Comparing answer with Kaplan

GREER (MAR/JUN 2023)

1 – Acquisition of Layout 
Greer Co whose shares are listed on a stock exchange and Layout Co, an unlisted company, 
entered into a business combination in two stages. On 1 January 20X7, Greer Co purchased 
35% of the share capital and voting rights of Layout Co for cash. On 1 April 20X7, Greer Co 
acquired  the  remaining  65%  of  the  share  capital  by  issuing  new  shares  to  Layout  Co’s 
shareholders. 
On 1 April 20X7, Greer Co had a market value of $70 million and Layout Co had a value of $90 
million. Greer Co’s business represents 44% and Layout Co’s business 56% of the total value 
of the combined businesses. After 1 April 20X7, the former shareholders of Greer Co owned 
51%  and  the  former  shareholders  of  Layout  Co  owned  49%  of  the  voting  rights  of  the 
combined entity. 
On  1  April  20X7,  the  purchase  agreement  provided  for  a  new  board  of  directors  of  the 
combined  entity  comprising  six  board  members  of  Greer  Co  and  two  board  members  of 
Layout Co. The CEO of Layout Co is the CEO of the combined entity. The board of directors 
nominates the members of the management team but the CEO has significant influence over 
the  selection  of  the  team.  The  management  team  comprises  the  CEO  and  five  other 
members, three from Greer Co and two from Layout Co. 

Required: 
(a)  Using exhibit 1, evaluate the reasons why Greer Co, rather than Layout Co, can be 
identified as the acquirer in the business combination. 
(10 marks)

Kaplan response:
The acquisition method set out in IFRS 3 Business Combinations is applied from the
viewpoint of the acquirer. The acquirer is the entity obtaining control over an acquiree,
which must meet the definition of a business. An acquirer must therefore be identified
whenever there is a business combination.
In more complex situations, IFRS 3 takes a substance over legal form approach to
identifying the acquirer. This approach looks beyond the rights of the combining
entities themselves. It also considers the relative rights of the combining entities’
owners before and after the transaction. IFRS 3 provides the following indicators to
consider:
? The entity which transfers cash or other assets or incurs the liabilities.
? The entity which issues the equity interests.
? The entity whose size is significantly greater than that of the other combining
entity or entities.
? The entity whose owners as a group retain the largest portion of the voting
rights.
? The entity whose owners have the ability to elect or appoint or remove a
majority of the members of the governing body of the combined entity.
? The entity whose (former) management dominates the combined management.
The arguments supporting Greer Co or Layout Co as the acquirer are finely balanced.
IFRS 10 Consolidated Financial Statements states that control exists when the investor
has:
? power over the investee
? exposure, or rights, to variable returns from its involvement with the investee,
and
? the ability to use its power over the investee to affect the amount of the
investor’s returns.

There could be a general presumption that Greer Co has achieved control over Layout
Co by acquiring more than one half of the voting rights of the combined entity (51%)
(unless it can be demonstrated that such ownership does not constitute control). A
controlling ownership does not necessarily mean that the entity has the power to
govern the combined entity’s financial and operating policies so as to affect the
amount of its returns, therefore other facts should also be considered.
As set out above, the entity which issues the equity interests is normally the acquirer
and that is Greer Co. Also, Greer Co has paid cash for 35% of the equity and this
represents a significant part of the total purchase consideration.
The former members of Greer Co’s board represent the majority of the board of
directors of the combined entity with six former board members of Greer Co and two
former board members of Layout Co.
It is not evident which company is able to dominate the management of the combined
business as the management team comprises the former CEO of Layout Co and five
other members, three from Greer Co and two from Layout Co. Although the board
(which comprises six former board members of Greer Co and two former board
members of Layout Co) nominates the management team, the CEO of Layout Co has
significant influence on the business and on the selection of the team.
Also, as the fair value of Layout Co ($90 million) is significantly greater than that of
Greer Co ($70 million), this again would point towards Layout Co as the acquirer.
Similarly, Greer Co’s business only represents 44% and Layout Co’s business 56% of the
total value of the combined businesses.
However, in deciding which company is the acquirer, the decision that Greer Co is the
acquirer is influenced by the fact that Greer Co issued the equity interest, transferred
cash and has the marginal controlling interest (51%).

My response:
An investor can be considered as acquirer of an entity if it gains control over that entity. And the control is
determined by the presence of the following conditions:
1. the investor has power over the direction of the activities of the acquiree company
2. the investor has exposure to, or right to, variable returns of the acquiree company
3. the investor has the power to control the returns/profits of the acquiree company for its benefit.
In the case of Greer Co and Layout Co, Greer Co can be considered acquirer of Layout Co because of the
following reasons:
1. Before 1 April 20X7, Greer Co owns only 35% of Layout Co which gives it the significant influence, and
not the control, over Layout. Therefore, upto 1 April 20X7, Layout can be considered as an associate
instead of a subsidiary. However, after acquiring 65% more shareholding in Layout Co, Greer Co becomes
90% owner of Layout, which gives it control over Layout.
2. Even though Greer Co has issued new shares to Layout Co for purchasing the additional 65% of the
shareholding, yet it gives only 49% of voting rights to the former owners of Layout Co which is below the
general threshold of being more than 50% to achieve control over the other entity.
3. While, on the other hand, Greer Co has 51% of the voting rights of the combined entity, which gives it
control to direct the activities of the combined entity.
4. Although Layout Co is contributing higher market value ($90 million as compared to Greer’s $70 million)
and higher business percentage (56% as compared to Greer’s 44%), it is not the ultimate test to determine
whether control has been acquired or not.
5. Greer Co has six board members against Layout Co’s only two board members which gives it clear
majority and it has the power to control the activities of Layout Co.
6. CEO of the Layout Co in the combined entity has only significant influence and not control over the
appointments of the management team.
7. Even though management team has equal number (3) of members from Greer and Layout, but the
management team usually has no role in the direction of the entity. Thus, it does not exercise control.

My response and Kaplan’s response are way different. However, considering the question and its requirements, how will you rate my answer? Thanks