acquisition date. The share options do not expire on the acquisition date and AC does not replace them. They
do not represent present ownership interest and do not entitle their holders to a proportionate share of TC’s
net assets in the event of liquidation. The market-based measure of the share options in accordance with
IFRS 2 at the acquisition date is £200. The acquirer measures the non-controlling interests that are related to
the share options at their market-based measure of £200.
8.5
Call and put options over non-controlling interests
In some business combinations where less than 100% of the equity shares are acquired,
it may be that the transaction also involves options over some or all of the outstanding
shares held by the non-controlling shareholders. The acquirer may have a call option,
i.e. a right to acquire the outstanding shares at a future date for cash at a particular price.
Alternatively, it may have granted a put option to the other shareholders whereby they
have the right to sell their shares to the acquirer at a future date for cash at a particular
price. In some cases, there may be a combination of call and put options, the terms of
which may be equivalent or may be different.
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IFRS 3 gives no guidance as to how such options should impact on the accounting for a
business combination. This issue is discussed in Chapter 7 at 6.
Similarly, IFRS 3 does not explicitly address the accounting for a sequence of transactions
that begin with an acquirer gaining control over another entity, followed by acquiring
additional ownership interests shortly thereafter. This frequently happens where public
offers are made to a group of shareholders and there is a regulatory requirement for an
acquirer to make an offer to the non-controlling shareholders of the acquiree.
The Interpretations Committee considered this issue and tentatively decided that the
guidance in IFRS 10 on how to determine whether the disposal of a subsidiary achieved
in stages should be accounted for as one transaction, or as multiple transactions,
[IFRS 10.B97], should also be applied to circumstances in which the acquisition of a business
is followed by successive purchases of additional interests in the acquiree. The
Interpretations Committee tentatively agreed that the initial acquisition of the controlling
stake and the subsequent mandatory tender offer should be treated as a single transaction.
Meanwhile, in the absence of any explicit guidance in IFRS for such transactions, we
believe that entities have an accounting policy choice as to whether or not they should
make an assessment as to whether the transactions should be treated as a single
acquisition in which control is gained (a single business combination), or are to be
treated as discrete transactions (a business combination, followed by an acquisition of
non-controlling interests). This issue is discussed in Chapter 7 at 6.2.4.
However, there was no consensus among the Interpretations Committee members
on whether a liability should be recognised for the mandatory tender offer at the
date that the acquirer obtains control of the acquiree. A small majority expressed
the view that a liability should be recognised in a manner that is consistent with
IAS 32. Other Interpretations Committee members expressed the view that a
mandatory tender offer to purchase NCI is not within the scope of IAS 32 or IAS 37
and that a liability should therefore not be recognised. The issue was escalated to
the IASB and at its May 2013 meeting the Board tentatively decided to discuss both
issues when it discusses the measurement of put options written on NCI.41 In
June 2014, the IASB decided that the project on put options written on NCI should
be incorporated into the broader project looking at the distinction between
liabilities and equity – the Financial Instruments with Characteristics of Equity
(‘FICE’) project.42 In June 2018, the IASB issued for comment a Discussion Paper,
Financial Instruments with Characteristics of Equity (‘DP’). The IASB has used the
example of mandatory tender offers in the DP to illustrate some of the challenges
of the FICE project. DP is discussed in Chapter 43 at 1.2.
Business
combinations
661
9
BUSINESS COMBINATIONS ACHIEVED IN STAGES (‘STEP
ACQUISITIONS’)
The third item in part (a) of the goodwill computation set out at 6 above is the acquisition-
date fair value of the acquirer’s previously held equity interest in the acquiree.
An acquirer sometimes obtains control of an acquiree in which it held an equity interest
immediately before the acquisition date. For example, on 31 December 2019, Entity A
holds a 35 per cent non-controlling equity interest in Entity B. On that date, Entity A
purchases an additional 40 per cent interest in Entity B, which gives it control of
Entity B. IFRS 3 refers to such a transaction as a business combination achieved in
stages, sometimes also referred to as a ‘step acquisition’. [IFRS 3.41].
If the acquirer holds a non-controlling equity investment in the acquiree immediately
before obtaining control, the acquirer remeasures that previously held equity
investment at its acquisition-date fair value and recognises any resulting gain or loss in
profit or loss or other comprehensive income, as appropriate. [IFRS 3.42].
In effect, the acquirer exchanges its status as an owner of an investment asset in an
entity for a controlling financial interest in all of the underlying assets and liabilities of
that entity (acquiree) and the right to direct how the acquiree and its management use
those assets in its operations. [IFRS 3.BC384].
In addition, any changes in the value of the acquirer’s equity interest in the acquiree
recognised in other comprehensive income (e.g. the investment was designated as
measured at fair value through other comprehensive income without recycling to
profit or loss upon derecognition) is recognised on the same basis that would be
required if the acquirer had directly disposed of the previously held equity
investment. [IFRS 3.42].
The acquirer’s non-controlling equity investment in the acquiree, after remeasurement
to its acquisition-date fair value, is then included as the third item of part (a) of the
goodwill computation set out at 6 above.
Under IFRS 9 investments in equity instruments that are not held for trading would
likely be classified as either:
• financial assets designated as measured at fair value through profit or loss; or
• financial assets measured at fair value through other comprehensive income if an
entity made an irrevocable election at initial recognition to present subsequent
changes in their fair value in other comprehensive income.
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In the former case no transfer would be necessary as gains or losses from changes
in the fair value would be already included in profit or loss in the previous periods.
In the latter case, as illustrated in the Example 9.18 below gains or losses from
changes in the fair value accumulated in other comprehensive income would
never be reclassified to profit or loss but may be transferred into the retained
; earnings on ‘deemed disposal’ of the investment, if an entity initially recognised
these changes in a separate component of equity rather than directly within the
retained earnings.
Example 9.18: Business combination achieved in stages – original investment
treated as FVOCI without recycling
Investor acquires a 20 per cent ownership interest in Investee (a service company) on 1 January 2018
for £3,500,000 cash, which is the fair value of the investment at that date. The Investor has concluded
that despite of its 20% holding it does not have significant influence over the Investee. At that date, the
fair value of Investee’s identifiable assets is £10,000,000, and the carrying amount of those assets is
£8,000,000. Investee has no liabilities or contingent liabilities at that date. The following shows
Investee’s statement of financial position at 1 January 2018 together with the fair values of the
identifiable assets:
Investee’s statement of financial position at 1 January 2018
Carrying
Fair values
amounts
£’000
£’000
Cash and receivables
2,000
2,000
Land 6,000
8,000
8,000
10,000
Issued equity: 1,000,000 ordinary shares
5,000
Retained earnings
3,000
8,000
During the year ended 31 December 2018, Investee reports a profit of £6,000,000 but does not pay any dividends.
In addition, the fair value of Investee’s land increases by £3,000,000 to £11,000,000. However, the amount
recognised by Investee in respect of the land remains unchanged at £6,000,000. The following shows Investee’s
statement of financial position at 31 December 2018 together with the fair values of the identifiable assets:
Investee’s statement of financial position
Carrying
Fair values
at 31 December 2018
amounts
£’000
£’000
Cash and receivables
8,000
8,000
Land 6,000
11,000
14,000
19,000
Issued equity: 1,000,000 ordinary shares
5,000
Retained earnings
9,000
14,000
Business
combinations
663
On 1 January 2019, Investor acquires a further 60 per cent ownership interest in Investee for £22,000,000
cash, thereby obtaining control. Before obtaining control, Investor does not have significant influence over
Investee, and accounts for its initial 20 per cent investment at fair value with changes in value recognised as
a component of other comprehensive income. Investee’s ordinary shares have a quoted market price at
31 December 2018 of £30 per share.
Throughout the period 1 January 2018 to 1 January 2019, Investor’s issued equity was £30,000,000.
Investor’s only asset apart from its investment in Investee is cash.
Accounting for the initial investment before obtaining control
Investor’s initial 20 per cent investment in Investee is measured at its fair value at the acquisition date of
£3,500,000. However, Investee’s 1,000,000 ordinary shares have a quoted market price at 31 December 2018
of £30 per share. Therefore, the carrying amount of Investor’s initial 20 per cent investment is remeasured in
Investor’s financial statements to £6,000,000 at 31 December 2018, with the £2,500,000 increase recognised
as a component of other comprehensive income. Therefore, Investor’s statement of financial position before
the acquisition of the additional 60 per cent ownership interest is as follows:
Investor’s statement of financial position
£’000
at 31 December 2018
Cash
26,500
Investment in Investee
6,000
32,500
Issued equity
30,000
Gain on remeasurement of the equity investment
2,500
designated as FVOCI (without recycling)
32,500
Accounting for the business combination
Assuming Investor adopts option 2 for measuring the non-controlling interest in Investee, i.e. at the
proportionate share of the value of the net identifiable assets acquired, it recognises the following amount for
goodwill in its consolidated financial statements:
£’000
Consideration transferred for 60% interest acquired
22,000
on 1 January 2019
Non-controlling interest – share of fair values of
3,800
identifiable net assets at that date (20% × £19,000,000)
Acquisition-date fair value of initial 20% interest
6,000
31,800
Acquisition-date fair values of identifiable net assets acquired
19,000
Goodwill 12,800
The existing gain on equity investment designated as FVOCI (without recycling) of £2,500,000 according to
the Investor’s accounting policy is transferred from the separate component of accumulated OCI to retained
earnings at the date of obtaining control on 1 January 2019. If under the Investor’s accounting policy gains
or losses upon remeasurement were included directly into the retained earnings rather accumulated in a
separate component of accumulated OCI, no transfer would be required.
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9
The following shows Investor’s consolidation worksheet immediately after the acquisition of the additional
60 per cent ownership interest in Investee, together with consolidation adjustments and associated explanations:
Investor
Investee
Consolidation adjustments
Consolidated
Dr
Cr
£’000
£’000
£’000
£’000
£’000
Cash and receivables
4,500
8,000
12,500
Investment in investee
28,000
–
28,000
–
Land 6,000
5,000
11,000
(a)
Goodwill
12,800
12,800 (b)
32,500
14,000
36,300
Issued equity
30,000
5,000
5,000
30,000 (c)
Gain on remeasurement
2,500
2,500
– (d)
of the equity investment
designated as FVOCI
(without recycling)
Retained earnings
9,000
9,000
2,500
2,500 (d)
Non-controlling
interest
3,800
3,800 (a)
32,500
14,000
36,300
Notes
The above consolidation adjustments result in:
(a) Investee’s identifiable net assets being stated at their full fair values at the date Investor obtains control
of Investee, i.e. £19,000,000, including land of £11,000,000. The 20 per cent non-controlling interest in
Investee is also stated at the non-controlling interest’s 20 per cent share of the fair values of In
vestee’s
identifiable net assets, i.e. £3,800,000 (20% × £19,000,000).
(b) goodwill being recognised from the acquisition date based on the computation set out at 6 above, i.e.
£12,800,000.
(c) issued equity of £30,000,000 comprising the issued equity of Investor of £30,000,000.
(d) a retained earnings balance of £2,500,000 being the amount transferred from accumulated other
comprehensive income relating to the previously held investment in Acquiree on the step acquisition.
If the investor in the above example had accounted for its original investment of 20%
as an associate using the equity method under IAS 28 – Investments in Associates and
Joint Ventures, then the accounting would have been as follows:
Example 9.19: Business combination achieved in stages – original investment
treated as an associate under IAS 28
This example uses the same facts as in Example 9.18 above, except that Investor does have significant
influence over Investee following its initial 20 per cent investment.
Accounting for the initial investment before obtaining control
Investor’s initial 20 per cent investment in Investee is included in Investor’s consolidated financial statements
under the equity method. Accordingly, it is initially recognised at its cost of £3,500,000 and adjusted
thereafter for its share of the profits of Investee after the date of acquisition of £1,200,000 (being 20% ×
£6,000,000). Investor’s policy for property, plant and equipment is to use the cost model under IAS 16;
therefore in applying the equity method it does not include its share of the increased value of the land held
by Investee. IAS 28 requires that on the acquisition of an associate, any difference between the cost of the
acquisition and its share of the fair values of the associate’s identifiable assets and liabilities is accounted for
as goodwill, but is included within the carrying amount of the investment in the associate. Accordingly,
Investor has included goodwill of £1,500,000 arising on its original investment of 20%, being £3,500,000
Business
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 131
