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ASC 805-10-25-4 provides the principle with regard to identifying the acquirer.

ASC 805-10-25-4

For each business combination, one of the combining entities shall be identified as the acquirer.

Application of the above principle requires one of the parties in a business combination to be identified as the acquirer for accounting purposes. The process of identifying the acquirer begins with the determination of the party that obtains control based on the guidance in the consolidation standard (ASC 810-10).
The general rule is the party that directly or indirectly holds greater than 50% of the voting shares has control. If a variable interest entity (VIE) that is a business is consolidated using the VIE subsections of ASC 810-10, the party that consolidates the VIE (i.e., primary beneficiary) is identified as the acquirer. See BCG 2.11 for further information.
If the accounting acquirer is not apparent when considering the guidance in ASC 810-10, the guidance in ASC 805-10-55-11 and ASC 805-10-55-12 can assist in the identification of the acquirer.

ASC 805-10-55-11

In a business combination 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.

Excerpt from ASC 805-10-55-12

In a business combination effected primarily by exchanging equity interests, the acquirer usually is the entity that issues its equity interests.

It is sometimes not clear which party is the acquirer if a business combination is effected through the exchange of equity interests. The acquirer for accounting purposes may not be the legal acquirer (i.e., the entity that issues its equity interest to effect the business combination). Business combinations in which the legal acquirer is not the accounting acquirer are commonly referred to as “reverse acquisitions.” See BCG 2.10 for further information. All pertinent facts and circumstances should be considered in determining the acquirer in a business combination that primarily involves the exchange of equity interests. ASC 805-10-55-12 provides additional factors that should be considered when determining the acquirer in a business combination effected through the exchange of equity interests.

Excerpt from ASC 805-10-55-12

a. The relative 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 combined entity. In determining which group of owners retains or receives the largest portion of voting rights, an entity shall consider the existence of any unusual or special voting arrangements and options, warrants, or convertible securities.
b. 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.
c. 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.
d. 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.
e. 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.

The weight of relative voting rights in the combined entity after the business combination generally increases as the portion of the voting rights held by the majority becomes more significant (e.g., a split of 75% and 25% may be more determinative than a split of 51% and 49%). See below for additional information on the consideration of options, warrants, and convertible instruments when evaluating relative voting rights.
The existence of a party with a large minority voting interest may be a factor in determining the acquirer. For example, a newly combined entity’s ownership includes a single investor with a 40% ownership, while the remaining 60% ownership is held by a widely dispersed group. The single investor that owns the 40% ownership in the combined entity is considered a large minority voting interest.
Consideration should be given to the initial composition of the board and whether the composition of the board is subject to change within a short period of time after the acquisition date. Generally, we believe control of the board should allow the board to vote on substantive matters post-acquisition. Assessing the significance of this factor in the identification of the acquirer would include an understanding of which combining entity has the ability to impact the composition of the board. These include, among other things, the terms of the current members serving on the governing body, the process for replacing current members, and the committees or individuals that have a role in selecting new members for the governing body.
Consideration should be given to the number of executive positions, the roles and responsibilities associated with each position, and the existence and terms of any employment contracts. The seniority of the various management positions should be given greater weight over the actual number of senior management positions in the determination of the composition of senior management.
The terms of the exchange of equity interests are not limited to situations where the equity securities exchanged are traded in a public market. In situations where either or both securities are not publicly traded, the reliability of the fair value measure of the privately held equity securities should be considered prior to assessing whether an entity paid a premium over the precombination fair value of the other combining entity or entities.
Other factors to consider in determining the acquirer include:
  • If one of the combining entities is significantly larger than the other combining entity or entities, it would typically be considered the accounting acquirer. When assessing relative size, a reporting entity may consider the combining entities’ assets, revenues, cash flows, or earnings measures that are most relevant, which may vary based on sector. Differences in accounting policies, entity capitalization, and the occurrence of nonrecurring items should also be considered when comparing the relative size of the combining entities.
  • When identifying the acquirer, a reporting entity should consider which of the combining entities initiated the business combination.
  • The combined entity’s name, location of its headquarters, and ticker symbol may also be considered.
  • A newly formed entity (NewCo) that issues equity to effect the combination/merger of two or more existing businesses would generally not be the accounting acquirer (see Example BCG 2-3). One of the existing combining entities should be determined to be the acquirer utilizing the criteria described in ASC 805-10-55-12. However, a NewCo that transfers cash or other assets or that incurs liabilities as consideration may be deemed to be the accounting acquirer. See BCG 2.3.1 for further guidance on NewCos.

In addition to these factors, certain circumstances can complicate the identification of the acquirer, including the following:
  • Acquisitions involving companies with overlapping shareholders. The effect of common ownership (but not common control) among the shareholders of the combining entities should be considered in the identification of the accounting acquirer. The analysis of the relative voting rights in a business combination involving entities with common shareholders should consider the former shareholder groups of the combining entities and not the individual owners that are common to the combining entities. The former shareholder group that retains or receives the largest portion of the voting rights in the combined entity would be the accounting acquirer, absent the consideration of any of the other factors provided in ASC 805.
  • Options, warrants, and convertible instruments. Options, warrants, and convertible instruments assumed or exchanged in a business combination are considered in the determination of the accounting acquirer if the holders of these instruments are viewed to be essentially the same as common shareholders. Options, warrants, and convertible instruments that are in the money and are vested, exercisable, or convertible may be included in the determination of the relative voting rights in the combined entity. Options, warrants, and convertible instruments that are not vested, exercisable, or convertible until after the acquisition date generally should not be included in the assessment of relative voting rights. However, if the instruments become vested, exercisable, or convertible shortly after the acquisition date and it can be reasonable to assume those instruments will be converted, then the instruments should be included in the analysis.
  • Debt holders that receive common shares. Debt holders that receive common shares in a business combination should be considered in the determination of the accounting acquirer if the debt holders are viewed to have attributes similar to common shareholders prior to the acquisition. The holders of debt that is exchanged for shares in a business combination may be included in the determination of the relative voting rights in the combined entity if the debt is convertible and in the money prior to the acquisition.
Example BCG 2-1 and Example BCG 2-2 illustrate the impact on the determination of relative voting rights in the combined entity if debt holders receive common shares in a business combination.
EXAMPLE BCG 2-1
Debt holders that exchange their interest for common shares that do not impact the determination of relative voting rights
Company A acquires Company B in a business combination by exchanging equity interests. Company B has nonconvertible debt that Company A does not wish to assume in the acquisition. Company A reaches an agreement with Company B’s nonconvertible debt holders to extinguish the debt for Company A’s common shares. The nonconvertible debt holders hold no other financial interests in Company B.
How do the shares issued to the nonconvertible debt holders impact the determination of relative voting rights?
Analysis
The extinguishment of the debt is a separate transaction from the business combination. The determination of relative voting rights in the combined entity would not include the equity interests received by Company B’s nonconvertible debt holders. Prior to the business combination, Company B’s nonconvertible debt holders do not have attributes similar to other shareholders. The debt holders have no voting rights and have a different economic interest in Company B compared to Company B’s shareholders before the business combination.
EXAMPLE BCG 2-2
Debt holders that exchange their interest for common shares that impact the determination of relative voting rights
Company A acquires Company B in a business combination by exchanging equity interests. Company B has convertible debt. The conversion feature is “deep in the money” and the underlying fair value of the convertible debt is primarily based on the common shares into which the debt may be converted. Company A does not wish to assume the convertible debt in the acquisition. Company A reaches an agreement with Company B’s convertible debt holders to exchange the convertible debt for Company A’s common shares.
How do the shares issued to the convertible debt holders impact the determination of relative voting rights?
Analysis
The determination of relative voting rights in the combined entity would include the equity interests received by Company B’s convertible debt holders. Prior to the business combination, these debt holders have attributes similar to common shareholders. The debt holders have voting rights that can be exercised by converting the debt into common shares, and the underlying fair value of the debt is primarily based on the common shares into which the debt may be converted. This would indicate that the convertible debt holders have a similar economic interest in Company B compared to Company B’s common shareholders prior to the business combination.

2.3.1 New entity created to facilitate a business combination

It is not uncommon to use one or more newly formed legal entities (NewCos) in a business combination or other common corporate transactions, such as legal reorganizations or recapitalizations. There may be various legal, tax, or other business purposes for the creation of a NewCo in such transactions.
NewCos may also be created to facilitate combinations between entities that are under common control or under a high degree of common ownership. Common control transactions are excluded from the scope of the business combinations guidance in ASC 805. See
BCG 7.1.1
 for further detail on common control transactions and
BCG 7.1.1.3
 for further detail on transactions involving entities with a high degree of common ownership.
If a NewCo is created to facilitate a business combination, an analysis needs to be performed to determine whether the NewCo is the accounting acquirer or whether it should be disregarded for accounting purposes. The determination of whether a NewCo is the accounting acquirer begins with assessing whether or not the NewCo is substantive. This assessment should be based on the specific facts and circumstances surrounding the transaction, which may include the following:
  • Will the NewCo survive the transaction or is it transitory in nature?
  • Does the NewCo issue shares or pay cash to acquire the shares of a business?
  • Does the NewCo have any ownership interest in the acquiree?
  • Are there significant precombination activities at the NewCo (e.g., raises debt, negotiates transactions, identifies businesses for acquisitions)?
It generally should not matter which entity formed the NewCo (i.e., the buyer or the seller) in the analysis of whether or not NewCo is substantive. A NewCo’s formation, ownership, and activities prior to the business combination should be considered and may provide evidence as to whether a NewCo is substantive. These factors are particularly relevant in the case of a NewCo that does not survive the transaction, as frequently a NewCo that survives the transaction is considered substantive. For example, a transitory NewCo that has assets, liabilities, or operating activities may be determined to be substantive. Alternatively, the following indicators may indicate that a transitory NewCo lacks substance and therefore is not an accounting acquirer:
  • NewCo was created solely as a means for a new investor to acquire the shares in the acquired business.
  • NewCo is newly formed for the transaction and has no other operations or activities that would lead to a conclusion that NewCo is a substantive entity.
  • Any debt used in the transaction is not raised or incurred by the NewCo.
The determination of whether a NewCo is the accounting acquirer is judgmental and requires an understanding of the substance and legal form of the transaction. If the NewCo is the acquirer, acquisition accounting (rather than pushdown accounting), would be applied in the NewCo’s financial statements. See BCG 10.1 for further information on pushdown accounting.
Special purpose acquisition company (SPAC)
A SPAC, also known as a blank-check company, is a publicly-traded company that completes an IPO with the intent of using the funds to acquire an existing company within a fixed period of time, often two years. If an acquisition is not identified and consummated within the specified time period, the funds raised in the SPAC’s IPO are returned to its investors.
In the merger transaction between the SPAC and the target operating company, an important accounting judgment is the determination of which entity is the accounting acquirer. The accounting acquirer is the entity that obtains control of the merged entity and may be different from the legal acquirer. If the SPAC merger is effectuated primarily by transferring cash or other assets or by incurring liabilities, the SPAC is usually the accounting acquirer. If the target operating company is a variable interest entity (VIE), the entity that is the primary beneficiary and consolidates the VIE is the accounting acquirer (i.e., if the SPAC becomes the primary beneficiary as a result of the merger, the SPAC would be the accounting acquirer). See CG 3 for guidance on VIE analysis and CG 7.1.1 for consolidation considerations when assessing limited liability companies and other similar entities.
If the voting interest model applies and the SPAC merger consideration is equity or a combination of cash and equity, the determination of the accounting acquirer requires further evaluation based on the facts and circumstances of the SPAC merger. The guidance in ASC 805-10-55-11 through ASC 805-10-55-15 includes factors that may indicate which party is the accounting acquirer (see BCG 2.3). In the common case of the SPAC merger consideration being in the form of equity, the target operating company may often be determined to be the accounting acquirer based on the relative voting rights of the historical stockholder groups in the merged entity and the composition of the governing body and senior management team of the merged entity. If the target operating company is the accounting acquirer, the transaction is considered a reverse merger. A reverse merger with a SPAC is typically accounted for as a reverse recapitalization because often the SPAC’s only pre-merger asset is cash received from investors and the SPAC generally does not meet the definition of a business. Instead, the substance of these types of reverse mergers is a capital transaction of the legal acquiree, which is equivalent to the issuance of shares by the target operating company for the net monetary assets of the SPAC accompanied by a recapitalization.
A SPAC is not a shell company. A shell company is a dormant, non-operating entity. For merger transactions with a shell company, refer to BCG 2.10.1.

2.3.1.1 NewCo issues shares to effect a merger

A NewCo that is established solely to issue equity interests to effect a business combination between two pre-existing businesses generally will not be substantive and should be “looked through” to determine the acquirer. Therefore, when a NewCo issues equity interests to effect a business combination, one of the existing entities or businesses would be identified as the acquirer in accordance with ASC 805-10-55-15.
Example BCG 2-3 illustrates circumstances in which a NewCo is established solely to issue equity interests to effect a business combination between two pre-existing businesses.
EXAMPLE BCG 2-3
Determining the acquirer: NewCo issues shares to facilitate a merger of two pre-existing businesses
A NewCo is formed by Company A to effect the combination of Company A and Company B. NewCo issues 100% of its equity interests to the owners of Company A and Company B in exchange for all of their outstanding equity interests.
Is NewCo the accounting acquirer?
Analysis
No. NewCo is not considered substantive and would be disregarded for accounting purposes. The transaction is, in substance, no different than a transaction in which one of the combining entities directly acquires the other. In accordance with ASC 805-10-55-15, NewCo would not be identified as the accounting acquirer; rather, one of the combining entities would be. Identification of the acquirer would be based on the guidance in ASC 805-10-55-12 through ASC 805-10-55-14.

2.3.1.2 Transitory NewCo may be substantive

A NewCo may be used to acquire control of a business by merging with and into the acquired business. A NewCo that does not survive the transaction (i.e., the acquired business is the surviving entity) is referred to as a transitory NewCo. The use of a transitory NewCo (sometimes referred to as a merger sub) may be driven by legal considerations, such as a means to limit liability, or may be driven by state merger laws when the acquiree is publicly traded or has numerous shareholders. A transitory NewCo formed solely for the merger transaction that has no other operations or activities would indicate that NewCo is not a substantive entity and therefore not the accounting acquirer. However, as illustrated in Example BCG 2-4, a transitory NewCo may be determined to be the acquirer if the NewCo is considered to be substantive.
EXAMPLE BCG 2-4
Determining the acquirer: transitory NewCo raises debt to fund the acquisition
A transitory NewCo is formed by a private equity firm to effect an acquisition. NewCo negotiates with lenders and raises debt to fund the acquisition of Target T. NewCo acquires and merges with Target T, with Target T being the surviving entity.
Is NewCo the accounting acquirer?
Analysis
Yes. NewCo is considered to have substantive precombination activities as a result of raising debt to fund the acquisition and would be identified as the accounting acquirer.

2.3.1.3 NewCo acquires a business and is the reporting entity

There are acquisitions in which a NewCo may acquire a business and survive the transaction. The NewCo may be determined to be the acquirer if the NewCo is considered to be substantive.
Example BCG 2-5 illustrates an acquisition in which a NewCo issues equity for cash to purchase 100% of the equity of a company and survives the transaction.
EXAMPLE BCG 2-5
Determining the acquirer: surviving NewCo
NewCo is formed by various unrelated investors for the purpose of acquiring a business. Newco issues equity to the investors for cash. Using the cash received, NewCo purchases 100% of the equity of a company.
Is NewCo the accounting acquirer?
Analysis
Yes. NewCo would be identified as the accounting acquirer. NewCo, itself, obtained control of a business and is not controlled by the former shareholders of the acquired company. In addition, NewCo independently raised the necessary cash to fund the acquisition. Based on these facts, NewCo would be considered substantive and would be identified as the accounting acquirer.

Example BCG 2-6 illustrates an acquisition in which a selling shareholder contributes a business to a NewCo, which concurrently issues shares to an unrelated investor for cash.
EXAMPLE BCG 2-6
Determining the acquirer: selling shareholder contributes a business to a NewCo, which concurrently issues shares to an unrelated investor for cash
As part of an integrated transaction, a seller contributes a business to NewCo in exchange for shares of NewCo. NewCo concurrently issues 60% of its common shares to an unrelated investor for cash. NewCo survives the transaction.
Is NewCo the accounting acquirer?
Analysis
Yes. NewCo would be identified as the accounting acquirer. ASC 805-10-20 defines a business combination as a "transaction or other event in which an acquirer obtains control of one or more businesses." In this instance, the surviving NewCo is considered the accounting acquirer as an unrelated investor has obtained control over it and the contributed business. The accounting for this transaction is the same as if the new investor had infused cash into a NewCo, which then issued equity securities to the seller in return for the net assets of the contributed business, resulting in a business combination.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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