is in relation to the acquiree, i.e. the identifiable assets acquired and the liabilities assumed,
particularly as these may include items that the acquiree had not previously recognised as
assets and liabilities in its financial statements and, in most cases, need to be measured at
their acquisition-date fair value (see 5 above). Information may also need to be obtained
in determining the fair value of any contingent consideration arrangements (see 7.1 above).
The measurement period ends as soon as the acquirer receives the information it was
seeking about facts and circumstances that existed as of the acquisition date or learns that
it cannot obtain more information. The measurement period cannot exceed one year
from the acquisition date. [IFRS 3.45]. The Basis for Conclusions notes that in placing this
constraint it was ‘concluded that allowing a measurement period longer than one year
would not be especially helpful; obtaining reliable information about circumstances and
conditions that existed more than a year ago is likely to become more difficult as time
passes. Of course, the outcome of some contingencies and similar matters may not be
known within a year. But the objective of the measurement period is to provide time to
obtain the information necessary to measure the fair value of the item as of the acquisition
date. Determining the ultimate settlement amount of a contingency or other item is not
necessary. Uncertainties about the timing and amount of future cash flows are part of the
measure of the fair value of an asset or liability.’ [IFRS 3.BC392].
Under IFRS 3, if the initial accounting is incomplete at the end of the reporting period in
which the combination occurs, the acquirer will include provisional amounts. [IFRS 3.45].
IFRS 3 specifies particular disclosures about those items (see 16.2 below). [IFRS 3.BC393].
Although paragraph 45 refers to the initial accounting being ‘incomplete by the end of
the reporting period’ and the acquirer reporting ‘provisional amounts for the items for
which the accounting is incomplete’, [IFRS 3.45], it is clear from the Illustrative Examples
accompanying IFRS 3 that this means being incomplete at the date of authorising for
issue the financial statements for that period (see Example 9.29 below). Thus, any items
that are finalised up to that date should be reflected in the initial accounting.
12.1 Adjustments made during measurement period to provisional
amounts
During the measurement period, the acquirer retrospectively adjusts the provisional
amounts recognised at the acquisition date to reflect new information obtained about
facts and circumstances at the acquisition date that, if known, would have affected the
measurement of the amounts recognised.
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Similarly, the acquirer recognises additional assets or liabilities if new information is
obtained about facts and circumstances at the acquisition date and, if known, would
have resulted in the recognition of those assets and liabilities as of that date. [IFRS 3.45].
IFRS 3 requires the acquirer to consider all pertinent factors to distinguish information
that should result in an adjustment to the provisional amounts from that arising from
events that occurred after the acquisition date. Factors to be considered include the
date when additional information is obtained and whether the acquirer can identify a
reason for a change to provisional amounts. Clearly, information obtained shortly after
the acquisition date is more likely to reflect circumstances that existed at the acquisition
date than information obtained several months later. If the acquirer sells an asset to a
third party shortly after the acquisition date for an amount that is significantly different
to its provisional fair value, this is likely to indicate an ‘error’ in the provisional amount
unless there is an intervening event that changes its fair value. [IFRS 3.47].
Adjustments to provisional amounts that are made during the measurement period are
recognised as if the accounting for the business combination had been completed at the
acquisition date. This may be in a prior period, so the acquirer revises its comparative
information as needed. This may mean making changes to depreciation, amortisation
or other income effects. [IFRS 3.49]. These requirements are illustrated in the following
example, which is based on one included within the Illustrative Examples
accompanying IFRS 3. [IFRS 3.IE50-IE53]. The deferred tax implications are ignored.
Example 9.29: Adjustments made during measurement period to provisional
amounts
Entity A acquired Entity B on 30 September 2018. Entity A sought an independent valuation for an item of
property, plant and equipment acquired in the combination. However, the valuation was not complete by the
time Entity A authorised for issue its financial statements for the year ended 31 December 2018. In its 2018
annual financial statements, Entity A recognised a provisional fair value for the asset of €30,000. At the
acquisition date, the item of property, plant and equipment had a remaining useful life of five years.
Five months after the acquisition date (and after the date on which the financial statements were issued), Entity A
received the independent valuation, which estimated the asset’s acquisition-date fair value at €40,000.
In its financial statements for the year ended 31 December 2019, Entity A retrospectively adjusts the 2018
prior year information as follows:
(a) The carrying amount of property, plant and equipment as of 31 December 2018 is increased by €9,500.
That adjustment is measured as the fair value adjustment at the acquisition date of €10,000 less the
additional depreciation that would have been recognised if the asset’s fair value at the acquisition date
had been recognised from that date (€500 for three months’ depreciation).
(b) The carrying amount of goodwill as of 31 December 2017 is decreased by €10,000.
(c) Depreciation expense for 2018 is increased by €500.
Entity A disclosed in its 2018 financial statements that the initial accounting for the business combination
has not been completed because the valuation of property, plant and equipment has not yet been received.
In its 2019 financial statements, Entity A will disclose the amounts and explanations of the adjustments to the
provisional values recognised during the current reporting period. Therefore, Entity A will disclose that the 2018
comparative information is adjusted retrospectively to increase the fair value of the item of property, plant and
equipment at the acquisition date by €10,000, resulting in an increase to property, plant and equipment of €9,500,
offset by a decrease to goodwill of €10,000 and an increase in depreciation expense of €500.
The example below illustrates that adjustments during the measurement period are also
made where information is received about the existence of an asset as at the acquisition date:
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Example 9.30: Identification of an asset during measurement period
Entity C acquired Entity D on 30 November 2018. Entity C engaged an independent appraiser to assist with
the identification and determination of fair values to be assigned to the acquiree’s assets and liabilities.
However, the appraisal was
not finalised by the time Entity C authorised for issue its financial statements for
the year ended 31 December 2018, and therefore the amounts recognised in its 2018 annual financial
statements were on a provisional basis.
Six months after the acquisition date, Entity C received the independent appraiser’s final report, in which it
was identified by the independent appraiser that the acquiree had an intangible asset with a fair value at the
date of acquisition of €20,000. As this had not been identified at the time when Entity C was preparing its
2018 annual financial statements, no value had been included for it.
In its financial statements for the year ended 31 December 2019, Entity C retrospectively adjusts the prior
year information to reflect the recognition of this intangible asset.
Although a change in the provisional amount recognised for an identifiable asset will usually
mean a corresponding decrease or increase in goodwill, new information obtained could
affect another identifiable asset or liability. If the acquirer assumed a liability to pay damages
relating to an accident in one of the acquiree’s facilities, part or all of which was covered by
the acquiree’s liability insurance policy, new information during the measurement period
about the fair value of the liability would affect goodwill. This adjustment to goodwill would
be offset, in whole or in part, by a corresponding adjustment resulting from a change to the
provisional amount recognised for the claim receivable from the insurer. [IFRS 3.48]. Similarly,
if there is a non-controlling interest in the acquiree, and this is measured based on the
proportionate share of the net identifiable assets of the acquiree (see 8 above), any
adjustments to those assets that had initially been determined on a provisional basis will be
offset by the proportionate share attributable to the non-controlling interest.
12.2 Adjustments made after end of measurement period
After the end of the measurement period, the acquirer can only revise the accounting for
a business combination to correct an error in accordance with IAS 8 – Accounting Policies,
Changes in Accounting Estimates and Errors. [IFRS 3.50]. This would probably be the case
only if the original accounting was based on a misinterpretation of the facts which were
available at the time; it would not apply simply because new information had come to light
which changed the acquiring management’s view of the value of the item in question.
Adjustments after the end of the measurement period are not made for the effect of
changes in estimates. In accordance with IAS 8, the effect of a change in estimate is
recognised in the current and future periods (see Chapter 3 at 4.5).
13
SUBSEQUENT MEASUREMENT AND ACCOUNTING
Assets acquired, liabilities assumed or incurred and equity instruments issued in a
business combination are usually accounted for in accordance with the applicable
IFRSs. However, there is specific guidance on subsequent measurement of and
accounting for the following:
(a) reacquired rights (see 5.6.5 above);
(b) contingent liabilities recognised as of the acquisition date (see 5.6.1.B above);
(c) indemnification
assets (see 5.6.4 above); and
(d) contingent
consideration (see 7.1.3 above). [IFRS 3.54].
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Other IFRSs provide guidance on subsequent measurement and accounting: [IFRS 3.B63]
(a) IAS 38 prescribes the accounting for identifiable intangible assets acquired in a business
combination (see Chapter 17), although accounting for some intangible assets is not
prescribed by IAS 38 but by other IFRSs (see Chapter 17 at 2). [IFRS 3.B39]. Goodwill is
measured at the amount recognised at the acquisition date less any accumulated
impairment losses, measured in accordance with IAS 36 (see Chapter 20 at 8);
(b) IFRS 4 provides guidance on the subsequent accounting for an insurance contract
acquired in a business combination (see Chapter 51); IFRS 17, if adopted, provides
guidance on the initial and subsequent measurement of a group of contracts within
the scope of IFRS 17 acquired in a business combination (see Chapter 52);
(c) IAS 12 prescribes the subsequent accounting for deferred tax assets (including
unrecognised deferred tax assets) and liabilities acquired in a business combination
(see Chapter 29);
(d) IFRS 2 provides guidance on subsequent measurement and accounting for the
portion of replacement share-based payment awards issued by an acquirer that is
attributable to employees’ future services (see Chapter 30 at 11); and
(e) IFRS 10 provides guidance on accounting for changes in a parent’s ownership
interest in a subsidiary after control is obtained (see Chapter 7).
14 REVERSE
ACQUISITIONS
The standard takes the view that the acquirer is usually the entity that issues its equity
interests, but recognises that in some business combinations, so-called ‘reverse
acquisitions’, the issuing entity is the acquiree.
Under IFRS 3, a reverse acquisition occurs when the entity that issues securities (the
legal acquirer) is identified as the acquiree for accounting purposes based on the
guidance in the standard as discussed at 4.1 above. Perhaps more accurately, the legal
acquiree must be identified as the acquirer for accounting purposes.
Reverse acquisitions sometimes occur when a private operating entity wants to become
a public entity but does not want to register its equity shares. The private entity will
arrange for a public entity to acquire its equity interests in exchange for the equity
interests of the public entity. Although the public entity is the legal acquirer because it
issued its equity interests, and the private entity is the legal acquiree because its equity
interests were acquired, application of the guidance results in identifying: [IFRS 3.B19]
(a) the public entity as the acquiree for accounting purposes (the accounting acquiree); and
(b) the private entity as the acquirer for accounting purposes (the accounting acquirer).
If the transaction is accounted for as a reverse acquisition, all of the recognition and
measurement principles in IFRS 3, including the requirement to recognise goodwill,
apply. The standard also notes that the legal acquirer must meet the definition of a
business (see 3.2 above) for the transaction to be accounted for as a reverse acquisition,
[IFRS 3.B19], but does not say how the transaction should be accounted for where the
accounting acquiree is not a business. It clearly cannot be accounted for as an
acquisition of the legal acquiree by the legal acquirer under the standard either, if the
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legal acquirer has not been identified as the accounting acquirer based on the guidance
in the standard. This is discussed further at 14.8 below.
14.1 Measuring the consideration transferred
The first item to be included in the computation of goodwill in a reverse acquisition is
the consideration transferred by the accounting acquirer, i.e. the legal
acquiree/subsidiary. In a reverse acquisition, the accounting acquirer usually issues no
consideration for the acquiree; equity shares are issued to the owners of the accounting
acquirer by the accounting acquiree. The fair value of the consideration transferred by
the accounting acquirer is based on the number of equity interests the legal subsidiary
would have had to issue to give the owners of the legal parent the same percentage
equity interest in the combined entity that results from the reverse acquisition. The fair
value of the number of equity interests calculated in that way is used as the fair value
of consideration transferred. [IFRS 3.B20].
These requirements are illustrated in the following example, which is based on one
included within the Illustrative Examples accompanying IFRS 3. [IFRS 3.IE1-IE5].
Example 9.31: Reverse acquisition – calculating the fair value of the
consideration transferred
Entity A, the entity issuing equity instruments and therefore the legal parent, is acquired in a reverse
acquisition by Entity B, the legal subsidiary, on 30 September 2019. The accounting for any income tax
effects is ignored.
Statements of financial position of Entity A and Entity B immediately before the business combination are:
Entity A
Entity
B
€
€
Current assets
500
700
Non-current assets
1,300
3,000
Total assets
1,800
3,700
Current liabilities
300
600
Non-current liabilities
400
1,100
Total liabilities
700
1,700
Owner’s equity
Issued equity
100 ordinary shares
300
60 Ordinary shares
600
Retained earnings
800
1,400
Total shareholders’ equity
1,100
2,000
Other information
(a) On 30 September 2019, Entity A issues 2.5 shares in exchange for each ordinary share of Entity B. All
of Entity B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues 150 ordinary
shares in exchange for all 60 ordinary shares of Entity B.
Business
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 135