IFRS 3 - The Equity consolidation in company acquisitions

Inhalt

1. Identifying the purchaser

2. Determining the acquisition date

3. Determining the purchase costs of a company acquisition

4. Recording of assets and liabilities during first consolidation

5. Valuation of assets and liabilities on first consolidation

1. Identifying the purchaser

A purchaser has to be identified in all business combinations in accordance with IFRS 3. This is important because with the purchase method the net assets and liabilities of the acquired company are revalued, whereas the net assets and liabilities of the purchaser remain at book values.

The purchaser is the company which obtains control over another company.^[1] Control is obtained when an company achieves the power to govern the financial and operating policies of another company, and draws benefits from that activity.^[2]

As regards the definition of control, two cases are differentiated:^[3]

Case 1 is based on acquisition of the majority of voting rights, i.e. a majority of more than 50%.^[4]

Case 2 describes obtaining control where less than half of the voting rights are obtained.

While the assumption of control in case 1 can be refuted (e.g. because of special regulations in the company’s articles on exercising voting rights), control in case 2 is considered as irrefutable.^[5] The following facts indicate in favour of the presence of control:^[6]

1. the acquiring company can have more than half the voting rights in agreement with other investors,
2. the acquiring company commands by memorandum of association or agreement the right to determine the finance and operating policies of the acquired company,
3. the acquiring company has the right to appoint or dispense with the majority of the members of the management and/or supervisory body or an equivalent management body of the other company,
4. the acquiring company has the right to exercise the majority of votes in meetings held by the management and/or supervisory body or an equivalent management body of the other company.

If a purchaser cannot be clearly identified, the following criteria are to be consulted for determining the purchaser in accordance with IFRS 3.^[7]

1. If the fair value of one of the combining entities is significantly higher, this entity is presumably the acquirer,
2. If the business combination is effected through an exchange of equity shares with voting rights for cash or other assets, the company relinquishing cash or other assets is presumably the purchaser,
3. If in a business combination the management of a company can determine the composition of the other company’s management, the company which can determine the composition is presumably the purchaser.
4. Furthermore, according to IFRS 3.B14, companies that make an identifiable payment or take on debts to pay for the capitalisation are considered to be the acquirer.

Special questions concerning the determination of the acquirer arise with reverse acquisitions, which are present if an company allows itself to be acquired. This happens, for example, if a large unlisted company wants to obtain a stock exchange listing by combining with a smaller listed company.^[8] The following could be evidence of a reverse:^[9]

1. the fair value of the legally acquired company is significantly higher than that of the acquiring company,
2. the management of the legally acquired company can determine the composition of the future management of the acquiring company.

In the case of a reverse acquisition the net assets and debts of the legal parent company are to be recorded at fair value within the framework of the acquisition method, whereas net assets and liabilities of the legal subsidiary are continued at book values.^[10]

2. Determining the acquisition date

The acquisition date is defined as the day on which control of net assets and the finance and business policies of the acquired company effectively passes to the acquirer.^[11] The necessity to determine the acquisition date is not explicitly mentioned in IFRS 3. The necessity to determine the acquisition date however results from the following facts:^[12]

1. The acquisition date represents the date of first consolidation
2. In cases of a single exchange transaction the values of the purchase price components not consisting of money are to be valued at the acquisition date.^[13]
3. The net assets and liabilities of the acquired company are to be valued at fair value on the acquisition date.^[14]
4. The goodwill is to be determined on the acquisition date.

The acquisition date is the date when the acquirer obtains actual control over the acquired company. In this respect it is the economic and not the legal content which is decisive. The earliest acquisition date is the signing of the contract, and the latest is the material execution (transfer of shares).

If the business combination depends on an official permission or approval by a committee, these dates may also be considered as possible acquisition dates.^[15]

With a single exchange transaction the acquisition date corresponds to the date of exchange. With an acquisition in stages the exchange dates are the dates when the investments are to be recorded in the individual company accounts of the acquirer. At each step the acquired non-cash items are recorded, irrespective of the acquisition date.^[16]

Since the acquisition date and reporting date of the acquired company only coincide in exceptional cases, normally interim accounts need to be drawn up showing the proportional financial result.

Further, the fair values of the assets and liabilities acquired and contingent liabilities need to be determined.

[...]

^[1] Cf. IFRS 3 margin no. 16

^[2] Cf. IFRS 3 margin no. 19

^[3] Cf. IFRS 3.19

^[4] Cf. IAS 27

^[5] Cf. Baetge/Hayn/Ströher Part B of IFRS 3, margin no. 79f

^[6] Cf. IFRS 3.19

^[7] Cf. IFRS 3, margin no. 20

^[8] Cf. IFRS 3 margin no. 21 and IFRS 3, Appendix B, margin no. B1

^[9] Cf. IFRS 3.20

^[10] Cf. IFRS 3 margin no. B7

^[11] Cf. IFRS 3.25

^[12] Cf. Lüdenbach / Hoffmann, 2006, § 31 margin no. 40

^[13] Cf. IFRS 3 margin no. 24

^[14] Cf. IFRS 3 margin no. 36

^[15] Cf. Lüdenbach / Hoffmann, 2006, § 31 margin no. 41 et seq.

^[16] Cf. IFRS 3. Appendix A