Accounting issues related to share swaps

Keywords: Mazars, Thailand, TFRS, TFCA, Share Swap,  

10 January 2024  

• An agreement on the share exchange sets the ratio at 1 share of Company B for every 5 shares of Company A. 
• Company B issues 200,000 common shares (40,000 shares x 5) to the shareholders of Company A. 
• Company B’s shares are valued at THB 120 each on the market (their par value is THB 100).  
• Based on an analysis of legal documentation, board resolutions, and other relevant agreements, it is found that Company B has obtained control of Company A.  

25 January 2024  

• The market price of Company B’s shares has increased to THB 130 each.  
• The share exchange is executed based on the agreed-upon ratio. 

Question: What should the acquisition date be?  

Answer:  
The Thai Federation of Accounting Professions’ (TFAC) article published on 11 October 2023 states: 

Under Thai Financial Reporting Standard (TFRS) 3 (revised 2009) related to business combinations, the acquisition date is defined as the date on which the acquirer gains control of the acquiree. Typically, the acquisition date matches the closing date – the date that the acquirer legally transfers the consideration, acquires the assets, and assumes the related liabilities. However, it is important to note that the acquirer may gain control on a date before or after the closing date. Where the acquirer identifies the acquisition date as being before the consideration is transferred, all of the relevant facts and circumstances must be taken into account, particularly when control is obtained on a date before the share swap. 

For instances involving a public offer to purchase securities, the acquisition date is usually the deadline for responding to the tender offer. This is because, at that point, the acquirer can determine whether control over the acquiree has been achieved.  

 As a result, the acquisition date is on 10 January 2024, the date that Company B obtained control of Company A 

Question: What should the value of the consideration be?  

Answer:  
The Thai Federation of Accounting Professions’ (TFAC) article published on 11 October 2023 states: 

Under TFRS 3, it is explicitly stated that the consideration transferred must be measured at fair value. This fair value is derived from the aggregate of fair values associated with the following items:  

• The assets transferred by the acquirer at the acquisition date.  
• The liabilities incurred by the acquirer to settle debts with the original owner of the acquiree.  
• The equity interest issued by the acquirer 

Various forms of consideration, such as cash, assets, business units, subsidiary companies, ordinary shares, preference shares, purchase rights, warrants, and member equity in joint ventures, are encompassed.  

In the context of an exchange of shares between a listed acquirer and a limited company, fair value is determined by the acquirer’s common shares issued to the acquiree’s shareholders. However, if the acquiree’s common shares are listed on the stock exchange, and their fair value is more clearly discernible, the acquirer should utilize this fair value.  

As a result, Company B should recognize this transaction as follows 

On 10 January 2024 

Question: Does Company B need to review the fair value of the consideration transferred after the share exchange date?  

Answer:  
The Thai Federation of Accounting Professions’ (TFAC) article published on 11 October 2023 states: 

Market fluctuations between the agreement date and the actual exchange date can have an impact on the common stock’s market price. The fair value should be reevaluated by considering the fair value of the acquiree’s equity, the synergy between the acquirer and the acquiree after the transaction, and the market price of the acquirer’s shares at the agreement date. Independent valuers can be engaged for this purpose.  

Upon obtaining the reviewed fair value, the acquirer adjusts the excess value of common shares, reflecting this adjustment in both investments in separate financial statements and goodwill in consolidated financial statements. 

As a result, Company B should perform a review of the fair value of the transferred consideration at the exchange date to assess if the initial valuation still holds true. This review may involve consulting qualified valuation professionals and taking into account various factors, such as market trends, future earnings potential, and any new information available since the agreement date. 

Depending on the outcome of the review, Company B’s financial statements may need to be adjusted as of the exchange date:

• An increase in the account, “Investment in Company A”: If the review determines that the transferred consideration is worth more due to the higher market price of Company B’s shares, Company B might need to increase the account, “Investment in Company A”, accordingly. This might result in the recognition of additional goodwill at the acquisition date.  
• No adjustment: If the review finds that the initial valuation remains accurate despite the change in market price, no adjustments may be necessary.   

Reference: The Thai Federation of Accounting Professions’ (TFAC) article published on 11 October 2023