IFRS 3 - Accounting for reverse acquisition transactions where the acquire is not a business

Date recorded:

The Committee considered two requests to provide guidance on how to account for reverse acquisition transactions in which the accounting acquiree is not a business. The objective of these transactions was for the legal acquiree to obtain a market listing status currently available to the legal acquirer without needing to undergo its own initial public offering and all the reporting requirements that an initial public offering typically entails.

The request for clarification related to whether:

  • IFRS 3 should apply, whereby the transaction is considered to be in substance a reverse acquisition and any aggregate of the consideration transferred and the amount of the identifiable net assets acquired is recognised as goodwill/capitalised.
  • IFRS 2 should apply, whereby the transaction is considered to be in substance a share-based payment transaction and any excess between the consideration ‘received’ by the legal acquiree and the consideration ‘paid’ by the legal acquirer represents unidentified goods or services received that should be recognised as an expense.
  • Neither IFRS 3 nor IFRS 2 apply and an accounting policy should be applied by analogy.

In considering how such transactions should be accounted in the two fact patterns received by the Committee, the staff noted that the transactions described in the fact pattern could not be considered reverse acquisitions in accordance with paragraph B19 in IFRS 3, and accounted for as business combinations, because the accounting acquirees are not businesses. Moreover, IFRS 3 does not specify how a reverse acquisition should be accounted for when the accounting acquiree is not a business.

The staff believed that to account for the transactions described in the fact pattern, an entity would need to develop an accounting policy based on the guidance in IFRS 2 and based on the guidance in IFRS 3 which would be applied by analogy in line with paragraphs 10–11 of IAS 8. In doing so, management would apply all the aspects of these IFRSs that are relevant to the transactions analysed.

As a result, the staff recommended that management would look at IFRS 3 because the transaction has many features of a reverse acquisition and IFRS 2 to identify the substance of the fact patterns analysed (based on paragraph 5 of IFRS 2). IFRS 3 provides relevant guidance on the identification of the accounting acquirer and on the measurement of the consideration transferred by the equity instruments granted by the non-public entity, which is not an aspect specifically covered by IFRS 2.

In reaching the above recommendation, which was developed considering the specific fact patterns received by the Committee, the staff noted that general guidelines could be developed to state how the existing requirements on business combinations in IFRS 3 and on share-based payments in IFRS 2 would be applied in circumstances in which the accounting acquiree does not meet the definition of a business. Therefore, the staff asked the Committee if an annual improvement project or an Interpretation should be developed on this issue.

Most Committee members supported the staff analysis of the issue. There was some level of disagreement as to whether IFRS 2 specifically applied to the transaction, with reference to paragraph 78 of IFRS 2, or whether IFRS 2 applies by analogy (in line with paragraphs 10–11 of IAS 8) given discussion in paragraph 38 of IFRS 2. However both approaches resulted in consistent conclusions.

Multiple Committee members, based on the perceived clarity in IFRSs, suggested that a rejection notice should be issued on the topic. However, one Committee member expressed concern with issuing a rejection notice given that at least some diversity exists in practice (citing an unsolicited comment letter which has been received by the Committee in advance of this discussion).

Additionally, one Committee member noted that the staff’s analysis may lead to divergence with US GAAP/US Securities and Exchange Commission (SEC) guidance even though the two underlying IFRSs (IFRS 3 and IFRS 2) are largely converged with that of equivalent US GAAP standards. Specifically, the Committee member noted that US GAAP would generally capitalise the listing costs outlined in the submissions rather than expensing as proposed under the staff analysis. However, another Committee member believed that the US GAAP application is a primary result of developments in practice as opposed to specific requirements in US GAAP. He noted that he was not troubled by a different answer between IFRSs and US GAAP in specific application even with largely converged standards as he acknowledged that other pieces of literature come into play in applying both IFRSs and US GAAP, and therefore, accepted that differences in practice may result.

Following the debate, Committee members generally agreed that in the case of a reverse acquisition transaction where one of the parties is not a business, and therefore, the premium can only be attributed to acquiring access to the listing status, these costs should be expensed. The Committee tentatively decided to issue a rejection notice outlining this view.

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