components of non-controlling interests that are present ownership interests and
entitle their holders to a proportionate share of the entity’s net assets in the event of a
liquidation (‘qualifying non-controlling interests’).
These measurement methods are:
• Option 1, to measure such components of non-controlling interests at acquisition-
date fair value (consistent with the measurement principle for other components
of the business combination).
• Option 2, to measure such components of non-controlling interests at their
proportionate share of the value of net identifiable assets acquired (described
at 5 above).
This choice is not available for all other components of non-controlling interests. These
are measured at their fair values, unless another measurement basis is required by
IFRSs. [IFRS 3.19].
Business
combinations
655
IFRS 3 defines non-controlling interest as ‘the equity in a subsidiary not attributable,
directly or indirectly, to a parent’. [IFRS 3 Appendix A]. This is the same as that in IFRS 10.
As discussed in Chapter 7 at 5.1, this definition includes not only equity shares in the
subsidiary held by other parties, but also other elements of ‘equity’ in the subsidiary.
These could relate to, say, other equity instruments such as options or warrants, the
equity element of convertible debt instruments, and the ‘equity’ related to share-based
payment awards held by parties other than the parent.
The application to particular instruments is set out in the table below.
Instruments issued by the acquiree
Measurement required by IFRS 3
Ordinary shares
Proportionate share of net assets OR fair value
Preference shares entitled to a pro rata share of net
Proportionate share of net assets OR fair value
assets upon liquidation
Preference shares not entitled to a pro rata share of
Fair value
net assets upon liquidation
Equity component of convertible debt and other Fair value
compound financial instruments◊
Share warrants◊ Fair
value
Options over own shares◊ Fair
value
Options under share-based payment transactions◊
IFRS 2 ‘market-based measure’
◊ In practice, because these instruments are generally not entitled to a share of net assets as of the acquisition date, their proportionate share of net assets is nil.
An illustration of the consequences of applying these requirements is given at 8.4 below.
The choice of method is to be made for each business combination on a transaction-
by-transaction basis, rather than being a policy choice. Each option, combined with the
accounting in IFRS 10 for changes in ownership interest of a subsidiary (see Chapter 7
at 4) could have a significant effect on the amount recognised for goodwill.
8.1
Measuring qualifying non-controlling interests at acquisition-
date fair value
An acquirer will sometimes be able to measure the fair value of a non-controlling interest
on the basis of a quoted price in an active market for the equity shares it does not hold. If
a quoted price in an active market is unavailable, the acquirer will need to measure the
fair value of the non-controlling interest by using other valuation techniques. [IFRS 3.B44].
The fair value of the acquirer’s interest in the acquiree and the non-controlling interest
on a per-share basis might differ. This may happen because the consideration
transferred by the acquirer may include a control premium, or conversely, the inclusion
of a discount for lack of control (also referred to as a non-controlling interest discount)
in the per-share value of the non-controlling interest if market participants would take
into account such a premium or discount when pricing the non-controlling interest.
[IFRS 3.B45]. In that case it would not be appropriate to extrapolate the fair value of an
acquirer’s interest (i.e. the amount that the acquirer paid per share) to determine the
fair value of the non-controlling interests. In case if acquiree’s shares are quoted on an
656 Chapter
9
active market, IFRS 13 requires the fair value of non-controlling interest to be
determined using the quoted price of the shares at the acquisition date (‘PxQ’).
8.2
Measuring qualifying non-controlling interests at the
proportionate share of the value of net identifiable assets acquired
Under this option, the non-controlling interest is measured at the share of the value of
the net assets acquired and liabilities assumed of the acquiree (see 5 above). The result
is that the amount recognised for goodwill is only the acquirer’s share. However, if any
part of the outstanding non-controlling interest is subsequently acquired, no additional
goodwill is recorded as under IFRS 10 this is an equity transaction (see Chapter 7 at 4.2).
8.3
Implications of method chosen for measuring non-controlling
interests
The following example illustrates the impact of the two measurement options on
measuring those components of qualifying non-controlling interests.
Example 9.15: Initial measurement of non-controlling interests in a business
combination (1)
Entity B has 40% of its shares publicly traded on an exchange. Entity A purchases the 60% non-publicly traded
shares in one transaction, paying €630. Based on the trading price of the shares of Entity B at the date of gaining
control a value of €400 is assigned to the 40% non-controlling interest, indicating that Entity A has paid a control
premium of €30. The fair value of Entity B’s identifiable net assets is €700. For the purposes of the illustration,
Entity B has no other instruments that would be regarded as non-controlling interests.
Option 1 – Non-controlling interest at fair value
Entity A accounts for the acquisition as follows:
Dr
Cr
€
€
Fair value of identifiable net assets acquired
700
Goodwill 330
Cash 630
Non-controlling interest in entity B
400
Option 2 – Certain non-controlling interests are measured at proportionate share of identifiable net assets
Entity A accounts for the acquisition as follows:
€
€
Fair value of identifiable net assets acquired
700
Goodwill 210
Cash 630
Non-controlling interest in entity B (€700 × 40%)
280
The IASB has noted that there are likely to be three main differences arising from
measuring the non-controlling interest at its proportionate share of the acquiree’s net
identifiable assets, rather than at fair value. First, the amounts recognised in a business
combination for the non-controlling interest and goodwill are likely to be lower (as
illustrated in the above example).
Second, if a cash generating unit to which the goodwill has been allocated is
subsequently impaired, any resulting impairment of goodwill recognised through
Business
combinations
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income is like
ly to be lower than it would have been if the non-controlling interest had
been measured at fair value. [IFRS 3.BC217]. Chapter 20 at 9 discusses testing goodwill for
impairment in entities with non-controlling interests. This guidance includes,
considerations when an entity applies an allocation methodology that recognises the
disproportionate sharing of the controlling and non-controlling interests in the goodwill
book value, i.e. taking into account the acquirer’s control premium, if any.
The third difference noted by the IASB is that which arises if the acquirer subsequently
purchases some or all of the shares held by the non-controlling shareholders. Under
IFRS 10, such a transaction is to be accounted for as an equity transaction (see Chapter 7
at 4). By acquiring the non-controlling interest, usually at fair value (unless there are
some special circumstances surrounding the acquisition), the equity of the group is
reduced by the non-controlling interest’s share of any unrecognised changes in fair
value of the net assets of the business, including goodwill. Measuring the non-
controlling interest initially as a proportionate share of the acquiree’s net identifiable
assets, rather than at fair value, means that the reduction in the reported equity
attributable to the acquirer is likely to be larger. [IFRS 3.BC218]. If in Example 9.15 above,
Entity A were subsequently to acquire all of the non-controlling interest for, say, €500,
then assuming that there had been no changes in the carrying amounts for the net
identifiable assets and the goodwill, the equity attributable to the parent, Entity A,
would be reduced by €220 (€500 – €280) if Option 2 (proportionate share of fair value
of identifiable net assets) had been adopted. If Option 1 (full fair value) had been
adopted, the reduction would only be €100 (€500 – €400).
In Example 9.15 above, the acquiree had no other instruments that would be regarded
as non-controlling interests. This will not always be the case. The impact of the
measurement of such non-controlling interests on goodwill is illustrated in
Example 9.16 below.
Example 9.16: Initial measurement of non-controlling interests in a business
combination (2)
Parent acquires 80% of the ordinary shares of Target, a private entity, for €950 in cash. The total fair value
of the equity instruments issued by Target is €1,165 and the fair value of its identifiable net assets is €850.
The fair value of the 20% of the ordinary shares owned by non-controlling shareholders is €190. In addition,
the subsidiary has also written gross settled call options over its own shares with a fair value of €25, which
are considered equity instruments under IAS 32.
Option 1 – Non-controlling interest at fair value
The impact of the business combination, and the measurement of non-controlling interests, are as follows:
Dr
Cr
€
€
Fair value of identifiable net assets
850
Goodwill (€1,165 – €850)
315
Cash
950
Non-controlling interest (€190 + €25)
215
Under this method, goodwill represents the difference between the fair value of Target and the fair value of
its identifiable net assets. The non-controlling interests are measured as the fair value of all equity instruments
issued by Target that are not owned by the parent (i.e. ordinary shares and gross settled call options).
658 Chapter
9
Option 2 – Certain non-controlling interests are measured at proportionate share of identifiable net assets
The impact of the business combination, and the measurement of non-controlling interests, are as follows:
€
€
Fair value of identifiable net assets
850
Goodwill ((€950 + €195) – €850)
295
Cash
950
Non-controlling interest (20% × €850 + €25)
195
Under this method, goodwill represents the difference between the total of the consideration transferred and the
amount of the non-controlling interests less the fair value of the net assets acquired and liabilities assumed. The
non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of
the Target’s net assets in the event of liquidation (i.e. the ordinary shares) are measured at the non-controlling
interest’s proportionate share of the identifiable net assets of Target. The non-controlling interests that are not
present ownership interests or do not entitle their holders to a proportionate share of the Target’s net assets in
the event of liquidation (i.e. the gross settled call options) are measured at their fair value.
Reconciliation of goodwill
Goodwill as determined under the two methods can be reconciled as follows:
€
Option 2: Goodwill (€950 – 80% × €850 + €25)
295
Goodwill related to the non-controlling interest in ordinary shares
20
(€190 – 20% × €850)
Option 1: Goodwill (€1,165 – €850)
315
This makes clear that Option 2 effectively ignores the goodwill related to ordinary shares that are held by
non-controlling shareholders.
In Example 9.16 above, under Option 2, the computation of the non-controlling
interests represented by the ordinary shares was based solely on the fair value of the
identifiable net assets; i.e. no deduction was made in respect of the other component of
non-controlling interest. IFRS 3 does not explicitly state whether this should be the case
or not. An alternative view would be that other components of non-controlling interests
should be deducted from the value of the identifiable net assets based on their
acquisition-date fair value (or market-based measure) or based on their liquidation
rights (see Chapter 7 at 5.2). This alternative is illustrated in Chapter 7 in Example 7.16.
8.4
Measuring share-based payment and other components of non-
controlling interests
These options in measuring the fair values of non-controlling interests only apply to
present ownership interests that entitle their holders to a proportionate share of the
entity’s net assets in the event of a liquidation. All other components of non-controlling
interests must be measured at their fair values, unless another measurement basis is
required by IFRSs. [IFRS 3.19]. For example, a preference share that entitles the holders
only to a preferred return of capital and accrued and unpaid dividends (or any other
restricted right) in the event of a liquidation does not qualify for the measurement
choice in paragraph 19 of IFRS 3 because it does not entitle its holder to a proportionate
share of the entity’s net assets in the event of liquidation.
Business
combinations
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The exception to fair values relates to outstanding share-based payment transactions
that are not replaced by the acquirer:
• If vested, they are measured at their market-based measure.
• If unvested, they are measured at their market-based measure as if the acquisition
date were the grant date. [IFRS 3.B62A].
The market-bas
ed measure of unvested share-based payment transactions is allocated
to the non-controlling interest on the basis of the ratio of the portion of the vesting
period completed to the greater of the total vesting period or the original vesting period
of the share-based payment transaction. The balance is allocated to post-combination
service. [IFRS 3.B62B].
The above requirements for equity-settled share-based payment transactions of the
acquiree are discussed further in Chapter 30 at 11.2.
Example 9.17: Measurement of non-controlling interest represented by
preference shares and employee share options
Preference shares
TC has issued 100 preference shares, which are classified as equity. The preference shares have a nominal
value of £1 each. The preference shares give their holders a right to a preferential dividend in priority to the
payment of any dividend to the holders of ordinary shares. On liquidation of TC, the holders of the preference
shares are entitled to receive out of the assets available for distribution the amount of £1 per share in priority
to the holders of ordinary shares but there are no further rights on liquidation.
AC acquires all ordinary shares of TC. The acquisition-date fair value of the preference shares is £120.
The non-controlling interests that relate to TC’s preference shares do not entitle their holders to a proportionate
share of the entity’s net assets in the event of liquidation. They are measured at their fair value of £120.
If the preference shares have an equal right and ranking to the ordinary shares in the event of liquidation,
they have a present ownership interest and could then be measured at their fair value or at or at their
proportionate share in the acquiree’s recognised amounts of the identifiable net assets. If the fair value of the
preference shares is £160 and the proportionate share of TC’s identifiable net assets attributable to the
preference shares is £140, the acquirer can elect to measure the preference shares at either of these amounts.
Employee share options
TC has issued share options to its employees. The share options are classified as equity and are vested at the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 130
