Question

How is an acquirer identified in Business Combination. Write an Essay

Answer 1

We must first go through the guidance within ASC Subtopic 810-10, Consolidation (or IFRS 10) related to determining the existence of a controlling financial interest to identify the acquirer. The acquirer is the entity that obtains control of the acquiree. Control is defined as the direct or indirect ability to determine the direction of management and policies through ownership, contract, or otherwise.

Here are some points

1. In a business combination effected by transferring cash or other assets or incurring liabilities, the acquirer is usually the entity that transfers the cash or other assets or incurs the liabilities.
2. In a business combination effected primarily by exchanging equity interests, the acquirer is usually the entity that issues its equity interests.
3. Other factors:
   1. The relevant voting rights in the combined entity after the business combination. The acquirer usually is the combining entity whose owners as a group retain or receive the largest portion of the voting rights in the combining entity.
   2. The existence of a large minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest. The acquirer usually is the combining entity whose single owner or organized group of owners holds the largest minority voting interest in the combined entity.
   3. The composition of the governing body of the combined entity. The acquirer usually is the combining entity whose owners have the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity.
   4. The composition of the senior management of the combined entity. The acquirer usually is the combining entity whose former management dominates the management of the combined entity.
   5. The terms of the exchange of equity interests. The acquirer usually is the combining entity that pays a premium over the precombination fair value of the equity interests of the other combining entity or entities.
4. The acquirer usually is the combining entity whose relative size is significantly larger than that of the other combining entity or entities.
5. In a business combination involving more than two entities, determining the acquirer shall include a consideration of, among other things, which of the combining entities initatied the combination, as well as the relative size of the combining entities.