Purchase accounting on Reverse Acquisition

Reverse Acquisitions

The term reverse acquisition refers to a business combination accounted for by the purchase method in which the company that issues its shares or gives other consideration to effect a business combination is determined to be the acquiree. This is typically based on the fact that the shareholders of the issuer will have less than a majority of voting control of the combined entity. Reverse acquisitions often involve a shell company or a blind pool created for the purpose of raising capital and using such assets to acquire an interest in an operating company by issuing its shares to acquire all of the stock of an operating company. A reverse acquisition is frequently characterized by the continued operations of the operating company under its precombination management, with little or no management involvement by officers and directors of the shell or blind pool. In a reverse acquisition, the legal acquiror continues in existence as the legal entity whose shares represent the outstanding common stock of the combined company. In some instances, the legal acquiror is a public company whose shares are listed on an exchange. By effecting a reverse acquisition, the accounting acquiror can thereby gain access to the public market without going through an initial public offering.

Applying Purchase Accounting to a Reverse Acquisition

In applying purchase accounting to a reverse acquisition, the assets of the legal acquiror must be revalued and the purchase price allocated to those assets acquired and liabilities assumed. The equity section of the combined company’s balance sheet should reflect the legal acquiror’s equity securities outstanding. The retained earnings or accumulated deficit of the accounting acquiror should carry over to the combined company, and the difference resulting from purchase price adjustments and adjustments to the legal acquiror’s common stock and other equity securities is charged or credited to paid-in capital.