Chapter 2: Multiple transactions that result in the acquisition of a business

An acquirer is identified for all business combinations. There can only be one acquirer in a business combination. The acquirer is the combining entity that obtains control of the acquiree, being the other combining business or businesses.

The guidance in IFRS 10 is used to determine which entity is the acquirer in a business combination: “an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee”.

There are additional guidance and indicators in IFRS 3 for identifying the acquirer where it is not clear which party is an acquirer. There is no hierarchy of indicators. Certain indicators will be more relevant in certain circumstances but, in general, all relevant indicators are applied to each business combination in order to determine the acquirer.

The entity that transfers the cash or other assets, or incurs the liabilities, is generally the acquirer, where the business combination is affected primarily by transferring cash or other assets, or by incurring liabilities. Where the equity of one entity is purchased by another entity, its owners cease their involvement. It is likely that the entity making the payment will control the purchased entity.

The acquirer is usually the entity that issues its equity instruments, where the business combination is affected primarily by exchanging equity interests.

Effecting a business combination through a series of linked transactions

An international media group, entity G, has agreed to acquire entity H’s television broadcast and production operations. For tax reasons, entity G will not acquire entity H’s shares. The programme rights will be purchased by one subsidiary of entity G, while the production facilities and workforce located in the related countries will be acquired by separate operating subsidiaries of entity G in those geographic locations. None of the transactions can complete unless all of the transactions complete. The transactions form a business combination. Separation into three transactions does not affect the substance of the arrangements. The transactions are linked, and the substance is that entity G has acquired entity H’s television business. Entity G accounts for the combined effect of the transactions as an acquisition of entity H.

Identifying the acquirer in a stapling arrangement

A stapling arrangement, that combines separate entities and businesses by the unification of ownership and voting interests in the combining entities, is a business combination under IFRS 3. The standard provides guidance on identifying the acquirer by assessing the relative voting rights in the combined entity after the combination. The acquirer is usually the combining entity whose owners, as a group, receive the largest portion of the voting rights in the combined entity. This guidance is relevant in identifying which of the combining entities is the acquirer in the stapling transaction.

Other considerations in identifying the acquirer

Some circumstances can complicate the identification of the acquirer.

For example: Acquisitions involving entities with ordinary (common) shareholders: The effect of common ownership (but not common control) among the shareholders of the combining entities should be considered in identifying the accounting acquirer. The analysis of the relative voting rights in a business combination involving entities with common shareholders should consider the former shareholder groups of the combining entities and not the individual owners that are common to the combining entities. The former shareholder group that retains or receives the largest portion of the voting rights in the combined entity would be the accounting acquirer, absent the consideration of any of the other factors provided in the standards.

Options, warrants and convertible instruments: Potential voting rights (such as options, warrants and convertible instruments assumed or exchanged in a business combination) are considered in the determination of the accounting acquirer if the holders of these instruments are viewed to be essentially the same as common shareholders. For example, holders of the debt that is exchanged for shares in a business combination can be included in the determination of the relative voting rights in the combined entity if the debt is convertible and ‘in the money’ prior to the acquisition.