International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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controlling interest, and is therefore remeasured to its fair value when determining the
consideration given for the subsidiary. [IFRS 3.42]. However, whilst the change is reflected
as a disposal and new acquisition in the consolidated financial statements, there is no
change in substance in the investor’s separate financial statements. That is, the investor
has not ‘given up’ its investment for another interest and continues to have the same
ownership entitlement and rights that it always had for that pre-existing investment.
Rather, the time of the asset’s acquisition is the time at which something is given up or
exchanged – which corresponds to the original acquisition dates of each tranche of the
investment. Because this date relates to the cash flows or exchanges at the dates of
acquisition, any adjustments to this value subsequent to acquisition are not considered an
element of ‘cost’, and are reversed. The reversal will be reflected in the statement of
comprehensive income, resulting in an adjustment to the component of equity containing
the cumulative valuation gains and losses, e.g. retained earnings, where the investment
has been treated as at fair value through profit or loss, or other reserve where the
investment has been treated as at fair value through other comprehensive income (if an
entity has elected to present gains and losses in other comprehensive income in
accordance with paragraph 5.7.5 of IFRS 9).
The Interpretations Committee is scheduled to discuss, during its September 2018
meeting, the application of IAS 27 when an entity obtains control of another entity
in which it previously held an interest. At the time of writing no updates were
available yet.9
Example 8.2:
Cost of a subsidiary acquired in stages
Entity A has a 10% interest in Entity B, which it acquired in January 2019 for €300. This investment is a
financial asset measured at fair value in accordance with IFRS 9, in both the consolidated and separate
financial statements of Entity A for the six months ended 30 June 2019. In July 2019, Entity A acquires a
further 45% interest in Entity B for €2,160 (its then fair value), giving Entity A control over Entity B. The
original 10% interest has a fair value of €480 at that date. In addition, transaction costs were incurred for both
tranches, in aggregate amounting to €50.
The cost of investment after both transactions is the sum of the consideration given for each tranche plus
transaction costs – €2,510 (€300 + €2,160 + €50). The increase in fair value of €180 (€480 – €300) relating
to the first 10% is reversed in the statement of comprehensive income, and reflected in retained earnings (if
the change was recognised in profit or loss) or equity reserves (if the change was recognised in other
comprehensive income).
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If changes to the carrying amount of the investment had resulted from an impairment
charge, this charge may not necessarily be reversed. This is because the investment must
still be considered for impairment in the separate financial statements of the investor.
The table below summarises the impact on the cost of investment in a subsidiary
acquired in stages depending on the accounting policy applied for the measurement of
the pre-existing interest and considering previous impairment, if any, recognised:
Classification of tranche
Changes in fair value
Changes in fair value are
Impairment permitted to be
prior to subsequent
were previously
reversed upon subsequent
reversed?
investment
recognised
investment
If the entity had chosen to
apply the cost basis:
Cost, as defined in
N/A – not remeasured
N/A – not remeasured – (see
Yes, through profit or loss in
IAS 27
– (see paragraph 10(a)
paragraph 10(a) of IAS 27)
retained earnings.
of IAS 27)
Test performed in accordance
with IAS 36
If the entity had chosen to
apply the equity method:
Equity method, as
N/A – not remeasured
N/A – not remeasured – (see
Yes, through profit or loss in
defined in IAS 28
– (see paragraph 10(c)
paragraph 10(c) of IAS 27)
retained earnings;
of IAS 27)
Test performed in accordance
with IAS 36
If the entity had chosen to
apply IFRS 9:
Fair value through profit
Recognised in profit
Reversed through profit or
N/A – remeasured – (see
or loss
or loss (see
loss in retained earnings
paragraph 5.7.1 of IFRS 9)
paragraph 10(b) of
IAS 27 and
paragraph 5.7.1 of
IFRS 9)
Fair value through other
Recognised in other
Reversed through other
N/A – remeasured – (see
comprehensive income (if
comprehensive income
comprehensive income in
paragraph 5.7.1 of IFRS 9)
an entity has elected to
(see paragraph 10(b)
equity reserve where other
present gains and losses
of IAS 27 and
comprehensive income is
in other comprehensive
paragraph 5.7.1(b) of
accumulated
income in accordance
IFRS 9)
with paragraph 5.7.5 of
IFRS 9).
2.1.1.D
Formation of a new parent
IAS 27 explains how to calculate the cost of the investment when a parent reorganises
the structure of its group by establishing a new entity as its parent and meets the
following criteria:
Separate and individual financial statements 549
(a) the new parent obtains control of the original parent by issuing equity instruments
in exchange for existing equity instruments of the original parent;
(b) the assets and liabilities of the new group and the original group are the same
immediately before and after the reorganisation; and
(c) the owners of the original parent before the reorganisation have the same absolute
and relative interests in the net assets of the original group and the new group
immediately before and after the reorganisation.
The new parent measures cost at the carrying amount of its share of the equity items
shown in the separate financial statements of the original parent at the date of the
reorganisation (see 2.1.1.E below). [IAS 27.13].
This approach also applies if the entity that puts a new parent between it and the
shareholders is not itself a parent, i.e. it has no subsidiaries. In such cases, references in
the three conditions to ‘original parent’ and ‘original group’ are to the ‘original entity’.
[IAS 27.14].
The type of reorganisation to which these requirements apply involves an existing
entity and its shareholders agreeing to create a new parent between them without
changing either the composition of the group or their own absolute
and relative
interests. This is not a general rule that applies to all common control transactions.
Transfers of subsidiaries from the ownership of one entity to another within a group
are not within the scope. The IASB has deliberately excluded extending the
amendment to other types of reorganisations or to common control transactions
more generally because of its plans to address this in its project on common control
transactions. [IAS 27.BC27].
The IASB has identified business combinations under common control as a priority
research project. In June 2014, the Board tentatively decided that the research
project should consider business combinations under common control and group
restructurings, and to give priority to considering transactions that involve third
parties.10 In October 2017, the Board tentatively decided to clarify that the scope of
the business combinations under common control project includes transactions
under common control in which a reporting entity obtains control of one or more
businesses, regardless of whether IFRS 3 would identify the reporting entity as the
acquirer if IFRS 3 were applied to the transaction.11 The scope will not specify to
which financial statements of that reporting entity – consolidated, separate or
individual – any accounting requirements developed in this project will apply. This
is because the financial statements affected by any accounting requirements
developed in the business combinations under common control project will depend
on specifics of the transaction. This is also consistent with how the scope is set out
in IFRS 3.12 The next step planned is the issuance of a Discussion Paper for public
comment in the second half of 2019.13
In the meantime, entities will continue to account for such common control transactions
in accordance with their accounting policies (see Chapter 10 at 3 and 4.4 below).
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As well as the establishment of a new ultimate parent of a group, arrangements that could
meet the criteria in paragraph 13 of IAS 27 mentioned above include the following:
(a) Reorganisations in which the new parent does not acquire all classes of the equity
instruments issued by the original parent.
For example, the original parent may have preference shares that are classified as
equity in addition to ordinary shares; the new parent does not have to acquire the
preference shares in order for the transaction to be within scope. [IAS 27.BC24(a)].
(b) A new parent obtains control of the original parent without acquiring all of the
ordinary shares of the original parent. [IAS 27.BC24(a)]. The absolute and relative
holdings must be the same immediately before and after the transaction.
[IAS 27.13(c)].
The requirements will apply, for example, if a controlling group of shareholders
insert a new entity between themselves and the original parent that holds all of
their original shares in the same ratio as before.
Example 8.3:
Formation of new parent that does not acquire all of original
parent’s ordinary shares
Shareholders A and B each hold 35% of the equity instruments of Original Parent. A and B transfer their
shares to New Parent in a share-for-share exchange so that both now hold 50% of the shares in New Parent.
The absolute and relative interests of A and B and those of the other shareholders in Original Parent are
unchanged, so the arrangement is a reorganisation to which the cost method for reorganisations applies.
(c) The establishment of an intermediate parent within a group. [IAS 27.BC24(b)].
The principle is exactly the same as inserting a new parent company over the top
of a group. ‘Original Parent’ will be an intermediate company within a group,
owned by another group company. If the transaction is within scope, the
intermediate parent will acquire Original Parent from its parent (the Owner) in a
share for share swap. The group structure before and after the transaction can be
summarised as follows:
Owners
Parent/Owner
Intermediate Parent
Original Parent
Subsidiaries
If the composition of the underlying group changes, perhaps because the intermediate
parent acquires only part of that group or because it acquires another subsidiary as part of
the reorganisation, then the arrangement will not be within scope as the assets and
liabilities of the group immediately after the reorganisation would not be ‘the same’ as those
Separate and individual financial statements 551
immediately before the reorganisation. [IAS 27.13(b)]. However, there might be arrangements
where to establish an intermediate parent, shares have to be issued for an amount of cash,
the value of which is typically driven by various legal concerns. Consequently, the assets
and liabilities of the new group differ from the assets and liabilities of the original group (or
subgroup) by the amount of cash received on the initial issue of shares by intermediate
parent. In those cases, the issuance of shares of the intermedia parent in exchange of cash
was merely done to allow the entity to be incorporated under the local jurisdiction. We
believe that such arrangements are within the scope of the exemption, provided that the
amount of cash is truly ‘de minimis’; that is, not sufficient to form a substantive part of the
group reorganisation transaction such that the assets and liabilities of the group
immediately before and after the reorganisation might still be considered ‘the same’.
The formation of a new parent was also considered by the Interpretation Committee
in 2011. The Interpretations Committee noted ‘that the normal basis for determining the cost
of an investment in a subsidiary under [...] paragraph 10(a) of IAS 27 [...] has to be applied to
reorganisations that result in the new intermediate parent having more than one direct
subsidiary. [...] Paragraphs 13 and 14 of IAS 27 [...] apply only when the assets and liabilities
of the new group and the original group (or original entity) are the same before and after the
reorganisation’. The Interpretations Committee observed that the reorganisations that result
in the new intermediate parent having more than one direct subsidiary do not meet the
conditions in IAS 27 and therefore the exemptions for group reorganisations in IAS 27 do
not apply. They also cannot be applied by analogy because this guidance is an exception to
the normal basis for determining the cost of investment in a subsidiary.14
For example, if in the group structure as presented above, the Intermediate Parent had
been inserted between the Original Parent and its subsidiaries, paragraphs 13 and 14 of
IAS 27 would not apply as there are several subsidiaries acquired by the Intermediate
Parent. In this case, there has been no ‘parent’ that has been established by the
Intermediate Parent as its new parent.
2.1.1.E
Formation of a new parent: calculating the cost and measuring equity
IAS 27 states that the new parent measures cost at the carrying amount of its share of
the ‘equity items’ shown in the separate financial statements of the original parent at the
date of the reorganisation. [IAS 27.13]. It does not define ‘equity items’ but the term
&n
bsp; appears to mean the total equity in the original parent, i.e. its issued capital and reserves
attributable to owners. This will be the equity as recorded in IFRS financial statements
so it will exclude shares that are classified as liabilities and include, for example, the
equity component of a convertible loan instrument.
It is important to stress that the new parent does not record its investment at the
consideration given (the shares that it has issued) or at the assets received (the fair value
of the investments it has acquired or the book cost of those investments). Instead, it
must look down, to the total of the equity in the original parent, which is the acquired
entity. Even then, it does not record the investment at the amount of original parent’s
investments but at the amount of its equity; that is to say, its net assets.
The requirements do not apply to the measurement of any other assets or liabilities in
the separate financial statements of either the original parent or the new parent, or in
the consolidated financial statements. [IAS 27.BC25].
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It is possible for the original parent to have negative equity because its liabilities exceed
its assets. IAS 27 does not discuss this but we consider that in these circumstances the
investment should be recorded at zero. There is no basis for recording an investment as
if it were a liability.
The above applies only when the new parent issues equity instruments but it does
not address the measurement of the equity of the new parent. IFRS has no general
requirements for accounting for the issue of own equity instruments. Rather,
consistent with the position taken by the Conceptual Framework that equity is a
residual rather than an item ‘in its own right’, the amount of an equity instrument is
normally measured by reference to the item (expense or asset) in consideration for
which the equity is issued, as determined in accordance with IFRS applicable to that
other item. The new parent will record the increase in equity at the carrying amount
of the investments it has acquired (i.e. at cost), regardless of the amount and face