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Transfer pricing
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Outsourcing Changes to the Outsourcing legislation, specifically when offshoringSignificant changes to the dynamic of the financial services sector in recent years have shifted the paradigms in how we work. The increased digitisation of the workforce, changes in business models, globalisation, and remote working capabilities have led to a new approach to the delivery of services.
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Banking Holding banking to account: the real diversity and inclusion pictureWe explore how the banking sector can continue to attract, retain and nurture women to build a more diverse and inclusive future.
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Sustainability From voluntary to mandatory ESG: How banks can future-proof their operationsAs we move from voluntary ESG initiatives to mandatory legislation, we explore what the banking sector needs to prioritise.
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IFRS IFRS 9 - Audit of Expected Credit LossesGPPC releases The Auditor’s response to the risks of material misstatement posed by estimates of expected credit losses under IFRS 9
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growthiQ Steering your company to long-term successHistory has something important to tell us about the difficulties of steering a business to long-term success – through seismic shifts in technology, consumer demands and product development. With that in mind it’s unsurprising that over half the world’s largest companies in the early 1900s had shut their doors by the late 1990s. Some, however, have endured.
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Infographic Grow workforce loyalty during the Great ResignationEmployers must work harder than ever to grow workforce loyalty and meet the increasing demands for a purpose-led organisation.
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Article Climate change: planning for mandatory TCFD reportingTFCD reporting requirements are becoming mandatory. Here’s how retailers can get ready for reporting on climate change.
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Women in Business The power of diversity: can life sciences maintain their lead?Our Women in Business 2022 report shows that life sciences companies – in line with other mid-market businesses – are taking deliberate, necessary action to create more inclusive working practices and giving female talent access to senior positions in greater numbers than ever before.
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United States Driving an insurance carrier ecosystem strategyGrant Thornton’s Mathew Tierney, global head of Insurance, and Andrée Bourgon, principal for Insurance Strategy and Transactions, recently talked with John Weber of A.M. Best Co. for that company’s “Best’s Review” video series.
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International Financial Reporting Standards Implementation of IFRS 17 ‘Insurance Contracts’The auditor’s response to the risks of material misstatement arising from estimates made in applying IFRS 17 ‘Insurance Contracts’
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IFRS Get ready for IFRS 17After twenty years of development the IASB has published IFRS 17 ‘Insurance Contracts’, find out more.
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Women in Business The power of diversity: can life sciences maintain their lead?Our Women in Business 2022 report shows that life sciences companies – in line with other mid-market businesses – are taking deliberate, necessary action to create more inclusive working practices and giving female talent access to senior positions in greater numbers than ever before.
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Report Technology insights Q2 2022What did Q2 2022 bring for technology, media, and telecommunications? Stay informed with our latest quarterly review.
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Not for profit How to effectively leave the pandemic behindAs the light at the end of the COVID-19 tunnel shines brighter, nonprofits are assessing the past year’s impact on their businesses and are focusing on the next steps to achieve success in the year ahead.
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Financial reporting advisory The rise of the Special Purpose Acquisition Company (SPAC)While we are seeing a rise in activity for Special Purpose Acquisition Companies, what is a SPAC and what do you need to consider before entering into one?
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Private equity ESG for private equityMost US private equity firms are taking steps, prompted by a combination of European examples, imminent regulation, limited partner expectations, and their own sense of what needs to be done.
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Access to finance Raise finance to invest in changePrepare your business to raise finance to invest in change.
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Private equity firms Private equity in the mid-market: reshaping strategies for 2021When the global COVID-19 pandemic stormed across the globe in early 2020, the private equity sector was hit hard but deals are coming back to the market.
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Article Time to review funding and financing arrangements?What does the funding landscape look like for public sector organisations in 2022?
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Global business pulse - industry analysis Mid-market recovery spreads to more industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Global business pulse - industry analysis A very uneven recovery across industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Industries European Real Estate PodcastJessica Patel, Tax Partner at Grant Thornton UK speaks with tax partners and directors across the network to share their insights on the real estate market and some of the challenges.
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Industries European Real Estate PodcastJessica Patel, Tax Partner at Grant Thornton UK speaks with tax partners and directors across the network to share their insights on the real estate market and some of the challenges.
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Global business pulse - industry analysis Mid-market recovery spreads to more industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Global business pulse - industry analysis A very uneven recovery across industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Article PSR report aims to make digital payments accessibleThe PSR aims to reduce barriers to digital payments but many remain hesitant. How can payment services move forward?
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Global business pulse - industry analysis Mid-market recovery spreads to more industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Global business pulse - industry analysis A very uneven recovery across industriesThe index results for 13 key industries of the mid-market reveals a very uneven recovery from COVID-19
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Telecoms Can tech and telecom leverage economic headwindsAs most businesses brace for an economic downturn, tech and telecom could see new prospects. But, to turn the headwinds to your advantage, you need to find your unique opportunities and risks.
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Technology Mid-market tech companies lead the way on diversity and inclusionWe explore how the mid-market tech sector can continue to build and nurture a culture that’s increasingly more diverse and inclusive for women.
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Tax Eight tax approaches for global tech employeesCompanies need to understand the tax implications for each unique geography and country there employees reside in.
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Telecoms Can tech and telecom leverage economic headwindsAs most businesses brace for an economic downturn, tech and telecom could see new prospects. But, to turn the headwinds to your advantage, you need to find your unique opportunities and risks.
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TMT TMT industry: Fully charged or on standby?Our research revealed five key trends that resonated with Technology, Media and Telecoms (TMT) industry leaders around the world. We asked a panel of our experts from UK, US, India Ireland and Germany, to give us their reaction to the findings.
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Cybersecurity One size fits nothingTechnology companies must adopt a new approach to digital risk: those that successfully develop a reputation for digital trust by demonstrating an unwavering commitment to cyber security and data privacy will be able to carve out a competitive advantage.
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Technology, media & telecommunications Why it’s time for a 5G reality checkFigures suggest the mobile sector is maturing. While data usage continues to soar, mobile revenues are expected to flatten out over the next few years.
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IFRS Alerts
IFRS Alerts covering the latest changes published by the International Accounting Standards Board (IASB).
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Example Financial Statements
General guidance for preparers of financial statements that supports the commitment to high quality, consistent application of IFRS.
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Insights into IFRS 2
Insights into IFRS 2 summarises the key areas of the Standard, highlighting aspects that are more difficult to interpret and revisiting the most relevant features that could impact your business.
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IFRS 3
Mergers and acquisitions are becoming more common as entities aim to achieve their growth objectives. IFRS 3 ‘Business Combinations’ contains the requirements for these transactions.
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IFRS 8
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IFRS 16
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IAS 36
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IFRS 17
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International indirect tax guide
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Global transfer pricing guide
Helping you easily find everything you need to know about the rules and regulations regarding transfer pricing and Country by Country reporting for every country you do business with.
Our ‘Insights into IFRS 3’ series summarises the key areas of the Standard, highlighting aspects that are challenging to interpret and apply in practice. This article follows on from our published article ‘Insights into IFRS 3 – Identifying the acquirer’ and presents guidance for an area which is difficult in practice – reverse acquisitions.
Our ‘Insights into IFRS 3’ series summarises the key areas of the Standard. Download the full article or read on for more information.
What is a reverse acquisition?
A reverse acquisition occurs when an entity that issues securities (the legal parent or the legal acquirer) is identified as the accounting acquiree, and accordingly, the legal subsidiary (or the legal acquiree) is identified as the accounting acquirer.
One situation in which reverse acquisitions often arise is when a private operating entity wants a fast-track to a public listing. To accomplish this, the private entity arranges for its equity interests to be acquired by a smaller, publicly listed entity. The listed entity carries out the acquisition by issuing shares to the shareholders of the private operating entity.
After the exchange of shares, the former shareholders of the private entity, as a group, hold the majority of the voting rights of the combined entity. In addition, the former shareholders of the private entity then appoint the majority of the members of the new combined entity’s board. In this case, although the publicly listed entity issued shares to acquire the private entity, the listed entity will be identified as the accounting acquiree and the private entity as the accounting acquirer as the former shareholders of the private entity, as a group, have obtained the control over the combined entity.
This is explained in the following diagram:
Is the reverse acquisition transaction a business combination?
Answering this question involves determining:
- which company is the ‘accounting acquirer’ under IFRS 3, ie the company that obtains effective control over the other, and
- whether or not the acquired company (ie the ‘accounting acquiree’) is a business as defined in IFRS 3.
Identifying the acquirer
When a transaction between entities is carried out primarily by exchanging shares, the entity that obtains the control over the other entity is the accounting acquirer. Although IFRS 3 indicates to use the guidance in IFRS 10 to identify such acquirer, in practice, the factors listed in IFRS 3 with regards to the transactions effected by an exchange of equity interests should also be analysed. Refer to our article ‘Insights into IFRS 3 – Identifying the acquirer’ for more details on this guidance.
The following facts and circumstances are likely to indicate the legal subsidiary is the accounting acquirer:
- the former shareholders of the legal subsidiary, as a group, retain or receive the largest portion of the voting rights in the new combined entity (which include potential voting rights that could be exercised)
- the relative size (measured in, for example, assets, revenues or profit) of the legal subsidiary is significantly greater than that of the legal parent
- the former owners or managers of the legal subsidiary dominate the composition of the governing body or senior
management of the combined entity.
Practical insight
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The IFRS Interpretations Committee (IFRIC) received a request to clarify whether a business (legally acquired) that is not a legal entity could be considered to be the accounting acquirer in a reverse acquisition under IFRS 3. In September 2011, the IFRIC observed that IFRS standards do not require a ‘reporting entity’ to be a legal entity. Therefore, an acquirer that is a ‘reporting entity’ but not a legal entity can be considered to be an accounting acquirer in a reverse acquisition.
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This IFRIC decision has raised some issues in practice on how to determine the boundaries of the assets and liabilities of the business and the nature of the equity that is transferred.
What if the legal acquirer transfers also cash?
When a legal parent pays cash to acquire shares in a subsidiary the transaction would normally be accounted for as a regular business combination, ie considering the entity that is transferring cash is the acquirer. However, in some circumstances the business combination can still be considered a reverse acquisition even if cash is transferred from the legal parent to the owners of the legal subsidiary where other facts demonstrate the legal subsidiary is finally the accounting acquirer.
An important determining factor in identifying the acquirer is control. When it is clear as part of this transaction the legal subsidiary has obtained control over the legal parent (in accordance with the definition of control as stated in IFRS 10 ‘Consolidated Financial Statements’), the transaction should then be accounted for as a reverse acquisition. While this is a possible scenario, and one that can be challenging to deal with in practice, we do not believe reverse acquisitions with a payment in cash are common in practice.
What is a business?
This is one of the most commonly asked application questions in practice, in part because the answer makes a significant difference to how the transaction is accounted for. IFRS 3 includes both a definition of a business and some detailed supporting guidance.
What are the minimum requirements to meet the definition of a business?
IFRS 3 acknowledges that despite most businesses having outputs, outputs are not necessary for an integrated set of assets and activities to qualify as a business. In order to meet the definition of a business, the acquired set of activities and assets must have as a minimum an input and a substantive process that can collectively significantly contribute to the creation of outputs.
Definition
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A business is defined as ‘An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.’
Furthermore, IFRS 3 includes an optional concentration test that could be relevant in the present context. Refer to our article ‘Insights into IFRS 3 – Definition of a business’ for more details, Including how to apply the optional concentration test.
In our view, a listed shell company that has no current substantive operations, and whose activities mainly involved managing its cash balances and filing obligations, would not meet the criteria of a business. This is because it has no substantive processes. For this reason, we consider many transactions in which a private operating company arranges to be acquired by a listed shell company are not business combinations and therefore fall outside the scope of IFRS 3.
How to account for a reverse acquisition
The following diagram illustrates the two possible accounting treatments, with reference to the relevant publications, when facing a reverse acquisition:
How we can help
We hope you find the information in this article helpful in giving you some insight into IFRS 3. If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or your local member firm.