Accounting Alerts

Insights into PFRS 3 - Reverse Acquisitions outside Scope

This Accounting Alert is issued to provide an overview of Philippine Financial Reporting Standards (PFRS) 3, Business Combinations, highlighting aspects that are more difficult to interpret and revisiting the most relevant features that could impact reporting entities.

Overview

Acquisitions of businesses can take many forms and can have a fundamental impact on the acquirer’s operations, resources, and strategies. These acquisitions are sometimes referred to as mergers or business combinations, and the accounting and disclosure requirements are set out in PFRS 3.

When is a reverse acquisition in the scope of PFRS 3?

Reverse acquisitions are within the scope of PFRS 3 provided the accounting acquiree is a business under PFRS 3. This Standard provides detailed guidance on what constitutes a business and what does not, and this guidance has been considered in our article ‘Insights into PFRS 3 – Definition of a business’.

IFRS Interpretations Committee (IFRIC) guidance

The IFRIC observed that PFRS 3’s guidance on identifying the accounting acquirer and on reverse acquisitions would be applied by analogy based on the hierarchy set out in PAS 8, Accounting Policies, Changes in Accounting Policies and Errors. The IFRIC also commented that a reverse acquisition transaction in which the accounting acquiree is listed but is not a business is a share-based payment transaction within the scope of PFRS 2, Share-based payment.

Is the reverse acquisition transaction a business combination

Answering this question involves determining:

  • which company is the ‘accounting acquirer’ under PFRS 3, i.e., the company that obtains effective control over the other, and;
  • whether or not the acquired company (i.e., the ‘accounting acquiree’) is a business as defined in PFRS 3. 

Accounting for a reverse acquisition when the transaction is not a business combination

Since PFRS 3 does not apply, management should apply PAS 8, and when doing so refer to the IFRIC March 2013 agenda decision mentioned to account for the reverse acquisition. The substance of the transaction is the accounting acquirer (operating company) has made a share-based payment to acquire a listing along with the listed company’s cash balances and other net assets (if any). The transaction should therefore be accounted for in accordance with PFRS 2.

 

See attached Accounting Alert for further details and illustrative examples.