IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 35/ Business Combinations (lFRS 3)

Required Should C be consolidated as a subsidiary in the group accounts? Solution C will be consolidated on the basis of actual dominant influence and control exercised by the group be– cause of the control contract. 3. IDENTIFYING AN ACQUIRER 3.1 Occasionally it may be difficult to identify an acquirer, but normally there will be indications that one exists; for example, when entities combine, the fair value of one of the entities is likely to be significantly greater than that of the other entity, or one entity may provide the bulk of the man– agement expertise. In this case, the entity with the greater fair value and that provides the manage– ment expertise is probably the acquirer. Similarly, if the combination results in the management of one of the entities being able to dominate the composition of the management team of the com– bined entity, then the entity whose management is dominating the composition of the management team is likely to be the acquirer. Facts X, a public limited company, is to merge its operations with Z, a public limited company. The terms of the merger will be that Z will offer two of its shares for everyone share of X. There will be no cash con– sideration. Z's market capitalization is $500 million and X's is $250 million. After the issue of shares, the board of directors will be comprised of only directors from Z. The group is to be named Z Group. Three months after the acquisition, 20% of X is sold. Required Is it possible to identify an acquirer? Solution It seems obvious that Z is the acquirer of X and not vice versa. Z is a much larger company and will dominate the business combination because of its control of the board of directors. Also the group is to be named the Z Group, which really confirms that Z is the acquirer. Additionally, part of X is sold after the acquisition, which again seems to indicate that Z acquired X. 3.2 Generally speaking, the entity that issues the equity shares in exchange for the net assets of the other entity normally can be designated the acquirer. However, in some business combinations that are referred to as reverse acquisitions , the acquirer could be the entity whose equity interests are acquired and the issuing entity is the acquiree. This can be the case where a private entity de– cides to have itself "acquired" by a smaller public entity in order to obtain a stock exchange listing. The entity issuing the shares will be regarded as the parent, and the private entity will be regarded as the subsidiary. The legal subsidiary will be deemed to be the acquirer if it has the power to gov– ern the financial and operation policies of the legal parent. Practical Insight Alliance Pharma, pic , a UK company, was "acquired" by Peerless Technology on Decem– ber 23, 2003. Peerless became the legal parent of Alliance but due to the relative values of the companies, the former shareholders of Alliance became the majority shareholder with 67% of the combined company. The management of the new group was that of Alliance, and Peerless changed its name to Alliance Pharma. This was a reverse acquisition. As a result of this reverse acquisition, the financial statements would comprise those of Alliance plus those of Peerless from the date of acquisition, and the comparative results of Alliance. Case Study 2