6.8 Reverse Acquisitions
As discussed in Chapter 3, a reverse acquisition occurs when the entity that issues its shares or gives other consideration to effect the transaction is determined for accounting purposes to be the acquiree (also called the accounting acquiree or legal acquirer), while the entity whose shares are acquired is for accounting purposes the acquirer (also called the accounting acquirer or legal acquiree). The accounting acquiree/legal acquirer generally continues in existence as the legal entity whose shares represent the outstanding common shares of the combined company. While the accounting acquiree/legal acquirer continues to issue its own financial statements, those statements are often in the name of the accounting acquirer/legal acquiree because the legal acquirer often adopts the name of the legal acquiree. The financial reporting reflects the accounting acquirer’s/legal acquiree’s financial information, except for its equity, which is retroactively adjusted to reflect the equity of the accounting acquiree/legal acquirer.
Example 6-23
Reverse Acquisition
Company A, a public company with substantive operations and a December 31 year-end, has one million common shares outstanding as of June 30, 20X9. On July 1, 20X9, in a transaction accounted for as a business combination, A issues four million of its newly registered common shares to Company B, a private entity, in exchange for all of B’s two million outstanding common shares (an exchange rate of 2:1). After the transaction, B controls A’s voting rights through its 80 percent ownership interest (four million common shares held ÷ five million total common shares outstanding) and its ability to elect the majority of the combined entity’s board members.
Although A issued common shares to effect the business combination, B would be considered the accounting acquirer under ASC 805, provided that there are no other existing pertinent facts and circ*mstances to the contrary after consideration of the factors in ASC 805-10-55-12 through 55-14.
6.8.1 Accounting Acquiree Must Meet the Definition of a Business
ASC 805-40
25-1 For a business combination transaction to be accounted for as a reverse acquisition, the accountingacquiree must meet the definition of a business. All of the recognition principles in Subtopics 805-10, 805-20,and 805-30, including the requirement to recognize goodwill, apply to a reverse acquisition.
ASC 805-40-25-1 states that the guidance in ASC 805-40 on reverse acquisitions only applies if theaccounting acquiree/legal acquirer meets the definition of a business in ASC 805 (see Section 2.4).Otherwise, the transaction is accounted for as either a reverse asset acquisition or a capital transaction, depending on the substance of the transaction.See Appendix C for more information about accounting for asset acquisitions.
6.8.2 Measuring Consideration Transferred
ASC 805-40
30-2 In a reverse acquisition, the accounting acquirer usually issues no consideration for the acquiree. Instead,the accounting acquiree usually issues its equity shares to the owners of the accounting acquirer. Accordingly,the acquisition-date fair value of the consideration transferred by the accounting acquirer for its interest in theaccounting acquiree is based on the number of equity interests the legal subsidiary would have had to issueto give the owners of the legal parent the same percentage equity interest in the combined entity that resultsfrom the reverse acquisition. Example 1, Case A (see paragraph 805-40-55-8) illustrates that calculation. Thefair value of the number of equity interests calculated in that way can be used as the fair value of considerationtransferred in exchange for the acquiree.
In a reverse acquisition, the accounting acquiree/legal acquirer typically issues its shares to the owners of the accounting acquirer/legal acquiree as consideration in the transaction. However, to apply the acquisition method of accounting, the accounting acquirer/legal acquiree must calculate the hypothetical amount of consideration that it would have transferred to acquire the accounting acquiree/legal acquirer and obtain the same percentage of ownership interest in the combined entity that results from the transaction. Accordingly, the fair value of the consideration transferred is determined on the basis of the number of equity interests that the accounting acquirer/legal acquiree would have had to issue to the accounting acquiree’s/legal acquirer’s owners to provide the same ratio of ownership of equity interests in the combined entity as a result of the reverse acquisition. Generally, the fair value of the consideration transferred equals the fair value of the accounting acquiree/legal acquirer.
In some reverse acquisitions, the accounting acquiree/legal acquirer may issue cash or other consideration, as well as shares, to acquire the shares of the accounting acquirer/legal acquiree. The payment of cash to the shareholders of the accounting acquirer/legal acquiree should be considered a distribution of capital and, accordingly, a reduction of shareholders’ equity of the accounting acquirer/ legal acquiree.
For reverse acquisitions between a public company and a private company in which the public company is the legal acquirer but is determined to be the accounting acquiree, the fair value of the public company’s shares generally is more reliably determinable than the fair value of the private company’s shares. Thus, the determination of the consideration transferred might be based on the fair value of the legal acquirer’s shares rather than the fair value of the legal acquiree’s shares.
6.8.3 Measuring the Accounting Acquiree’s Assets and Liabilities, IncludingGoodwill
ASC 805-40
30-1 All of the measurement principles applicable to business combinations in Subtopics 805-10, 805-20, and805-30 apply to a reverse acquisition.
In a reverse acquisition accounted for as a business combination, the accounting acquiree’s/legalacquirer’s assets and liabilities are measured in accordance with the guidance in ASC 805 on businesscombinations. ASC 805-40-55-12 clarifies that an entity should measure goodwill in a reverse acquisition“as the excess of the fair value of the consideration effectively transferred” (emphasis added) by theaccounting acquirer/legal acquiree divided by the fair value of the accounting acquiree’s/legal acquirer’sidentifiable assets and liabilities. The consideration effectively transferred is calculated as described inSection 6.8.2.
In some reverse acquisitions, the accounting acquirer/legal acquiree owns shares of the accounting acquiree/legal acquirer before the transaction. To calculate the amount of goodwill to recognize, the accounting acquirer/legal acquiree must remeasure its previously held interest in the accounting acquiree/legal acquirer at its acquisition-date fair value and add it to the consideration transferred. See Section 6.5 for more information about the accounting for previously held interests.
If the accounting acquiree/legal acquirer does not meet the definition of a business and the acquisitionis accounted for as a reverse asset acquisition, the accounting acquiree’s assets and liabilities aremeasured in accordance with the subsections in ASC 805-50 on the acquisition of assets rather than abusiness. See Appendix C for more information about accounting for asset acquisitions.
6.8.4 Noncontrolling Interests
ASC 805-40
25-2 In a reverse acquisition, some of the owners of the legal acquiree (the accounting acquirer) might notexchange their equity interests for equity interests of the legal parent (the accounting acquiree). Those ownersare treated as a noncontrolling interest in the consolidated financial statements after the reverse acquisition.That is because the owners of the legal acquiree that do not exchange their equity interests for equity interestsof the legal acquirer have an interest in only the results and net assets of the legal acquiree ― not in theresults and net assets of the combined entity. Conversely, even though the legal acquirer is the acquiree foraccounting purposes, the owners of the legal acquirer have an interest in the results and net assets of thecombined entity.
30-3 The assets and liabilities of the legal acquiree are measured and recognized in the consolidated financialstatements at their precombination carrying amounts (see paragraph 805-40-45-2(a)). Therefore, in a reverseacquisition the noncontrolling interest reflects the noncontrolling shareholders’ proportionate interest in theprecombination carrying amounts of the legal acquiree’s net assets even though the noncontrolling interests inother acquisitions are measured at their fair values at the acquisition date.
In some reverse acquisitions, some shareholders of the accounting acquirer/legal acquiree maynot exchange their interests for interests in the accounting acquiree/legal acquirer, which resultsin noncontrolling interests in the combined entity. Because the noncontrolling interest holdersown ownership interests in the entity determined to be the acquirer for accounting purposes,“the noncontrolling interest reflects the noncontrolling shareholders’ proportionate interest in the precombination carrying amounts of the legal acquiree’s net assets even though the noncontrollinginterests in other acquisitions are measured at their fair values at the acquisition date.”
6.8.5 Presentation of the Combined Entity’s Financial Statements
In a reverse acquisition, the financial statements of the newly combined entity represent a continuationof the financial statements of the accounting acquirer/legal acquiree. As a result, the assets andliabilities of the accounting acquirer/legal acquiree are presented at their historical carrying values inthe consolidated financial statements of the newly combined entity and the assets and liabilities of theaccounting acquiree/legal acquirer are recognized on the acquisition date and measured by using theacquisition method. The results of the accounting acquiree’s/legal acquirer’s results of operations areincluded in the combined company’s financial statements beginning on the acquisition date.
ASC 805-40
30-4 Paragraph 805-40-45-1 provides guidance on required adjustments to the accounting acquirer’s legalcapital to reflect the legal capital of the legal parent (accounting acquiree) in the consolidated financialstatements following a reverse acquisition.
45-1 Consolidated financial statements prepared following a reverse acquisition are issued under thename of the legal parent (accounting acquiree) but described in the notes as a continuation of the financialstatements of the legal subsidiary (accounting acquirer), with one adjustment, which is to retroactively adjustthe accounting acquirer’s legal capital to reflect the legal capital of the accounting acquiree. That adjustment isrequired to reflect the capital of the legal parent (the accounting acquiree). Comparative information presentedin those consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legalparent (accounting acquiree).
45-2 Because the consolidated financial statements represent the continuation of the financial statementsof the legal subsidiary except for its capital structure, the consolidated financial statements reflect all of thefollowing:
The assets and liabilities of the legal subsidiary (the accounting acquirer) recognized and measured attheir precombination carrying amounts.
The assets and liabilities of the legal parent (the accounting acquiree) recognized and measured inaccordance with the guidance in this Topic applicable to business combinations.
The retained earnings and other equity balances of the legal subsidiary (accounting acquirer) before the business combination.
The amount recognized as issued equity interests in the consolidated financial statements determinedby adding the issued equity interest of the legal subsidiary (the accounting acquirer) outstandingimmediately before the business combination to the fair value of the legal parent (accounting acquiree)determined in accordance with the guidance in this Topic applicable to business combinations.However, the equity structure (that is, the number and type of equity interests issued) reflects the equitystructure of the legal parent (the accounting acquiree), including the equity interests the legal parentissued to effect the combination. Accordingly, the equity structure of the legal subsidiary (the accountingacquirer) is restated using the exchange ratio established in the acquisition agreement to reflect thenumber of shares of the legal parent (the accounting acquiree) issued in the reverse acquisition.
The noncontrolling interest’s proportionate share of the legal subsidiary’s (accounting acquirer’s)precombination carrying amounts of retained earnings and other equity interests as discussed inparagraphs 805-40-25-2 and 805-40-30-3 and illustrated in Example 1, Case B (see paragraph 805-40-55-18).
The table below summarizes the presentation of the combined entity’s financial statements at the time of a reverse acquisition.
Statement of FinancialPosition Balance(s) | Presentation |
|---|---|
Assets and liabilities | Sum of (1) the accounting acquiree’s/legal acquirer’s assets and liabilities,measured by using the acquisition method under ASC 805, and (2) theaccounting acquirer’s/legal acquiree’s assets and liabilities, measured at theircarrying values. |
Retained earnings and otherequity balances | The accounting acquirer’s/legal acquiree’s precombination carrying amount,proportionately reduced by any noncontrolling interests. |
Issued equity | Sum of (1) the accounting acquirer’s/legal acquiree’s issued equity immediately before the reverse acquisition, proportionately reduced by any noncontrolling interests, and (2) the fair value of the accounting acquiree/legal acquirer (i.e., the hypothetical consideration transferred). The equity structure (i.e., the number and type of equity interests issued) reflects the accounting acquiree’s/legal acquirer’s equity structure. However, the balance is adjusted to reflect the par value of the outstanding shares of the accounting acquiree/legal acquirer, including the number of shares issued in the reverse acquisition. Any difference is recognized as an adjustment to the APIC account. |
APIC | The historical APIC account of the accounting acquirer/legal acquireeimmediately before the reverse acquisition is carried forward and increased toreflect the additional fair value of the accounting acquiree/legal acquirer lessthe par value of the shares held by its preacquisition shareholders. |
Noncontrolling interest | The noncontrolling interest’s proportionate share of the accounting acquirer’s/legal acquiree’s precombination retained earnings, issued equity, and otherequity balances. |
Prior-period presentation | For periods before the reverse acquisition, the shareholders’ equity ofthe combined entity presented on the basis of the historical equity of theaccounting acquirer/legal acquiree before the acquisition, retroactively recast toreflect the number of shares received in the acquisition. |
6.8.6 EPS Calculation
In a reverse acquisition, the financial statements of the combined entity reflect the equity of theaccounting acquiree/legal acquirer, including the equity interests issued as part of the reverseacquisition. As a result, EPS is calculated on the basis of the capital structure of the accounting acquiree/legal acquirer.
ASC 805-40
45-3 As noted in (d) in the preceding paragraph [ASC 805-40-45-2(d)], the equity structure in the consolidated financial statementsfollowing a reverse acquisition reflects the equity structure of the legal acquirer (the accounting acquiree),including the equity interests issued by the legal acquirer to effect the business combination.
45-4 In calculating the weighted-average number of common shares outstanding (the denominator of theearnings-per-share [EPS] calculation) during the period in which the reverse acquisition occurs:
The number of common shares outstanding from the beginning of that period to the acquisitiondate shall be computed on the basis of the weighted-average number of common shares of thelegal acquiree (accounting acquirer) outstanding during the period multiplied by the exchange ratioestablished in the merger agreement.
The number of common shares outstanding from the acquisition date to the end of that period shall bethe actual number of common shares of the legal acquirer (the accounting acquiree) outstanding duringthat period.
45-5 The basic EPS for each comparative period before the acquisition date presented in the consolidatedfinancial statements following a reverse acquisition shall be calculated by dividing (a) by (b):
The income of the legal acquiree attributable to common shareholders in each of those periods
The legal acquiree’s historical weighted-average number of common shares outstanding multiplied bythe exchange ratio established in the acquisition agreement.
6.8.7 Illustrative Example
ASC 805-40-55-2 through 55-23 illustrate the guidance on accounting for reverse acquisitions:
ASC 805-40
55-2 The following Cases illustrate the guidance in this Subtopic on accounting for a reverse acquisition:
A reverse acquisition if all the shares of the legal subsidiary are exchanged (Case A)
A reverse acquisition if not all of the shares of the legal subsidiary are exchanged and a noncontrollinginterest results (Case B).
55-3 In these Cases, Entity B, the legal subsidiary, acquires Entity A, the entity issuing equity instruments andtherefore the legal parent, on September 30, 20X6. These Cases ignore the accounting for any income taxeffects. Cases A and B share all of the following information and assumptions.
55-4 The statements of financial position of Entity A and Entity B immediately before the business combinationare as follows.
55-5 On September 30, 20X6, Entity A issues 2.5 shares in exchange for each common share of Entity B. Allof Entity B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues 150 common shares inexchange for all 60 common shares of Entity B.
55-6 The fair value of each common share of Entity B at September 30, 20X6, is $40. The quoted market priceof Entity A’s common shares at that date is $16.
55-7 The fair values of Entity A’s identifiable assets and liabilities at September 30, 20X6, are the same as theircarrying amounts, except that the fair value of Entity A’s noncurrent assets at September 30, 20X6, is $1,500.
Case A: All the Shares of the Legal Subsidiary Are Exchanged
55-8 This Case illustrates the accounting for a reverse acquisition if all of the shares of the legal subsidiary,the accounting acquirer, are exchanged in a business combination. The accounting illustrated in this Caseincludes the calculation of the fair value of the consideration transferred, the measurement of goodwill and thecalculation of earnings per share (EPS).
55-9 The calculation of the fair value of the consideration transferred follows
55-10 As a result of the issuance of 150 common shares by Entity A (legal parent, accounting acquiree), EntityB’s shareholders own 60 percent of the issued shares of the combined entity, that is, 150 of 250 issuedshares. The remaining 40 percent are owned by Entity A’s shareholders. If the business combination hadtaken the form of Entity B issuing additional common shares to Entity A’s shareholders in exchange for theircommon shares in Entity A, Entity B would have had to issue 40 shares for the ratio of ownership interestin the combined entity to be the same. Entity B’s shareholders would then own 60 of the 100 issued sharesof Entity B — 60 percent of the combined entity. As a result, the fair value of the consideration effectivelytransferred by Entity B and the group’s interest in Entity A is $1,600 (40 shares with a per-share fair value of$40). The fair value of the consideration effectively transferred should be based on the most reliable measure.In this Case, the quoted market price of Entity A’s shares provides a more reliable basis for measuringthe consideration effectively transferred than the estimated fair value of the shares in Entity B, and theconsideration is measured using the market price of Entity A’s shares ― 100 shares with a per-share fair valueof $16.
55-11 Goodwill is measured as follows.
55-12 Goodwill is measured as the excess of the fair value of the consideration effectively transferred (thegroup’s interest in Entity A) over the net amount of Entity A’s recognized identifiable assets and liabilities, asfollows.
55-13 The consolidated statement of financial position immediately after the business combination is asfollows.
55-14 In accordance with paragraph 805-40-45-2(c) through (d), the amount recognized as issued equityinterests in the consolidated financial statements ($2,200) is determined by adding the issued equity of thelegal subsidiary immediately before the business combination ($600) and the fair value of the considerationeffectively transferred, measured in accordance with paragraph 805-40-30-2 ($1,600). However, the equitystructure appearing in the consolidated financial statements (that is, the number and type of equity interestsissued) must reflect the equity structure of the legal parent, including the equity interests issued by the legalparent to effect the combination.
55-15 The calculation of EPS follows.
55-16 Entity B’s earnings for the annual period ended December 31, 20X5, were $600, and the consolidatedearnings for the annual period ended December 31, 20X6, are $800. There was no change in the number ofcommon shares issued by Entity B during the annual period ended December 31, 20X5, and during the periodfrom January 1, 20X6, to the date of the reverse acquisition on September 30, 20X6. EPS for the annual periodended December 31, 20X6, is calculated as follows.
55-17 Restated EPS for the annual period ending December 31, 20X5, is $4.00 (calculated as the earnings ofEntity B of 600 divided by the 150 common shares Entity A issued in the reverse acquisition).
Case B: Not All the Shares of the Legal Subsidiary Are Exchanged
55-18 This Case illustrates the accounting for a reverse acquisition if not all of the shares of the legal subsidiary,the accounting acquirer, are exchanged in a business combination and a noncontrolling interest results.
55-19 Assume the same facts as in Case A except that only 56 of Entity B’s 60 common shares are exchanged.Because Entity A issues 2.5 shares in exchange for each common share of Entity B, Entity A issues only 140(rather than 150) shares. As a result, Entity B’s shareholders own 58.3 percent of the issued shares of thecombined entity (140 of 240 issued shares). The fair value of the consideration transferred for Entity A, theaccounting acquiree, is calculated by assuming that the combination had been effected by Entity B’s issuingadditional common shares to the shareholders of Entity A in exchange for their common shares in Entity A.That is because Entity B is the accounting acquirer, and paragraphs 805-30-30-7 through 30-8 require theacquirer to measure the consideration exchanged for the accounting acquiree.
55-20 In calculating the number of shares that Entity B would have had to issue, the noncontrolling interestis ignored. The majority shareholders own 56 shares of Entity B. For that to represent a 58.3 percent equityinterest, Entity B would have had to issue an additional 40 shares. The majority shareholders would then own56 of the 96 issued shares of Entity B and, therefore, 58.3 percent of the combined entity. As a result, the fairvalue of the consideration transferred for Entity A, the accounting acquiree, is $1,600 (that is, 40 shares eachwith a fair value of $40). That is the same amount as when all 60 of Entity B’s shareholders tender all 60 ofits common shares for exchange. The recognized amount of the group’s interest in Entity A, the accountingacquiree, does not change if some of Entity B’s shareholders do not participate in the exchange.
55-21 The noncontrolling interest is represented by the 4 shares of the total 60 shares of Entity B that arenot exchanged for shares of Entity A. Therefore, the noncontrolling interest is 6.7 percent. The noncontrollinginterest reflects the noncontrolling shareholders’ proportionate interests in the precombination carryingamounts of the net assets of Entity B, the legal subsidiary. Therefore, the consolidated statement of financialposition is adjusted to show a noncontrolling interest of 6.7 percent of the precombination carrying amounts ofEntity B’s net assets (that is, $134 or 6.7 percent of $2,000).
55-22 The consolidated statement of financial position at September 30, 20X6, reflecting the noncontrollinginterest is as follows.
55-23 The noncontrolling interest of $134 has 2 components. The first component is the reclassificationof the noncontrolling interest’s share of the accounting acquirer’s retained earnings immediately beforethe acquisition ($1,400 × 6.7% or $93.80). The second component represents the reclassification of thenoncontrolling interest’s share of the accounting acquirer’s issued equity ($600 × 6.7% or $40.20).
6.8.8 Public Shell Corporations and SPACs
ASC 805-40
05-2 As one example of a reverse acquisition, a private operating entity may want to become a public entitybut not want to register its equity shares. To become a public entity, the private entity will arrange for a publicentity to acquire its equity interests in exchange for the equity interests of the public entity. In this situation,the public entity is the legal acquirer because it issued its equity interests, and the private entity is the legalacquiree because its equity interests were acquired. However, application of the guidance in paragraphs805-10-55-11 through 55-15 results in identifying:
The public entity as the acquiree for accounting purposes (the accounting acquiree)
The private entity as the acquirer for accounting purposes (the accounting acquirer).
In some cases, a nonoperating public shell company legally acquires a private operating company by using cash, other assets, equity, or a combination thereof. A nonoperating public shell company is a registrant that has no or nominal operations and no or nominal assets (other than possibly cash). The owners and management of the private company generally have actual or effective operating control of the combined company after the transaction, and the private company gains access to the public market without going through an IPO. The SEC staff considers the acquisition of a private operating company by a nonoperating public shell company to be, in substance, a capital transaction rather than a business combination (or asset acquisition). That is, the transaction is a reverse recapitalization, equivalent to the issuance of shares by the private operating company for the net monetary assets of the public shell company accompanied by a recapitalization. The accounting is similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets are recognized.
In other cases, a SPAC, sometimes also called a “blank check” company, legally acquires a private operating company. A SPAC is a newly formed company that raises cash in an IPO and uses that cash or the equity of the SPAC, or both, to fund the acquisition of a target. After a SPAC IPO, the SPAC’s management looks to complete an acquisition of a target (the “transaction”) within the period specified in its governing documents (e.g., 24 months). In many cases, the SPAC and target may need to secure additional financing to facilitate the transaction. For example, they may consider funding through a private investment in public equity (PIPE), which will generally close contemporaneously with the consummation of the transaction. If an acquisition cannot be completed within the required time frame, the cash raised by the SPAC in the IPO must be returned to the investors and the SPAC is dissolved (unless the SPAC extends its timeline via a proxy process).
Before completing an acquisition, SPACs hold no material assets other than cash; therefore, they are nonoperating public “shell companies,” as defined by the SEC (see paragraph 1160.2 of the SEC Division of Corporation Finance’s Financial Reporting Manual [FRM]). However, SPACs engage in significant precombination activities (e.g., raising cash in public markets, identifying investment opportunities). Therefore, entities must analyze transactions in which a SPAC acquires an operating company to determine whether the SPAC or the operating company is the acquirer for accounting purposes (“accounting acquirer”).
The ASC master glossary defines an acquirer as follows:
The entity that obtains control of the acquiree. However, in a business combination in which a variable interest entity (VIE) is acquired, the primary beneficiary of that entity always is the acquirer.
Entities must first consider the guidance in ASC 805-10-25-5, which states, in part, that “in a business combination in which a [VIE] is acquired, the primary beneficiary of that entity always is the acquirer. The determination of which party, if any, is the primary beneficiary of a VIE shall be made in accordance with the guidance in the Variable Interest Entities Subsections of Subtopic 810-10, not by applying either the guidance in the General Subsections of that Subtopic, relating to a controlling financial interest, or in paragraphs 805-10-55-11 through 55-15.” Consequently, entities must consider whether the legal acquiree (i.e., the operating company) is a VIE on the basis of the guidance in ASC 810-10-15-14.
To qualify as a VIE, a legal entity needs to have only one of the following characteristics:
- The legal entity does not have sufficient equity investment at risk (see Section 5.2 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest).
- The equity investors at risk, as a group, lack the characteristics of a controlling financial interest (see Section 5.3 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest). In this assessment, there are specific requirements for entities that are limited partnerships or similar legal entities such as limited liability companies with managing members. Some of these entities may be VIEs depending on what voting rights are provided to limited partners in a limited partnership or to nonmanaging members for certain limited liability corporations (see Section 5.3.1.2 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest).
- The legal entity is structured with disproportionate voting rights, and substantially all of the activities are conducted on behalf of an investor with disproportionately few voting rights (see Section 5.4 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest).
If the legal acquiree is a voting interest entity rather than a VIE, entities should identify the acquirer by first considering the guidance in the general subsections of ASC 810-10 related to determining the existence of a controlling financial interest. If they cannot identify the acquirer on the basis of that guidance, they should consider the factors in ASC 805-10-55-11 through 55-15.
ASC 805-10-55-11 states that in an acquisition “effected primarily by transferring cash or other assets or by incurring liabilities, the acquirer usually is the entity that transfers the cash or other assets or incurs the liabilities.” Therefore, if the acquisition is effected primarily by the SPAC’s transfer of cash or other assets rather than its equity, the SPAC will usually be identified as the accounting acquirer.
ASC 805-10-55-12 states that in an acquisition “effected primarily by exchanging equity interests, the acquirer usually is the entity that issues its equity interests. However, in some business combinations, commonly called reverse acquisitions, the issuing entity is the acquiree.” That is, if the acquisition is effected primarily by exchanging equity interests, the SPAC is the entity that issues its equity interests to effect the transaction and is therefore the “legal acquirer.” Sometimes, the SPAC may also be identified as the accounting acquirer. However, in certain transactions, the operating company whose equity interests are acquired and is therefore the “legal acquiree” is determined to be the accounting acquirer. Entities should consider the following factors in ASC 805-10-55-12 and 55-13 when identifying the accounting acquirer in business combinations effected primarily by exchanging equity shares:
- “The relative voting rights in the combined entity after the business combination” (ASC 805-10- 55-12(a)).
- “The existence of a large minority voting interest in the combined entity” (ASC 805-10-55-12(b)).
- “The composition of the governing body of the combined entity” (ASC 805-10-55-12(c)).
- “The composition of the senior management of the combined entity” (ASC 805-10-55-12(d)).
- “The terms of the exchange of equity interests” (ASC 805-10-55-12(e)).
- The “relative size (measured in, for example, assets, revenues, or earnings)” of the combining entities (ASC 805-10-55-13).
See Section 3.1 for more information about identifying the acquirer.
If the SPAC is determined to be the accounting acquirer, the entities must determine whether the operating company meets the definition of a business (see Section 2.4). If it does, the transaction is a business combination and the SPAC recognizes the operating company’s assets and liabilities in accordance with the guidance in ASC 805-10, ASC 805-20, and ASC 805-30, generally at fair value. If the operating company is determined to be a group of assets that does not meet the definition of a business, the transaction is an asset acquisition and the SPAC recognizes the operating company’s assets and liabilities in accordance with the guidance in ASC 805-50 at relative fair value (see Appendix C). By contrast, if the operating company is determined to be the accounting acquirer, generally the SPAC’s only precombination asset is the cash raised from its investors and the substance of the transaction is a recapitalization of the operating company (i.e., a reverse recapitalization). Accordingly, the accounting for the transaction is similar to that of an acquisition of a private operating company by a nonoperating public shell company (as described above).
Because a reverse recapitalization is equivalent to the issuance of shares by the private operating company for the net monetary assets of the public shell company, the transaction costs incurred to effect the recapitalization may represent costs related to issuing equity and raising capital that are recognized as a reduction to the total amount of equity raised (i.e., reduction of APIC) rather than expensed as incurred.
See Section 5.7 of Deloitte’s Roadmap Initial Public Offerings for more information about offering costs. Also, for further discussion of reporting considerations related to acquisitions by public shell companies and SPACs, see SAB Topic 5.A and Deloitte’s October 2, 2020 (updated April 11, 2022), Financial Reporting Alert.
