ACT504 Chap.3 The Acquisition Method: Acquirer and Acquisition Date
The Acquisition Method: Acquirer and Acquisition Date
Four steps, and the first two contain no arithmetic
A business combination is accounted for one way only, by the acquisition method, and it has four key steps: identify the buyer, fix the day control passed, put a value on what was acquired and on what was taken on at that day, and then deal with whatever is left over, which is either goodwill or a bargain gain.
Steps one and two get skimmed because nothing is calculated in them, which is exactly why they are worth marks. They choose whose balance sheet is remeasured and on which day, so an error in either is unrecoverable further down.
The acquirer is the entity that obtains control
Not the entity that paid, and not the larger one. In the ordinary case those coincide and there is nothing to discuss.
The examinable case is where they come apart. The course opens with one: an entity sells its mining division to a second entity and takes shares in return, holding less than half. Both parties have acquired something, but only one has acquired a business and obtained control of it.
The other has acquired a single asset, a parcel of shares carrying no control, so there is no business combination on its side at all.
The reverse structure, and the indicators that settle it
The hardest version is where two entities combine and a new company is formed to issue shares and acquire both.
The obvious answer, that the new company is the acquirer, is expressly wrong: the buyer has to be one of the companies that was already there beforehand. The indicators supplied are voting rights, the composition of the governing body, the composition of senior management, a premium paid to gain control, relative size and who initiated the exchange. They are not a scoring system.
Voting rights, the board and senior management speak directly to whose management is running the combined entity and whose shareholders own it, and where they agree with each other and disagree with relative size, they win.
Fixing the date, which is not the obvious one
Several dates appear in any acquisition: the day the contract was signed, the day the price was handed over, the day the assets arrived, and the day the last condition fell away.
The acquisition date is none of them by definition. It is the date on which the acquirer effectively obtains control, and it is fixed independently of when the assets arrive and of when the price is actually settled.
Assets may be delivered in stages and payments spread over years without moving it.
Why the date carries every later number
Everything in steps three and four is measured at fair value on the acquisition date: the identifiable assets and liabilities, the cash, the non-monetary assets handed over, the shares issued and any contingent amounts.
Move the date by a month in a question with a moving share price and the consideration changes, so goodwill changes with it. That is why an examiner will offer four candidate dates and let you choose, and why the strong answer names the date and says what evidences the passing of control on it.
Two date traps
The first is the conditional offer.
Where an offer depends on a regulatory clearance or a shareholder vote, control cannot have passed while the condition is outstanding, so the date the offer becomes unconditional is usually the operative one. The second is the staged deal, where assets arrive in tranches or the price is settled over years.
Control still passes on one day, everything is measured on that day, and the later movements are settlements of a liability that already exists.
What this chapter covers
- 01
The four steps of the acquisition method, and why their order is binding
- 02
Identifying the acquirer by control rather than by payment or size
- 03
The case where both parties acquire something and only one acquires a business
- 04
The reverse structure, and why a newly formed company cannot be the acquirer
- 05
Six indicators, and how to weigh them rather than count them
- 06
Four candidate dates, and the one the standard actually means
- 07
Why every later fair value is read off on that single day
- 08
Conditional offers and staged deals
Identify the acquirer when a new parent is interposed
- 2Eliminate the candidate that cannot be the acquirer, and say why.
- 2Weigh the indicators for the two remaining candidates.
- 2State the consequence for the rest of the problem.
Key terms
- Acquisition Method
- The one method by which a business combination may be accounted for, made up of identifying the buyer, determining the acquisition date, recognising and measuring what was acquired, and recognising goodwill or a bargain purchase gain.
- Acquirer
- Whichever entity ends up in control of the company bought. It is identified by control rather than by which party transferred consideration or which party is larger.
- Acquisition Date
- The day on which the buyer effectively takes control of the company bought. It is independent of when assets are delivered or consideration is paid, and every fair value in the transaction is measured on it.
- Reverse Structure
- An arrangement in which a new company is formed to acquire two combining entities. The new company cannot be the acquirer, so one of the pre-existing entities must be identified as such.
The Acquisition Method: Acquirer and Acquisition Date FAQ
If a new holding company buys both businesses, is it the acquirer?
No. The standard requires the buyer to be one of the companies that was already there beforehand, so the newly formed company is excluded however the shares were issued. You then weigh the indicators between the two original entities: voting rights in the combined entity, the composition of the governing body, the composition of senior management, any premium paid, relative size and who initiated the exchange.
The first three usually settle it, and they can point against the larger entity.
Is the acquisition date the date the contract was signed?
Only if that is when control passed, which is rarely the case. The acquisition date is the date on which the acquirer effectively obtains control, and it is fixed whatever the delivery and payment timetable says. Where an offer is conditional on a clearance or a vote, control cannot have passed while the condition is outstanding, so the date the offer becomes unconditional is usually the one to use.
Name the evidence for the date in your answer, because the mark is for testing it rather than picking it.
Exam move
Find a real acquisition announcement and list every date it mentions, then decide which one control passed on and write one sentence of justification. Do it for two or three deals. The point is not the deals; it is building the reflex of separating signing, payment, delivery and control, because an examination question will present all four and expect you to choose without hesitating.
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