NON-CONTROLLING INTEREST

When a partial acquisition occurs, the acquisition-date fair value of the non-controlling interest
should be recognized. When identifying the instruments that should be included in the non-
controlling interest, the buyer will need to consider the target’s or, in some cases, the buyer’s
financial instruments (or embedded features) and determine whether those instruments (or
embedded features) meet the definition of a liability or equity (which can be a complex
determination). The financial instruments (or embedded features) that are issued by the buyer
and meet the requirements to be classified as equity as well as instruments of the target that
should be classified as equity in its stand alone financial statements would be considered part
of the non-controlling interest in the target.

In general, it is not appropriate for the buyer to base the fair value of the non-controlling
interest solely on the per-share consideration transferred to obtain the controlling interest
because the consideration transferred to obtain the controlling interest would typically include
a control premium.

Within the consolidated balance sheet, the non-controlling interest in a target should be: (a)
clearly identified and labeled and (b) presented separately within equity (i.e., not combined
with the buyer’s [i.e., parent’s equity] equity). However, public companies must also consider
additional guidance that could result in non-controlling interests that include redemption
features being classified as mezzanine equity (which is presented on the balance sheet between
liabilities and equity).

A business combination achieved in stages (IFRS 3)

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 20X1, Entity A holds a 35% non-controlling equity interest in Entity
B. On that date, Entity A purchases an additional 40% interest in Entity B which gives it control of Entity B. This IFRS
refers to such a transaction as a business combination achieved in stages, sometimes also referred to as a step
acquisition. (IFRS 3:41) exceeds 50% - controlling interest. Computation of non-controlling interest is based on the
net assets acquired by the acquirer. (Net asset FMV * controlling interest percentage = controlling interest
amount). Non-controlling interest – share that has no control on company’s management

In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the
acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss. In prior
reporting periods, the acquirer may have recognized changes in the value of its equity interest in the acquiree in
other comprehensive income (for example, because the investment was classified as available for sale). If so, the
amount that was recognized in other comprehensive income shall be recognized on the same basis as would be
required if the acquirer had disposed directly of the previously held equity interest. (IFRS 3:42) in prior reporting
period, there can be any changes of recognition in equity interest of acquirer’s OCI. If the acquirer directly
disposed an asset that is held for sale, there is no need to recognize it at fmv he has already a controlling interest,
and his basis will only be the amount of the asset that is held for sale.
STEP ACQUISITION
A step acquisition occurs when the buyer in a business combination has a previously held equity
interest in the target and acquires an additional interest in the target that results in the buyer
obtaining control. For example, on November 1, 2018, the buyer owns a 30% equity interest in
the target. On November 2, 2018, the buyer buys an additional 35% equity interest in the
target, which ultimately provides the buyer with a 65% controlling interest in the target. As a
result of acquiring the additional 35% equity interest, the buyer has acquired the target for
accounting purposes and must account for this acquisition as a business combination.

When a step acquisition occurs the buyer must recognize either: (a) a gain for the excess of the
acquisition-date fair value of the buyer’s previously held equity interest in the target over the
carrying value of that interest or (b) a loss for the excess of the carrying value of the buyer’s
previously held equity interest in the target over the acquisition-date fair value of that interest.
In general, it is not appropriate for the buyer to base the fair value of its previously held equity
interest in the target that solely on the per-share consideration transferred to obtain the
controlling interest because the consideration transferred to obtain the controlling interest
would typically include a control premium.

A business combination achieved without the transfer of consideration (IFRS 3)

(IFRS 3:43) An acquirer sometimes obtains control of an acquiree without transferring consideration. The
acquisition method of accounting for a business combination applies to those combinations. Such circumstances
include:

(a) The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to
obtain control.
(b) Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the
acquirer held the majority voting rights. (vetoed rights lapsed) control is prevented to the acquirer even if
his interest is controlling
(c) The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer transfers no
consideration in exchange for control of an acquiree and holds no equity interests in the acquiree, either
on the acquisition date or previously. Examples of business combinations achieved by contract alone
include bringing two businesses in a stapling arrangement or forming a dual listed corporation.

In a business combination achieved by contract alone, the acquirer shall attribute to the owners of the acquiree the
amount of the acquiree’s net assets recognized in accordance with this IFRS. In other words, the equity interests in
the acquiree held by parties other than the acquirer are a non-controlling interest in the acquirer’s post-
combination financial statements even if the result is that all of the equity interests in the acquiree are attributed to
the non-controlling interest. (IFRS:3-44)
(c) The acquirer should designate to the share owners of the acquired company the amount of net assets of the
acquiree. Even though all shares of the acquiree’s owners owns non-controlling interest (exceeded 50% or not, as
long as it has been declared as non-controlling, they don’t have a control to the company, only the acquirer). What
will be included in the post-combination financial statements is non-controlling interest.

Business combination achieved without the transfer of consideration

A business combination occurs when the buyer obtains control of a business through a
transaction or other event. The three key elements in the definition of a business combination
are the following:

1. That which is being acquired must meet the definition of a business. A business includes
inputs and processes that are at least capable of producing outputs (i.e., outputs do not
have to be part of the transferred set). In some situations, considerable judgment will
need to be exercised in determining whether a business (rather than just a group of
assets or net assets) was acquired by the buyer. For example, all of the inputs and
processes used by the seller to produce outputs do not have to be acquired to conclude
that a business has been acquired. Determining whether sufficient inputs and processes
have been acquired in these situations to conclude that a business has been acquired
often requires considerable judgment to be exercised.

2. The buyer must obtain control of a business. The definition of control used for this
purpose is the same definition used in determining whether a voting interest entity
should be consolidated. The “usual” condition for control is a greater than 50%
ownership interest in the investee (i.e., a majority ownership interest). However, control
may be obtained under other circumstances as well. For example, one entity may obtain
control of another entity through contract alone.
3. Control can be obtained by the buyer through a transaction or other event. An “other
event” may occur through no direct action of the buyer. For example, the buyer may
obtain control of an investee as a result of that investee acquiring its own shares which
has the effect of increasing the buyer’s ownership interest to that of a controlling
interest. Assume that an investor owns 60,000 shares in a business and the business has
150,000 shares outstanding. In this situation, the investor owns a 40% interest in the
business and accounts for its investment using the equity method. If the business buys
or redeems 50,000 of its own shares from other investors, those shares are retired or
become treasury shares and are no longer considered outstanding. As a result, the
investor’s ownership interest in the business increases to 60% (the investor’s 60,000
shares in the business divided by 100,000 shares outstanding). This example illustrates
that an investor can become a “buyer” by obtaining control without transferring
consideration and without undertaking any other direct action on its own behalf and be
subject to the business combination accounting guidance.