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Accounting for a Reverse Acquisition

14/10/2011


Reverse Acquisitions

Reverse acquisition transactions are commonly used by both Capital Pool Companies (“CPC’s”) to complete their qualifying transaction and Private Companies who wish to obtain a stock exchange listing without having to go through the Initial Public Offering (“IPO”) process. There are two methods of accounting that need to be considered when a reverse acquisition takes place as the transaction would either fall under IFRS 2 Share based payment or IFRS 3 Business combinations.

Accounting for a Reverse Acquisition

A reverse acquisition takes place when the entity issuing the equity securities is actually the entity that ends up being the acquiree for accounting purposes. In this case, the entity who is receiving the shares in exchange for its net assets ends up being the acquirer for accounting purposes as they have received the majority of the outstanding shares of the legal acquirer. For example, if a reverse acquisition took place whereby a private company was acquired by a publicly traded entity, the private company would be the acquirer for accounting purposes and the public company would be the acquiree for accounting purposes. The financial statements of the consolidated group would be titled under the name of the public company however, the continuing entity would be the private company and the comparative period presented would be that of the private company.

In order for a reverse acquisition transaction to be accounted for under IFRS 3, the transaction needs to meet the definition of a business. IFRS 3 defines a business as having three components: inputs, processes and outputs; however, outputs are not necessarily required to qualify as a business. Any acquisition related costs are capitalized to the extent that they were incurred in the issuance of the equity securities.

IFRS 2 Share based payment, is applied to a reverse acquisition when the accounting acquiree does not constitute a business as defined under IFRS 3. This is common when the transaction involves a CPC because the entity is normally a shell company looking to complete a qualifying transaction over a specified period of time and would not meet the definition of a business.

IFRS 2 states that for equity-settled share based payment transactions, the entity shall measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless the fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity will measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. When the transaction is accounted for under IFRS 2, no goodwill will arise on the transaction; rather the amount is recognized as a listing expense in Profit and Loss.

IFRS Financial Statements

Private companies who are considering a reverse acquisition as a means to become publicly listed need to realize that this will require them to comply with securities regulations and the preparation of financial statements in accordance with IFRS for both the current year and for the comparative period as IFRS is effective for public companies for fiscal years beginning on or after January 1, 2011. If the reverse acquisition does not take place then the company has the ability to adopt Accounting Standards for Private Enterprises (“ASPE”).

Conclusion

Accounting for acquisitions, including reverse acquisitions, can often be complex. This complexity can range from determining the appropriate acquirer/acquiree to determining what periods need to be presented and identifying the correct Generally Accepted Accounting Principles that should be used for each period. Both private and public companies would be advised to seek advice from an accounting advisor when they are contemplating an acquisition.

This article has been prepared for informational purposes only and is not intended for any other purpose. We do not assume any responsibility or liability for losses occasioned by you in reliance on this information. We would be pleased to discuss with you the issues raised within the context of your particular circumstances. Please contact your local MNP Public Companies advisor.