separately by the non-controlling shareholders;
• the offer period is short; and
• the price per share offered for subsequent increases is fixed and consistent with
the price paid for the controlling interest.
These factors are generally all present in the case of public offers to the entire group of
shareholders. They may not all be present for private offers where, for example, some
of the options may be for extended terms.
If a put option is granted over the non-controlling interest and the terms of the put
option are such that the present ownership interest attached to the underlying shares is
gained at the same time as gaining control, this will satisfy the second criterion above.
Whilst the put may nominally extend over a long period, the effect is that ownership
has already passed to the acquirer. See 6.2.2 above for the factors to be considered in
assessing whether or not the acquirer gains present ownership interest over the
underlying shares. Where the other criteria above are also met, this is a linked
transaction and it is accounted for as one transaction.
6.2.4.B Accounting
for
the linked transaction
A linked transaction is accounted for as if all ownership interests were acquired at the
acquisition date as part of the transaction to gain control.
The consideration transferred is the sum of the amount paid for the controlling and
non-controlling interest and the percentage acquired is the sum of the respective
shareholdings. If, at the date of gaining control the non-controlling interest has not
actually been acquired, a financial liability is recognised at the present value of the
amount payable upon exercise of the option to acquire the non-controlling interest.
If at the date the non-controlling interest is actually acquired, the percentage acquired
differs to that originally accounted for as being acquired, the purchase accounting is
adjusted to reflect the actual percentage acquired. A ‘true up’ exercise is performed to
adjust the total consideration paid and therefore the amount of goodwill recognised. It is
not accounted for as a partial disposal of non-controlling interest (changes in ownership
interest without loss of control are addressed at 4 above). The non-controlling interest is
measured as of the date of acquisition, not as of the date that the offer expires.
When the transaction is linked because the arrangement provides a present ownership
interest in the non-controlling interest, the entity will not recognise a non-controlling
interest. Accounting for the transaction is as described in Approach 1 at 6.2.3.A above.
If the granting of the put option and its subsequent exercise are not linked to the
transaction in which the acquirer gains control, see 6.4 below for discussion of how the
acquirer accounts for the NCI put.
522 Chapter
7
Example 7.19 below illustrates the accounting for a linked transaction.
Example 7.19: Put option and gaining control accounted for as a single transaction
Entity A acquires a 60% controlling interest in listed Entity B. As Entity A has obtained a controlling interest
in Entity B, the regulator requires Entity A to offer to purchase the remaining shares of Entity B from all
other shareholders of Entity B, paying the same price per share as in the transaction in which Entity A
obtained control of Entity B. Entity A makes the offer immediately and the offer period lasts for 30 days.
At the end of 30 days, other shareholders of Entity B owning 30% accept the offer for their shares. The offer
to acquire the remaining 10% of shares held in Entity B expires unexercised.
When considering whether the put option (and acquisition of the 30% of Entity B’s shares tendered) are
linked to the acquisition of 60% of Entity B’s shares, in which Entity A gained control, it is relevant that:
• the price per share is fixed and at the same price as paid by Entity A to acquire 60% of Entity B’s shares;
• the shareholders of Entity B who own the 30% did not negotiate to receive the offer;
• the offer benefits the shareholders of Entity B (by providing the same opportunity to sell their shares
that the shareholder(s) who sold the 60% received);
• although the offer was initiated by Entity A, it stemmed from a regulatory requirement triggered by the
acquisition of Entity B (it was not at Entity A’s discretion to make the offer); and
• the offer period is relatively short.
Entity A concludes that the acquisition of 30% of Entity B’s shares is linked to the transaction when control was
gained and is therefore part of the business combination. Therefore, Entity A records the following journal entries:
a)
Acquisition of 60% and entering into the put option on the remaining shares (granting the offer):
Dr Net assets (summarised, 100% of fair value of net assets of Entity B, as required by IFRS 3)
Dr Goodwill (as if Entity A acquired 100% of Entity B)
Cr Cash transferred (on acquisition date)
Cr Financial liability (present value of offer price to be paid at the expiry date of the
option relating to the 40% of Entity B’s shares subject to the offer)
b)
Accounting for the liability in accordance with IFRS 9 (unwinding of the discount during the 30-
day period):
Dr Finance expense
Cr Financial liability
c)
Acquisition of 30% offered at the end of the 30-day period is accounted for as a reduction of the
financial liability:
Dr Financial liability
Cr Cash
d) Reclassification of the financial liability to equity for the 10% outstanding at the end of the offer
period – Entity A adjusts the initial purchase price allocation related to Entity B to recognise any
non-controlling interest, with an offset to goodwill:
Dr Financial liability (offer price of 10% of shares)
Cr Non-controlling interest (either (1) fair value of the non-controlling interest in
Entity B or (2) the 10% shareholders’ proportionate share of Entity B’s identifiable
net assets), measured as of the acquisition date (the date that control was gained,
and not the date that the offer expires)
Dr/Cr Goodwill (difference, if applicable).
Consolidation procedures and non-controlling interests 523
6.3
Combination of call and put options
In some business combinations, there might be a combination of call and put options,
the terms of which may be equivalent or may be different.
The appropriate accounting for such options is determined based on the discussions
in 6.1 and 6.2 above. However, where there is a call and put option with equivalent
terms, particularly at a fixed price, the combination of the options is more likely to mean
that they give the acquirer a present ownership interest.
In such cases, where the options are over all of the shares not held by the parent, the
acquirer has effectively acquired a 100% interest in the subsidiary at the date of the
business combination. The entity may be in a similar position as if it had acquired a
100% interest in the subsidiary with either deferred consideration (where the exercise
price is fixed) or contingent consideration (where the settlement amount is not fixed,
but is dependent upon a future event
). See Chapter 9 at 7.
As noted at 6 above, similar considerations also apply where the acquirer entered into
a forward purchase contract for the shares held by the other shareholders.
6.4
Call and put options entered into in relation to existing non-
controlling interests
The discussion in 6.1 and 6.2 above focused on call and put options entered into at the
same time as control is gained of the subsidiary. However, an entity may enter into the
options with non-controlling shareholders after gaining control. The appropriate
accounting policy will still be based on the discussions in 6.1 and 6.2 above.
Where the entity already has a controlling interest and as a result of the options now
has a present ownership interest in the remaining shares concerned, or concludes that
IAS 32 takes precedence, the non-controlling interest is no longer recognised within
equity. The transaction is accounted for as an acquisition of the non-controlling
interest, i.e. it is accounted for as an equity transaction (see 4 above), because such
acquisitions are not business combinations under IFRS 3.
6.5
Put options over non-controlling interests – Interpretations
Committee and IASB developments
The Interpretations Committee unequivocally confirmed as early as 2006 that an NCI
put to be settled for cash is itself a financial liability.25 During 2011, the Interpretations
Committee developed a proposal that NCI puts be accounted for as if they were
derivatives. This means that, initially and subsequently, they would have been
measured on a net basis at fair value, rather than being measured on a gross basis at the
present value of the option exercise price, as is required by IAS 32. The net treatment
would also have resolved issues such as how to account for the receipt of dividends,
the component of equity that should be debited when the ‘gross’ liability is initially
recognised (see approaches 2, 3 and 4 in 6.2.3.B, 6.2.3.C and 6.2.3.D above) and how to
account for the expiry of the NCI put. These questions only become significant if the
liability for the NCI put is measured on a ‘gross’ basis.
524 Chapter
7
This was never seen as other than a short-term solution but nevertheless it would
require a scope exception from IAS 32 for certain NCI puts. However, in
September 2011 the IASB rejected the scope amendment proposal.26
Consequently, in May 2012, the Interpretations Committee issued a draft Interpretation
to clarify that all changes in the measurement of the NCI put must be recognised in
profit or loss in accordance with IFRS 9 (paragraphs 5.7.1 and 5.7.2).27 This is on the
basis that the changes in the measurement of the financial liability do not change the
relative interests in the subsidiary that are held by the parent and the non-controlling-
interest and therefore are not equity transactions.28 Transactions with owners in their
capacity as owners that are taken to equity are described at 4 above. The proposals
would have precluded an entity from applying Approach 3, partial recognition of non-
controlling interest, described at 6.2.3.C above. It would not have affected the other
three approaches described in 6.2.3 above.
In January 2013, the Interpretations Committee discussed a summary and an analysis of
the comments received. The Interpretations Committee reaffirmed the proposals in the
draft Interpretation, acknowledging that the draft consensus published in May 2012 is
the correct interpretation of existing Standards.
However, the Interpretations Committee expressed the view that better information
would be provided if NCI puts were measured on a net basis at fair value, consistently
with derivatives that are within the scope of IFRS 9. It also noted that many respondents
to the draft Interpretation think that either the Interpretations Committee or the IASB
should address the accounting for NCI puts – or all derivatives written on an entity’s
own equity – more comprehensively.
Consequently, before finalising the draft Interpretation, the Interpretations Committee
decided in January 2013 to ask the IASB to reconsider the requirements in paragraph 23 of
IAS 32 for put options and forward contracts written on an entity’s own equity. It noted that
such work should consider whether NCI puts and NCI forwards should be accounted for
differently from other derivatives written on an entity’s own equity. The Interpretations
Committee directed the staff to report its views as well as the feedback received in the
comment letters to the IASB and ask the IASB how it would like to proceed.29
At its meeting in March 2013, the IASB discussed the Interpretations Committee’s views
and the feedback received in the comment letters. The IASB tentatively decided to
reconsider the requirements in paragraph 23 of IAS 32, including whether all or
particular put options and forward contracts written on an entity’s own equity should
be measured on a net basis at fair value.30 However, in June 2014, the IASB decided
that the project on put options written on non-controlling interests should be
incorporated into the broader project looking at the distinction between liabilities and
equity – the Financial Instruments with Characteristics of Equity (‘FICE’) project.31 In
June
2018, the IASB issued Discussion Paper – Financial instruments with
Characteristics of Equity, with a six month comment period. The FICE project is
discussed further at 7.4 below.
As indicated at 6.2 above, the previous deliberations relating to NCI puts have been in the
context of an NCI put that is required to be settled for cash. The Interpretations Committee
has also considered in 2016 a request regarding how an entity accounts for an NCI put in its
Consolidation procedures and non-controlling interests 525
consolidated financial statements where the NCI put has a strike price that will be settled
by the exchange of a variable number of the parent’s own equity instruments.
Specifically, the Interpretations Committee was asked to consider whether, in its
consolidated financial statements, the parent:
(a) applies paragraph 23 of IAS 32 and, therefore, recognises a financial liability
representing the present value of the option’s strike price, i.e. a gross liability; or
(b) does not apply paragraph 23 of IAS 32 and, therefore, recognises a derivative
financial liability presented on a net basis measured at fair value.
The Interpretations Committee was also asked whether the parent applies the same
accounting in its consolidated financial statements for NCI puts for which the parent
has the choice to settle the exercise price either in cash or a variable number of its own
equity instruments to the same value.
In November 2016, the Interpretations Committee decided not to add this issue to its
agenda. In reaching this decision, the Interpretations Committee observed that, in the
past, it had discussed issues relating to NCI puts that are settled in cash. Those issues
were referred to the IASB and are being considered as part of the FICE project
(discussed further at 7.4 below). The Interpretations Committee further noted that, on
the basis of its previous discussions, the issue is too broad f
or the Interpretations
Committee to address efficiently within the confines of existing IFRS Standards and
that the IASB is currently considering the requirements for all derivatives on an entity’s
own equity comprehensively as part of the FICE project.32
Given that the Interpretations Committee did not conclude on this matter, in our view,
both approaches are acceptable.
6.6
Put and call options in separate financial statements
Purchased call options (and written put options) over shares in an acquired subsidiary
are derivatives in the separate financial statements. Note that this treatment differs from
that in the consolidated financial statements which is addressed generally at 6 above.
A purchased call option over shares in an acquired subsidiary is initially recognised
as a financial asset at its fair value, with any subsequent changes in the fair value of
the option recognised in profit or loss. Similarly, a written put option over shares
in an acquired subsidiary is initially recognised as a financial liability at its fair
value, with any subsequent changes in the fair value of the option recognised in
profit or loss.
The initial credit entry for the call option (and the initial debit entry for the put option)
will depend on the transactions giving rise to the options. For example, the entity may
have paid (or received) consideration for the call (or put option) in a separate
transaction or as part of a larger transaction.
Where a purchased call option (or written put) option lapses, the financial asset (or
financial liability) is derecognised, with a debit (or credit) to profit or loss. Where a
purchased call option (or written put option) is exercised, the financial asset (or financial
liability) is derecognised with an adjustment to the cost of investment of purchasing the
shares subject to the option.
526 Chapter
7
The fair value of the purchased call option (or written put option) may not be significant
if it is exercisable at the fair value of the underlying shares at the date of exercise, or at
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 104
