Chapter 4: Determining the acquisition date

Determining the date when control passes: not the date of agreement

The date on which control passes is a matter of fact and cannot be backdated or artificially altered by the parties specifying a different date. Control might pass in a number of ways. This will often depend on how the offer for the entity is made, whether it is a private sale or it is affected by the issue or cancellation of shares. The date when control is transferred in a public offer is usually the date when the offer is accepted unconditionally and provides the acquirer with the right to control the acquiree. This will usually be the date on which a sufficient number of irrevocable acceptances are received to enable the new parent to exercise control over the undertaking. Under a private treaty, the date when control is transferred is generally the date when an unconditional offer is accepted. Some jurisdictions require an acquirer to register the shares in a new subsidiary with the relevant administrative department.

Registration is routine and is never refused, but the process takes several weeks to complete, and the acquirer will not have legal title to the shares until the registration form is issued. This requirement is not a substantive condition required to protect the parties. The business combination is recognised when control passes, even if this is before the registration process is complete. The accounting for a business combination occurs when control of the acquiree passes to the acquirer.

The negotiations to purchase or sell a subsidiary might take place over a considerable period, and there might be delays between the time when agreement is reached in principle and the time when a binding agreement is reached.

For example, if a business combination agreement provides that completion will take place only if material litigation is resolved in the acquiree’s favour, the business combination will not be recognised until the litigation is resolved. Other conditions, such as competition authority or shareholder approval, might also take time to be satisfied. Example : Entity C acquires 100% of entity D for cash. The sale agreement specifies that the acquisition date is 10 March.

The shares in entity D are transferred to entity C when the consideration is paid on 1 April. Entity C nominates directors and appoints them in place of the existing directors on 15 April (that is, the date when all of the conditions in the sale agreement are satisfied). The date of acquisition is 15 April (that is, the date from which entity C is able to control entity D). This is the date on which entity C is able to appoint the directors. The date in the sale agreement is not determinative for accounting purposes. The date when control passes to the acquirer might differ from the date specified in the agreement.

Determining the acquisition date where no consideration is transferred

An acquisition date might not coincide with the purchase of an ownership interest, but rather through another transaction or event (that is, a business combination achieved without the transfer of consideration). The acquisition date for these business combinations is the date when control is obtained through the other transaction or event.

This situation might arise, for example, if an investee enters into a share buy-back arrangement with certain investors and, as a result, control of the investee changes. Acquisition date is the date on which the share repurchase (and cancellation) occurred, resulting in an investor obtaining control over the investee.

Recognising and measuring consideration transferred

Consideration transferred is generally measured at fair value. Consideration transferred includes the assets transferred, the liabilities incurred by the acquirer to the former owners of the acquiree, and the equity interests issued by the acquirer to the former owners of the acquiree. Examples of consideration transferred include cash, other assets, contingent consideration, a subsidiary or a business of the acquirer transferred to the seller, common or preferred equity instruments, options, warrants and member interests of mutual entities.

Post-combination dividend treated as part of purchase consideration

Purchase consideration can take the form of a special dividend paid by the acquirer after the date of acquisition. For example, as part of the offer, a special dividend might be paid shortly after the acquisition to those sellers who became shareholders as a result of accepting the acquirer’s offer for the shares of the acquired entity. This is not specifically mentioned in IFRS 3 but, in principle, such dividends would be treated as part of the consideration transferred where it can be demonstrated that the payment was, in substance, part of the consideration transferred for the acquired business and not, for example, compensation for future employee services or a simple post-combination dividend to equity participants of the entity. Where a dividend is recognised as consideration, the acquirer would need to ensure that the cost of the dividend is not double counted in arriving at the fair value of the total consideration.

For example, the shares issued in consideration for the acquisition might need to be valued at an ‘ex-div’ price (‘excluding the dividend’). Example Entity F acquires entity G from entity H. Entity F issues shares to entity H that rank for dividends during a period before control passes to entity F. Dividends on the consideration shares are not paid during this period, but a special dividend will be paid on these shares shortly after control passes and the acquisition is completed.

How are the dividends accounted for?

The dividends are treated as part of the consideration. The seller receives more value than it would have received if the consideration shares had ranked for dividends only after the date of acquisition. Any dividend accrued after the date when control has passed to entity F is treated as a distribution. Payments might be structured to come from the acquired entity itself. This might be driven by tax or other regulatory reasons. If the acquired entity’s financial statements include a liability in respect of such payments, this is regarded as part of consideration rather than as a pre-combination liability of the acquired entity. The obligation to make such payments is treated, in the fair value exercise, as an element of the consideration and not as a reduction in the acquired entity’s net assets.