As we all know and perhaps keep a track about all the latest developments related to the proposed merger of Idea and Vodafone, it would be interesting to co-relate this with an interesting topic called “Reverse Acquisition” from the perspective of latest accounting standards i.e Ind-As/ IFRS that are applicable for many Indian Companies and presumably this proposed deal will also be covered within this section of Ind-As 103 “ Business Combination” which has specifically mentioned under its para B-19 to B-27 of “Reverse Acquisition”.
Idea-Vodafone proposed deal has been taken just an example and reader should note that there could be some other form of structuring once the deal is finalized in days to come which might change its accounting as well.
What is reverse acquisition and why it is important to identify?
When proposed acquirer (who intends to Control (buy) some entity) does not want its share to be listed but intends to become listed company then, in legal terms it will be like listed company is buying shares of non-listed company however from an accounting perspective the deal will be treated as reverse acquisition as non-listed company is controlling (buying) a listed company and accordingly accounting will be done.
Now, the question comes why it is so important to know who is actual acquiree (whose business is being bought) while dealing with these accounting requirements. Reader can follow below one important aspect of this accounting which require fair value of all the assets acquired & liabilities assumed by an acquirer-
Para 18 of Ind-As 103 “Business Combination” states that “The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values” which means that acquirer need to get all FAIR VALUED assets and liabilities of an acquire into its balance sheet and hence it is very important to identified who is actually be acquiree….
Now, Since Vodafone is not listed in India and Idea being a listed Company in Indian Stock market and assuming that Vodafone will acquire Idea (assumption only) duly fulfilling the requirement of control gained by acquirer over the acquiree as per Ind-As 110 “Consolidated Financial Statements”and accordingly para B-19 to B-27 of Ind-As 103 will applied for accounting of such reverse acquisition.
Since we all will agree that if Vodafone is acquiring Idea then presumable it will satisfy its definition being a “Business” as defined in Ind-As 103 “A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business combinations as that term is used in this Ind AS”.
Now, let’s have a very practical example to understand how the reverse accounting will work after assuming Vodafone “acquirer ” will acquire Idea “acquiree” (assumptions only) under reverse acquistion-
| Proposed | (per Ind-As 113) | |||||
| Status | Exchange of shares | Ratio | Fair value/ Shares | |||
| Vodafone | Private company | Acquiror |
|
(5:1) | Not directly available | |
| Idea | Listed Company | Acquiree | 50,000 | 200 | ||
| IDEA Balance Sheet (at the date of acquisition) | ||||||
| Book Value of total Assets | 3,000,000 | |||||
| Fair Value of total assets | 4,000,000 | |||||
| Book value of liabilities | 2,000,000 | |||||
| Fair Value of liabilities | 2,000,000 | |||||
|
|
||||||
| Fair value net assets | 2,000,000 | A | ||||
| Existing share of Idea |
|
25,000 | Before this acquitting | |||
| Fair value of the shares | 5,000,000 | “(25000 X 200) | B | |||
| (Shares X Market rate/share) | ||||||
| Goodwill | B- A | 3,000,000 | (applicable to Vodafone & NCI) | |||
| (Consideration over Fair value) | ||||||
| IDEA will issue additionally 50,000 more share (as mentioned above) and total share issued will be below- | ||||||
| Share upto the acquisition | 25,000 | |||||
| To be issued to Vodafone | 50,000 | |||||
| Total Outstanding after this merger | 75,000 | no. of shares | ||||
| Vodafone will have % holding | 67% | (50K/ 75K) shares | ||||
| Non-controlling interest in % | 33% | remaining shares | ||||
| 100% | ||||||
Key notes:
- One can simply argue that how the Vodafone has been concluded to be acquirer merely because it has larger net asset value and not listed on exchange, But there are many conditions and terms which needs to be looked at before concluding who is acquirer, e.g. if the acquirer directors are going to resign and will be accepting directorship in acquiree, terms of contractual arrangements that clearly shows that even legal acquirer is Idea but ultimately business will be managed/ directed / controlled by Vodafone in substance, the general motive for such acquisition is to get control over listed business by a privately managed business,
- The requirement of reverse acquisition accounting generally will specify that even legal parent will be different than the actual parent in substance, fair value accounting of net asset will be of legal parent (accounting acquiree which is Idea in our case), hence it is very essential to establish the fact who is acquiree in order to do fair valuation of assets acquired & liabilities assumed,
- The above reverse acquisition will be required in case of consolidated financial statements to be prepared which will however be prepared in the name of legal parent but by the way of noted to account it will reflect who was the accounting acquirer / acquire accordingly,
- Uniform accounting policies should be followed as required under Ind-AS 110 “Consolidated Financial Statements” to the extent it is possible (which has been relaxed as per CARVE-OUT brought in by Ind-As comparing to IFRS-10 which require strictly uniformities of all accounting policies),
- There should be extensive evaluation of the definition “Business” in order to continue with the reverse acquisition accounting as mentioned above or else Ind-As 102 “Share based payments” provisions will attract and applied accordingly,
- Goodwill generated here will not be amortized as we currently do in present accounting system and only will be tested for impairment subject to the criteria defined in other accounting standards,
- Business combination steps and all other important aspects such as contingent consideration, taxation aspects needs to be evaluated in details to get overall feasibility of such mergers
Since all such acquisition and merger will be based on fair value accounting , management needs to evaluate all such valuation and goodwill that will be generated in such combination and accordingly create its system/ processes to make these accounting changes accordingly.
Once again, reader must note that the above case has just been hypothetically taken to illustrate reverse acquisition rules and proposed merger may completely be different and might require all together different accounting that we have just discussed.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
(For any further discussion please feel free to drop an email on anujagarwalsin@gmail.com or whats-app on +91- 9634706933)
Click here to Read Other Articles of CA Anuj Agrawal
Author Bio
Many thanks for all those who have shared their valuable feedbacks….feel free to revert in case anything further to explore to make Ind-As/ IFRS easy…thanks