Business Combinations
...uiring entity. The senior management of an entity generally consists of the executive committee, when one exists, or the chair of the board, the chief executive officer, the chief operating officer, the chief financial officer, and those divisional heads that report directly to the officers. .13 Occasionally, an entity obtains ownership of the shares of another entity but, as part of the transaction, issues enough voting shares as consideration that control of the combined entity passes to the shareholders of the entity acquired. This situation is referred to as a “reverse take-over”. Although legally the entity which issues the shares is regarded as the parent or continuing entity, the entity whose former shareholders now hold more than 50% of the voting shares of the combined entity is treated as the acquiring entity. As a result, the issuing entity is deemed to be a continuation of the acquiring entity and control of the assets and business of the issuing entity is deemed to have been acquired in consideration for the issue of capital. .14 If a new entity is formed to issue shares to effect a business combination, one of the existing combining entities is considered to be the acquiring entity on the basis of the evidence available. The guidance in paragraphs 1580.10 to 1580.12 is also useful in identifying the acquiring entity. THE APPLICATION OF THE PURCHASE METHOD Determining the cost of the purchase .15 ä The cost of a purchase to an acquiring entity should be determined by the fair value of the consideration given, except when the transaction does not represent the culmination of the earnings process (see NON-MONETARY TRANSACTIONS, paragraph 3830.08). When the fair value of the consideration given is not clearly evident, the acquiring entity should use its share of the fair value of the net assets acquired as the cost of its purchase. .16 The cost of the purchase to the acquiring entity is determined by the fair value of the consideration given. Fair value is the amount of the consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. .17 The general principles to be applied in determining the cost of the purchase depend upon the nature of the transaction. When the consideration given is cash or other assets, the cost is the amount of cash disbursed or the fair value of other assets distributed. When debt securities are issued or liabilities incurred, the cost to the acquiring entity is determined using the current market rate for similar instruments. When shares are issued, the cost of the purchase is the fair value of such shares. .18 In accounting for a purchase effected by issuing shares, the value of the shares is based on the market price of the shares over a reasonable period of time before and after the date the terms of the acquisition are agreed to and announced. .19 When the quoted market price is not indicative of the fair value of the shares issued, or the fair value of the shares issued is not otherwise clearly evident, the fair value of the net assets acquired is used to determine the cost of the purchase. The fair value is determined for the entity as a whole, including tangible and intangible assets and liabilities, and the cost of the purchase is then calculated by applying the percentage of the equity acquired to that fair value. The valuation necessitates reference to all aspects of the acquisition, including factors entering into the negotiations. Independent appraisals may be used as an aid in determining fair value. Contingent consideration .20 ä When the amount of any contingent consideration can be reasonably estimated at the date of acquisition and the outcome of the contingency can be determined beyond reasonable doubt, it should be recorded at that...