Abstract
In this chapter, we focus on the purchase (acquisition) method, which is applied by an investor to account for controlling interests in the investee. In particular, we discuss the following issues: identifying the acquirer and the acquiree, determining the acquisition date, measuring the acquisition consideration goodwill and non-controlling interests. We also demonstrate the accounting treatment in cases of negative goodwill and for reverse acquisitions.
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Notes
- 1.
Relevant activities are those that significantly affect a company’s returns or economic performances (e.g., selecting, acquiring or disposing of assets, R&D of new products or processes, determining a funding structure or obtaining funding, appointing key management personnel, etc.).
- 2.
Guidance on how to determine the fair value of the acquirer’s equity interests issued is provided in IFRS 9.
- 3.
This is exactly the same accounting treatment required for previously held equity interests in a target company in case of step acquisitions and/or step disposals (i.e., acquisitions and/or disposals achieved in stages rather than in a single deal). Therein, any previously held equity interest in the target company is remeasured at fair value only when control is obtained (step acquisitions) or when it is lost (step disposals). The difference between the carrying amount and the fair value of the previously held equity interest is reported directly in the income statement.
- 4.
Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components of that instrument in proportion to the allocation of proceeds. Transaction costs that relate jointly to more than one transaction (e.g., costs of a concurrent offering of some shares and a stock exchange listing of other shares) are allocated to those transactions using a basis of allocation that is rational and consistent with similar transactions.
- 5.
IFRS 3 defines a business as: “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants”.
- 6.
The equity structure (i.e., the number and type of equity interests issued) reflects the equity structure of the legal parent (the accounting acquiree), including the equity interests the legal parent issued to effect the combination. Accordingly, the equity structure of the legal subsidiary (the accounting acquirer) is restated using the exchange ratio established in the acquisition agreement to reflect the number of shares of the legal parent (the accounting acquiree) issued in the reverse acquisition.
- 7.
Entity B’s earnings (€600) divided by Entity A’s shares issued in the reverse acquisition (150).
References
Financial Accounting Standards Board (FASB), ASC 450 Contingencies, as updated lastly in 2010.
Financial Accounting Standards Board (FASB), ASC 805 Business Combinations, as updated lastly in 2019.
Financial Accounting Standards Board (FASB), ASC 810 Consolidation, as updated lastly in 2018.
International Accounting Standards Board (IASB), IAS 32 Financial Instruments: Presentation, as amended lastly in 2012.
International Accounting Standards Board (IASB), IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as amended lastly in 2020.
International Accounting Standards Board (IASB), IFRS Framework, as amended lastly in 2018.
International Accounting Standards Board (IASB), IFRS 2 Share-Based Payments, as amended lastly in 2016.
International Accounting Standards Board (IASB), IFRS 3 Business Combinations, as amended lastly in 2020.
International Accounting Standards Board (IASB), IFRS 9 Financial Instruments, as amended lastly in 2020.
International Accounting Standards Board (IASB), IFRS 10 Consolidated Financial Statements, as amended lastly in 2015.
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Amir, E., Ghitti, M. (2020). Main Issues in Purchase Accounting. In: Financial Analysis of Mergers and Acquisitions . Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-61769-1_2
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DOI: https://doi.org/10.1007/978-3-030-61769-1_2
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