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IFRS 3 — Accounting for reverse acquisition transactions where the acquiree is not a business

Date recorded:

The Committee previously considered two separate requests to clarify the accounting for reverse acquisition transactions where the accounting acquiree is not a business. Such transactions are not business combinations, and thus, not included within the scope of IFRS 3.

The requests included fact patterns in which a non-operating entity that has a public listing is used to provide an existing non-listed operating entity with a market listing by combining the non-operating entity with the operating entity in such a way that the merged/consolidated entity retains the non-operating entity’s listing, the former shareholders of the operating entity become the majority shareholders of the combined entity and there is a difference between the value of the identifiable net assets of the accounting acquiree and the value of the consideration deemed to be transferred by the accounting acquirer.

At its previous meeting, the Committee observed that the transaction has some features of a reverse acquisition and consequently, believed it was 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. In accordance with this guidance, the legal acquiree is identified as the accounting acquirer and the legal acquirer is identified as the accounting acquiree.

The Committee also observed that based on the guidance in paragraph B7 of IFRS 3 the accounting acquiree is not a business. Because the accounting acquiree is not a business, the transaction would be considered a share-based payment transaction that would be accounted for in accordance with IFRS 2 Share-based Payment (in circumstances in which a non-listed operating entity issues shares in return for obtaining a service (i.e., a listing) from the non-operating entity).

The Committee noted that in applying the reverse acquisition guidance in paragraph B20 of IFRS 3 by analogy, the accounting acquirer is deemed to have issued shares to obtain control of the acquiree. Any difference in the fair value of the shares deemed to have been issued and the fair value of the acquiree’s identifiable net assets, represents a service received by the accounting acquirer for the net assets of the accounting acquiree, that service being the listing of shares.

The Committee further noted that the receipt of this service in exchange for the deemed issue of shares is a share-based payment, the value of which is recognised in profit or loss.

The Committee, at its September 2012 meeting, directed the staff to draft a tentative agenda decision which considered the Committee discussions for consideration at a future meeting.

At this meeting, the Committee considered the staff tentative agenda decision which highlighted the above considerations. In it, the staff recommended that the Committee not take this issue to its agenda in light of existing IFRS requirements.

One Committee member expressed concern that the agenda decision would not limit diversity in practice. Specifically, he saw the proposed agenda wording as expressing one possible accounting application to the issue. However, he preferred that an interpretation be developed on the topic which effectively considered whether this type of transaction is representative of a service which should always be expensed. Many Committee members preferred that the issue not be developed into an interpretation unless outreach with constituents reveals a need to consider as an agenda-level project. They noted that the tentative agenda decision would be proposed for comment, and therefore, the Committee could evaluate the need for an agenda-level project at a later stage.

Other Committee members highlighted more specific concerns with the proposed tentative agenda wording, including desires to develop a ‘step-by-step’ response in the tentative agenda decision outlining the interaction between standards and highlighting the Committee’s assessment of the issue against its agenda criteria.

When put to a vote, the Committee decided to issue a tentative agenda decision broadly consistent with the staff’s proposed wording. However, the staff noted it would make certain amendments to the wording following meeting discussions. The staff plans to recirculate its proposed redraft of the tentative agenda decision.

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