IFRS 3 – Business combinations involving newly formed entities contingent on an IPO (new)
Identification of the acquirer
The Committee received a request for guidance on the circumstances or factors that are relevant when identifying an acquirer in a business combination under IFRS 3 Business Combinations.
More specifically, clarification was requested as to whether the existence of a condition (for example, an initial public offering (IPO)) that is imposed to effect the acquisition of subsidiaries by a new entity that has been formed to effect a business combination (and the identity of the party that formed this new entity), is relevant in this identification. T
he Committee discussed this request for guidance in the context of specific circumstances outlined by the submitter, but acknowledged that this fact pattern appeared rare in practice. Specifically, the Committee considered an environment in which a group spins-off a portion of its business in an IPO by incorporating a new entity (Entity A). Entity A will only acquire that part of the group being spun-off if the IPO occurs. The environment surrounding the acquisition is such that:
- Entity A raises adequate funds to purchase the other entities of the group from outside parties.
- A change in control is evident as a result of the transaction.
- Cash (or other consideration) is transferred in the acquisition.
- The business combination will not occur without the IPO (the condition) occurring.
In the context of these particular circumstances, the Committee was asked to consider two distinct views:
- The fact that an acquisition is conditional on an IPO is a critical feature, and the newly incorporated entity subsequent to the IPO, Entity A, may be considered the acquirer in a business combination because there would not have been a business combination had the IPO not occurred.
- The fact that an acquisition is conditional on an IPO is not a critical feature, and the critical feature in identifying the acquirer is who established Entity A.
The staff presented its analysis of the guidance in paragraphs 7 and B13-B18 in IFRS 3, which they believed provided sufficient guidance for the identification of the acquirer in a business combination, with "control" (paragraph 7 of IFRS 3) serving as the fundamental concept for identifying the acquirer. The staff, in application of this guidance, noted that a newly formed entity could be regarded as the acquirer when it transfers cash as consideration in the acquisition and obtains control of the business acquired. Thus, the conditional event of an IPO, in this particular circumstance, could be considered a critical feature in the business combination as it could trigger a change in control.
Multiple Committee members expressed a desire to ensure any agenda decision with respect to this submission clearly specified the facts and circumstances presented by this particular submission as opposed to providing a generalised view for application to other transactions. The reason for this clarification was that multiple Committee members wanted to ensure the merits of a particular transaction were considered in the context of IFRS 3 in determining that a transaction is representative of a business combination and not merely a structural transaction which would not meet the definition of a business combination.
In considering the staff's analysis of available and sufficient guidance in IFRS 3 to identify the acquirer in a business combination in these particular circumstances, as well as staff outreach of national standard-setters on this particular issue which noted that the issue appears neither prevalent nor a current or emerging source of significant diversity in practice, the Committee decided not to add the issue to its agenda.