRS 3 9
How we can help
We hope you find the information in this article helpful in giving you some insight into IFRS 3. If you would like to discuss
any of the points raised, please speak to your usual Grant Thornton contact or visit www.grantthornton.global/locations
to find your local member firm.
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