WEBVTT
00:00:00.160 --> 00:00:03.919
Welcome to Financial Reporting Conversations brought to you by Bass for Consulting.
00:00:04.000 --> 00:00:13.199
We're here to make the unknowns and known accounting, auditing and climate standards known so you can avoid the blindfredding mistakes and do financial reporting better.
00:00:13.519 --> 00:00:18.239
Each episode will unpack what the standards really say, what they mean in practice.
00:00:18.480 --> 00:00:24.000
Whether you're a preparer, auditor, director, or litigator, our aim is to help you get it right.
00:00:24.640 --> 00:00:27.760
Hello and welcome to Financial Reporting Conversations.
00:00:27.920 --> 00:00:37.439
If you have tuned into our previous episodes, you would have heard that Wayne and I have been working on an iFres 3 course that is turning out to be one of our longest courses.
00:00:37.679 --> 00:00:44.560
Mainly because there are so many areas in applying iFres 3 where material misstatements can and do occur.
00:00:44.719 --> 00:00:54.000
In that episode, we first talked about the key question of whether the transaction should even be accounted for and under iForest 3 was just simply an asset acquisition.
00:00:54.159 --> 00:01:03.840
In that episode, we also talked about top hats, and that is where a new entity is inserted in between an existing business or a business group and its shareholders.
00:01:04.000 --> 00:01:07.920
And there is no change in the ultimate control ownership of that group.
00:01:08.079 --> 00:01:16.400
Now, in this episode, Wayne and I are going to talk about another area where errors can frequently occur, and that is identifying the acquirer.
00:01:16.640 --> 00:01:24.159
This is usually the entity that transfers cash or shares, and the entity that will ultimately become the parent of the group.
00:01:24.319 --> 00:01:27.519
So, Wayne, isn't this step relatively straightforward?
00:01:27.760 --> 00:01:39.040
We identify the entity that pays cash or transfer the shares, which usually is the purchase purchaser in the share sales agreement contract, isn't it?
00:01:39.280 --> 00:01:47.040
I would agree with the proposition that usually the person that issues the shares is the acquirer, the person that pays the cash is the acquirer.
00:01:47.359 --> 00:01:49.760
But it is a complicated world.
00:01:50.000 --> 00:02:00.079
When you're in the world of backdoor listings, reverse acquisitions, putting restructuring together to go IPOs.
00:02:00.400 --> 00:02:10.240
So you know, classically, I Lisco issue shares to operating co, I'm the acquirer, I am the legal acquirer.
00:02:10.400 --> 00:02:20.639
But I've only got a thousand shares on issue, and I go and issue two thousand shares to the owners of Operating Co.
00:02:21.599 --> 00:02:25.680
And after the transaction, the owners of Operating Co.
00:02:26.000 --> 00:02:30.719
own two thousand of the three thousand Lisco shares.
00:02:31.039 --> 00:02:33.840
Well, it's a reverse acquisition.
00:02:34.159 --> 00:02:35.280
Operating Co.
00:02:35.680 --> 00:02:37.199
has acquired Lisco.
00:02:37.439 --> 00:02:38.639
It's complicated.
00:02:38.960 --> 00:02:48.879
And remember, in a lot of cases, in all of these reverse acquisitions, no cash flows to the vendor, it's only shares.
00:02:49.039 --> 00:02:52.319
And this is where again we flip into that world of top hats.
00:02:52.879 --> 00:03:00.080
And is it just a reorganization of an existing business with a purpose of going IPO?
00:03:00.400 --> 00:03:06.960
So IFRS3 defines the acquirer as the entity that obtains control of another entity.
00:03:07.039 --> 00:03:11.759
And IFRS3 tells us control is defined under IFRS 10.
00:03:11.919 --> 00:03:25.520
What are the indicators that preparers and auditors should look at to determining which entity actually has control when you know the situation that you you've described where transactions affected by issuing shares?
00:03:25.919 --> 00:03:29.840
For all auditors, you need to understand the transaction.
00:03:30.159 --> 00:03:35.439
Why was the transaction entered into and who are the dominant parties in it?
00:03:35.759 --> 00:03:48.560
Which shareholders or which board members of the pre-existing companies will end up on the board of the enlarged group.
00:03:48.879 --> 00:03:56.719
In a number of cases, when you've got these LISCO situations, the existing board approves the acquirer of operating co.
00:03:57.199 --> 00:04:11.280
Operating co has got their own board, and as soon as the transaction happens, all of the Lisco board resigns and the operating co board becomes the directors.
00:04:11.680 --> 00:04:13.840
They've got the majority of the shares.
00:04:14.000 --> 00:04:15.759
Again, it's a reverse acquisition.
00:04:15.840 --> 00:04:23.839
So look at where the shareholdings flow and where the board composition flows.
00:04:24.160 --> 00:04:29.279
If you're finding this discussion useful, please take a moment to click like, subscribe, and share.
00:04:37.920 --> 00:04:44.079
And so I think you've sort of explained how I forest like a reverse acquisition works.
00:04:44.560 --> 00:04:50.560
What sort of common mistakes do you see in financial reporting in terms of reverse acquisitions?
00:04:50.879 --> 00:04:51.759
There's two.
00:05:00.399 --> 00:05:03.759
And that confusion happens in typically two ways.
00:05:04.000 --> 00:05:13.199
That a lot of times the reverse acquisition, in order to get a listing, actually is alongside a capital raise.
00:05:35.839 --> 00:05:47.680
The existing shareholders of Lisco only end up with 5% of the shares, but the new money that came in actually ends up with a bounce, ends up with 55%.
00:05:48.319 --> 00:05:58.000
And then people wrongly conclude ah, because they only ended up with 40% of the shares, they it's not a reverse acquisition, it's flawed.
00:05:58.240 --> 00:06:35.759
And the other way to miss things is a lot of these organ these transactions, they also they can be mixed as all almost a merger that you have operating co a merges and acquires operating co B, and that in large group reverses into Lisco, and again people look at it and say, ah, operating Co A only ended up with 40% of the shares, and they're missing the fact there were a number of entities involved, and the ultimate acquirer is operating CoA.
00:06:36.079 --> 00:06:52.000
And then the second one that people get wrong a lot is they say that is a backdoor listing, therefore it is a reverse acquisition, and the entity they've backdoored into is a shell.
00:06:52.399 --> 00:07:10.879
It has no business, it has no processes, it has no assets, it has no employees, it fails the definition of a business, and therefore it's not a business combination, it is not subject to reverse acquisition accounting, it's actually a share-based payment under IFRS2.
00:07:11.279 --> 00:07:21.759
So we need to go back to what we talked about last episode in terms of whether that acquiry still we still need to go back and look at whether that is an asset.
00:07:22.079 --> 00:07:30.160
But putting your mind into this reverse, so we've convinced ourselves the company being acquired legally is a business.
00:07:30.319 --> 00:07:33.920
It's got a mine, it's got operating, it's a real business.
00:07:34.160 --> 00:07:39.839
But you need also to put your mind to ah, we're doing a reverse acquisition.
00:07:40.079 --> 00:07:44.000
Is the entity for an accounting purpose is being acquired?
00:07:44.240 --> 00:07:45.600
Is that a business?
00:07:45.839 --> 00:07:49.439
And in so many cases, it's just a shell.
00:07:49.519 --> 00:07:58.319
And therefore, again, you're not in reverse acquisition accounting, you do not get goodwill, you have a listing expense under IFRS2.
00:07:58.639 --> 00:07:59.279
Thanks, mate.
00:07:59.439 --> 00:08:09.600
So going back, if we miss, you said one of the common mistakes is people miss the um a reverse acquisition and wrongly identify the right acquirer.
00:08:09.759 --> 00:08:14.000
So the accounting acquiry, they've wrongly treated that as the acquirer.
00:08:15.040 --> 00:08:21.680
How does that impact on the financial statements like goodwill, comparatives, EPS?
00:08:22.079 --> 00:08:23.120
Everything's wrong.
00:08:23.360 --> 00:08:30.160
So if you get the wrong acquirer, you've gone and fair valued the assets of the wrong entity.
00:08:30.560 --> 00:08:46.960
So if you've believed it's not a reverse acquisition, really Lisco acquired operating co, you've then gone and done your purchase price allocation, you've fair valued all of operating co's assets, and you shouldn't have.
00:08:47.200 --> 00:08:59.360
You've recognised a weird amount of goodwill that relates really to the goodwill in operating co where it should relate to the goodwill in Lisco.
00:08:59.759 --> 00:09:04.240
Your comparatives are the wrong companies, your EPS is completely wrong.
00:09:04.559 --> 00:09:09.759
So if you manage to get the wrong acquirer, you really have misstated your accounts.
00:09:10.000 --> 00:09:16.559
So that's when you had you treated Lisco as the parent and the operating co as the subsidiary.
00:09:16.879 --> 00:09:17.120
Yeah.
00:09:17.360 --> 00:09:37.759
We did not end up with more than 50% of the shares, missing the fact it was also a capital raise, or it was a close call, and oh look, a month after the transaction, all of Lisco board uh resigned, and suddenly all of Operating Co.'s board are Lisco's board.
00:09:38.000 --> 00:09:39.519
So what should it look like?
00:09:39.759 --> 00:09:40.639
It's the reverse.
00:09:40.720 --> 00:09:48.399
So it should be you do the purchase price allocation of the assets and liabilities of Lisco.
00:09:48.960 --> 00:09:53.600
If you end up with Goodwill, it is the difference that Operating Co.
00:09:54.000 --> 00:09:59.200
paid for the fair value of the net assets of Lisco.
00:09:59.759 --> 00:10:04.879
And comparatives, it's a continuation of Operating Co.
00:10:05.440 --> 00:10:06.559
Okay, thanks Wayne.
00:10:06.720 --> 00:10:19.919
So well, this is a short episode, but this is a very uh important area where people can get it wrong and where getting it wrong makes everything quite looks completely wrong.
00:10:20.240 --> 00:10:40.960
I think the phrase it is materially misstated, completely materially misstated, and extraordinarily embarrassing for again the audit committee, the directors, the financial controller, and really brings into question how the auditor signed an unmodified audit opinion.
00:10:41.120 --> 00:11:07.840
You know, this is when you're doing the transaction, not when you're doing the audit in the last week in September, when the transaction has been announced, the auditors need an accounting paper, ticking off why who the acquirer is, and be satisfied right at the start of the transaction, almost before the transactions happened, to get the accounting right.
00:11:08.080 --> 00:11:15.600
So, like many aspects of IF3, it's one of those areas where a transaction that could look simple but can actually become quite complex.
00:11:15.919 --> 00:11:21.600
People in this mindset, I acquired 100% of the shares of that entity.
00:11:22.000 --> 00:11:25.519
It must be a business combination, or I am the acquirer.
00:11:25.600 --> 00:11:28.480
That mindset is a very dangerous mindset.
00:11:28.720 --> 00:11:29.279
Yeah, thanks.
00:11:29.360 --> 00:11:46.399
So if you'd like to explore these issues further, Wayne and I cover them in much more detail in our IFS3 business combinations icepring course, and where we'll walk through the practical examples, some of the common mistakes we see in practice, and so feel free to contact us for more details if you're interested.
00:11:46.559 --> 00:11:50.960
And thanks for joining us for this short episode of Financial Reporting Conversations.
00:11:51.120 --> 00:11:53.200
We'll see you in our next episode.
00:11:53.519 --> 00:11:56.320
Thanks for listening to Financial Reporting Conversations.
00:11:56.480 --> 00:12:04.240
For guidance on applying accounting and auditing standards, or to access our online training programs, please visit buzzfordconsulting.com.
00:12:04.399 --> 00:12:08.799
Don't forget to like, subscribe, and share this episode with your colleagues and contacts.
00:12:08.960 --> 00:12:13.679
We'll see you next time where we make the unknowns in financial reporting known.
00:00:00.160 --> 00:00:03.919
Welcome to Financial Reporting Conversations brought to you by Bass for Consulting.
00:00:04.000 --> 00:00:13.199
We're here to make the unknowns and known accounting, auditing and climate standards known so you can avoid the blindfredding mistakes and do financial reporting better.
00:00:13.519 --> 00:00:18.239
Each episode will unpack what the standards really say, what they mean in practice.
00:00:18.480 --> 00:00:24.000
Whether you're a preparer, auditor, director, or litigator, our aim is to help you get it right.
00:00:24.640 --> 00:00:27.760
Hello and welcome to Financial Reporting Conversations.
00:00:27.920 --> 00:00:37.439
If you have tuned into our previous episodes, you would have heard that Wayne and I have been working on an iFres 3 course that is turning out to be one of our longest courses.
00:00:37.679 --> 00:00:44.560
Mainly because there are so many areas in applying iFres 3 where material misstatements can and do occur.
00:00:44.719 --> 00:00:54.000
In that episode, we first talked about the key question of whether the transaction should even be accounted for and under iForest 3 was just simply an asset acquisition.
00:00:54.159 --> 00:01:03.840
In that episode, we also talked about top hats, and that is where a new entity is inserted in between an existing business or a business group and its shareholders.
00:01:04.000 --> 00:01:07.920
And there is no change in the ultimate control ownership of that group.
00:01:08.079 --> 00:01:16.400
Now, in this episode, Wayne and I are going to talk about another area where errors can frequently occur, and that is identifying the acquirer.
00:01:16.640 --> 00:01:24.159
This is usually the entity that transfers cash or shares, and the entity that will ultimately become the parent of the group.
00:01:24.319 --> 00:01:27.519
So, Wayne, isn't this step relatively straightforward?
00:01:27.760 --> 00:01:39.040
We identify the entity that pays cash or transfer the shares, which usually is the purchase purchaser in the share sales agreement contract, isn't it?
00:01:39.280 --> 00:01:47.040
I would agree with the proposition that usually the person that issues the shares is the acquirer, the person that pays the cash is the acquirer.
00:01:47.359 --> 00:01:49.760
But it is a complicated world.
00:01:50.000 --> 00:02:00.079
When you're in the world of backdoor listings, reverse acquisitions, putting restructuring together to go IPOs.
00:02:00.400 --> 00:02:10.240
So you know, classically, I Lisco issue shares to operating co, I'm the acquirer, I am the legal acquirer.
00:02:10.400 --> 00:02:20.639
But I've only got a thousand shares on issue, and I go and issue two thousand shares to the owners of Operating Co.
00:02:21.599 --> 00:02:25.680
And after the transaction, the owners of Operating Co.
00:02:26.000 --> 00:02:30.719
own two thousand of the three thousand Lisco shares.
00:02:31.039 --> 00:02:33.840
Well, it's a reverse acquisition.
00:02:34.159 --> 00:02:35.280
Operating Co.
00:02:35.680 --> 00:02:37.199
has acquired Lisco.
00:02:37.439 --> 00:02:38.639
It's complicated.
00:02:38.960 --> 00:02:48.879
And remember, in a lot of cases, in all of these reverse acquisitions, no cash flows to the vendor, it's only shares.
00:02:49.039 --> 00:02:52.319
And this is where again we flip into that world of top hats.
00:02:52.879 --> 00:03:00.080
And is it just a reorganization of an existing business with a purpose of going IPO?
00:03:00.400 --> 00:03:06.960
So IFRS3 defines the acquirer as the entity that obtains control of another entity.
00:03:07.039 --> 00:03:11.759
And IFRS3 tells us control is defined under IFRS 10.
00:03:11.919 --> 00:03:25.520
What are the indicators that preparers and auditors should look at to determining which entity actually has control when you know the situation that you you've described where transactions affected by issuing shares?
00:03:25.919 --> 00:03:29.840
For all auditors, you need to understand the transaction.
00:03:30.159 --> 00:03:35.439
Why was the transaction entered into and who are the dominant parties in it?
00:03:35.759 --> 00:03:48.560
Which shareholders or which board members of the pre-existing companies will end up on the board of the enlarged group.
00:03:48.879 --> 00:03:56.719
In a number of cases, when you've got these LISCO situations, the existing board approves the acquirer of operating co.
00:03:57.199 --> 00:04:11.280
Operating co has got their own board, and as soon as the transaction happens, all of the Lisco board resigns and the operating co board becomes the directors.
00:04:11.680 --> 00:04:13.840
They've got the majority of the shares.
00:04:14.000 --> 00:04:15.759
Again, it's a reverse acquisition.
00:04:15.840 --> 00:04:23.839
So look at where the shareholdings flow and where the board composition flows.
00:04:24.160 --> 00:04:29.279
If you're finding this discussion useful, please take a moment to click like, subscribe, and share.
00:04:37.920 --> 00:04:44.079
And so I think you've sort of explained how I forest like a reverse acquisition works.
00:04:44.560 --> 00:04:50.560
What sort of common mistakes do you see in financial reporting in terms of reverse acquisitions?
00:04:50.879 --> 00:04:51.759
There's two.
00:05:00.399 --> 00:05:03.759
And that confusion happens in typically two ways.
00:05:04.000 --> 00:05:13.199
That a lot of times the reverse acquisition, in order to get a listing, actually is alongside a capital raise.
00:05:35.839 --> 00:05:47.680
The existing shareholders of Lisco only end up with 5% of the shares, but the new money that came in actually ends up with a bounce, ends up with 55%.
00:05:48.319 --> 00:05:58.000
And then people wrongly conclude ah, because they only ended up with 40% of the shares, they it's not a reverse acquisition, it's flawed.
00:05:58.240 --> 00:06:35.759
And the other way to miss things is a lot of these organ these transactions, they also they can be mixed as all almost a merger that you have operating co a merges and acquires operating co B, and that in large group reverses into Lisco, and again people look at it and say, ah, operating Co A only ended up with 40% of the shares, and they're missing the fact there were a number of entities involved, and the ultimate acquirer is operating CoA.
00:06:36.079 --> 00:06:52.000
And then the second one that people get wrong a lot is they say that is a backdoor listing, therefore it is a reverse acquisition, and the entity they've backdoored into is a shell.
00:06:52.399 --> 00:07:10.879
It has no business, it has no processes, it has no assets, it has no employees, it fails the definition of a business, and therefore it's not a business combination, it is not subject to reverse acquisition accounting, it's actually a share-based payment under IFRS2.
00:07:11.279 --> 00:07:21.759
So we need to go back to what we talked about last episode in terms of whether that acquiry still we still need to go back and look at whether that is an asset.
00:07:22.079 --> 00:07:30.160
But putting your mind into this reverse, so we've convinced ourselves the company being acquired legally is a business.
00:07:30.319 --> 00:07:33.920
It's got a mine, it's got operating, it's a real business.
00:07:34.160 --> 00:07:39.839
But you need also to put your mind to ah, we're doing a reverse acquisition.
00:07:40.079 --> 00:07:44.000
Is the entity for an accounting purpose is being acquired?
00:07:44.240 --> 00:07:45.600
Is that a business?
00:07:45.839 --> 00:07:49.439
And in so many cases, it's just a shell.
00:07:49.519 --> 00:07:58.319
And therefore, again, you're not in reverse acquisition accounting, you do not get goodwill, you have a listing expense under IFRS2.
00:07:58.639 --> 00:07:59.279
Thanks, mate.
00:07:59.439 --> 00:08:09.600
So going back, if we miss, you said one of the common mistakes is people miss the um a reverse acquisition and wrongly identify the right acquirer.
00:08:09.759 --> 00:08:14.000
So the accounting acquiry, they've wrongly treated that as the acquirer.
00:08:15.040 --> 00:08:21.680
How does that impact on the financial statements like goodwill, comparatives, EPS?
00:08:22.079 --> 00:08:23.120
Everything's wrong.
00:08:23.360 --> 00:08:30.160
So if you get the wrong acquirer, you've gone and fair valued the assets of the wrong entity.
00:08:30.560 --> 00:08:46.960
So if you've believed it's not a reverse acquisition, really Lisco acquired operating co, you've then gone and done your purchase price allocation, you've fair valued all of operating co's assets, and you shouldn't have.
00:08:47.200 --> 00:08:59.360
You've recognised a weird amount of goodwill that relates really to the goodwill in operating co where it should relate to the goodwill in Lisco.
00:08:59.759 --> 00:09:04.240
Your comparatives are the wrong companies, your EPS is completely wrong.
00:09:04.559 --> 00:09:09.759
So if you manage to get the wrong acquirer, you really have misstated your accounts.
00:09:10.000 --> 00:09:16.559
So that's when you had you treated Lisco as the parent and the operating co as the subsidiary.
00:09:16.879 --> 00:09:17.120
Yeah.
00:09:17.360 --> 00:09:37.759
We did not end up with more than 50% of the shares, missing the fact it was also a capital raise, or it was a close call, and oh look, a month after the transaction, all of Lisco board uh resigned, and suddenly all of Operating Co.'s board are Lisco's board.
00:09:38.000 --> 00:09:39.519
So what should it look like?
00:09:39.759 --> 00:09:40.639
It's the reverse.
00:09:40.720 --> 00:09:48.399
So it should be you do the purchase price allocation of the assets and liabilities of Lisco.
00:09:48.960 --> 00:09:53.600
If you end up with Goodwill, it is the difference that Operating Co.
00:09:54.000 --> 00:09:59.200
paid for the fair value of the net assets of Lisco.
00:09:59.759 --> 00:10:04.879
And comparatives, it's a continuation of Operating Co.
00:10:05.440 --> 00:10:06.559
Okay, thanks Wayne.
00:10:06.720 --> 00:10:19.919
So well, this is a short episode, but this is a very uh important area where people can get it wrong and where getting it wrong makes everything quite looks completely wrong.
00:10:20.240 --> 00:10:40.960
I think the phrase it is materially misstated, completely materially misstated, and extraordinarily embarrassing for again the audit committee, the directors, the financial controller, and really brings into question how the auditor signed an unmodified audit opinion.
00:10:41.120 --> 00:11:07.840
You know, this is when you're doing the transaction, not when you're doing the audit in the last week in September, when the transaction has been announced, the auditors need an accounting paper, ticking off why who the acquirer is, and be satisfied right at the start of the transaction, almost before the transactions happened, to get the accounting right.
00:11:08.080 --> 00:11:15.600
So, like many aspects of IF3, it's one of those areas where a transaction that could look simple but can actually become quite complex.
00:11:15.919 --> 00:11:21.600
People in this mindset, I acquired 100% of the shares of that entity.
00:11:22.000 --> 00:11:25.519
It must be a business combination, or I am the acquirer.
00:11:25.600 --> 00:11:28.480
That mindset is a very dangerous mindset.
00:11:28.720 --> 00:11:29.279
Yeah, thanks.
00:11:29.360 --> 00:11:46.399
So if you'd like to explore these issues further, Wayne and I cover them in much more detail in our IFS3 business combinations icepring course, and where we'll walk through the practical examples, some of the common mistakes we see in practice, and so feel free to contact us for more details if you're interested.
00:11:46.559 --> 00:11:50.960
And thanks for joining us for this short episode of Financial Reporting Conversations.
00:11:51.120 --> 00:11:53.200
We'll see you in our next episode.
00:11:53.519 --> 00:11:56.320
Thanks for listening to Financial Reporting Conversations.
00:11:56.480 --> 00:12:04.240
For guidance on applying accounting and auditing standards, or to access our online training programs, please visit buzzfordconsulting.com.
00:12:04.399 --> 00:12:08.799
Don't forget to like, subscribe, and share this episode with your colleagues and contacts.
00:12:08.960 --> 00:12:13.679
We'll see you next time where we make the unknowns in financial reporting known.
