Accounting Alerts

Insights into PFRS 3 - Reverse Acquisitions within 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’.

Measurement of consideration transferred

In a reverse acquisition, no consideration is normally issued by the accounting acquirer for the accounting acquiree. Rather, the accounting acquiree usually issues its own equity shares to the shareholders of the accounting acquirer. In this specific situation, the fair value of the deemed consideration transferred by the accounting acquirer needs to be determined. This fair value should be determined based on the number of equity interests the legal subsidiary (accounting acquirer) would have had to issue to give the owners of the legal parent (accounting acquiree) the same percentage of equity interest in the combined entity that results from the reverse acquisition.

Measurement of goodwill

In a reverse acquisition in the scope of PFRS 3, the acquisition method should be applied even if the legal parent is the accounting acquiree. This means that goodwill is measured as the excess of the fair value of the deemed consideration transferred over the fair value of the accounting acquiree’s identifiable assets acquired and liabilities assumed.

Accounting for non-controlling interest

In a reverse acquisition, some of the owners of the legal subsidiary (accounting acquirer) may decide not to exchange their equity interests for equity interests of the legal parent (accounting acquiree). Those owners are treated as a non-controlling interest in the consolidated financial statements after the reverse acquisition.

 

See attached Accounting Alert for further details and illustrative examples.