What is a Stapling transaction and Dual-listed entities under IFRS 3

Stapling transaction and Dual-listed entities under IFRS 3

A stapling arrangement (that is, one that combines separate entities and businesses by the unification of ownership and voting interests in the combining entities) is a business combination. The formation of dual listed entities is also a business combination.

Stapling transactions and dual-listed entities are rare, and they occur only in certain territories. A stapling transaction is a contractual arrangement between two legal entities. One legal entity issues equity securities that are combined with (that is, stapled to) the securities issued by the other legal entity.

The stapled securities are quoted at a single price and cannot be traded or transferred independently.

A dual-listed entity is typically an arrangement between two listed legal entities, in which their activities are managed under contractual arrangements as a single economic entity while retaining their separate legal identities.

The securities of each entity normally are quoted, traded, and transferred independently in different capital markets.

One entity has not acquired an ownership interest in the other entity, and the individual legal entities have not been combined to form a new legal entity. However, this is considered a business combination from an accounting perspective. [IFRS 3 para 43(c)].

Stapling transactions and the formation of dual-listed entities typically occur without the transfer of consideration.

Now, let’s revise some of the elements of what is business and what is an asset acquisition?

A business combination is defined as “a transaction or other event in which an acquirer obtains control of one or more businesses”.

All business combinations are accounted for using the acquisition method under IFRS 3, including those described as ‘true mergers’.

The standard does not apply to:

• Acquisition of an asset or group of assets that does not meet the definition of a business.
• Formations of a joint arrangement in the financial statements of the joint arrangement itself. Combinations of entities or businesses under common control.
• The acquisition by an investment entity of an investment in a subsidiary that is required to be measured at fair value through profit or loss

Now, let’s understand what is the definition of Business?

What do you think? The definition of business is very important to understand whether the company is acquiring a business or just an asset of the company? A business typically would involve the management and running the operations to earn some economic benefits. It would typically involve the INPUTS to be fed into (like material, man-hours, overheads, etc..), PROCESSES to convert those inputs into OUTPUTS which can be then sold in the market to earn some economic benefits.

Not all inputs and associated processes used by the seller need to be transferred to be considered a business. A business exists if a market participant is capable of continuing to manage the acquired group to provide a return (for example, the buyer would be able to integrate the acquired group with its own inputs and processes). An organized workforce can constitute a process, but processes can be separated from the people required to execute those processes. A business will need people, but they do not have to be the current individuals carrying out those processes. A market participant could, for example, integrate the business with its own inputs and processes, or it might be able to easily acquire any missing inputs or processes.

Important Note: Nearly all businesses have liabilities as well as assets. However, liabilities do not need to be present for a business to exist.

Now, let’s see whether a business can be considered with no outputs.

Example:

Computer entity X acquires programming development entity Y. Entity X was founded to make mobile applications. The current activities of the entity include researching and developing its first product and creating a market for the product. The entity has not generated any revenues and has no existing customers. Entity Y’s workforce is composed primarily of programmers. Entity Y has the intellectual property, software and fixed assets required to develop applications. The elements in the acquisition contain both inputs and processes. The inputs are intellectual property used to design the applications, fixed assets and employees. The processes are strategic and operational processes for developing the applications. It is likely that a business has been acquired because entity Y has access to the inputs and processes necessary to manage and produce outputs.

The lack of outputs, such as revenue and a product, does not prevent the entity from being considered a business.

The most common method to execute a business combination is to purchase a controlling interest in shares. This purchase might be in cash, by issuing equity interests, or incurring liabilities (or a combination of these), or without any transfer of consideration. A parent might acquire a subsidiary by other means. The exchange of assets other than cash (non-monetary assets) might result in the acquisition of a business.