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The Changes and the Consequences

Step Acquisitions – Examples

Example 1 – Step Acquisition (from 25% to 75%)


Acquirer buys 25% of Target on 1 January 2009 for 180. Fair value of 100% INA at 1
January 2009 is 600 (25% of FV INA = 150). Target’s balance sheet is as follows:

Target’s balance sheet as of 1 Jan 2009 Carrying Fair value


amount
Land and building 200 200
Other identifiable net assets 400 400
Total identifiable net assets 600 600
Total equity (600)

Acquirer buys additional 50% of Target on 1 January 2010 for 520. Fair value of 100% of
INA at 1 January 2010 is 800 (50% of FV INA = 400). Target’s equity is 600 (i.e., Target
recorded zero profit for year ended 31 December 2009 and did not recognize any asset
revaluations). Target’s balance sheet is as follows:

Target’s balance sheet as of 1 Jan 2010 Carrying Fair value


amount
Land and building 200 400
Other identifiable net assets 400 400
Total identifiable net assets 600 800
Total equity (600)

• As the table above shows, the 200 movement in the fair value of identifiable net assets
between the two transaction dates is attributable to the change in the fair value of land
and building (value not recognized in Target’s books; i.e., Target’s equity at 1 January
2010 is 600).

• Prior to the acquisition of the additional 50%, Acquirer’s initial 25% interest is equity
accounted. The carrying amount of Acquirer’s 25% interest in Target as at 1 January
2010 is cost (180) – i.e., no equity accounted adjustments.

• The fair value of Acquirer’s pre-existing 25% interest in Target as at 1 January 2010 is
250.

• Fair value of the minority interest held at 1 January 2010 is 260.

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IFRS 3: The Changes and the Consequences

Accounting under (prior) IFRS 3


It is necessary to calculate goodwill for each exchange transaction:

Calculate goodwill on first exchange transaction (1 January 2009):

Cost 180
25% of fair value of identifiable net assets 150 (25% of 600 = 150)
Goodwill 30

Calculate goodwill on second exchange transaction (1 January 2010):

Cost 520
50% of fair value of identifiable net assets 400 (50% of 800 = 400)
Goodwill 120

Therefore, total goodwill to recognize is 150 (30+120).

Record business combination accounting


• The investment in Target is currently measured in the separate financial statements of
acquirer at cost of 700 (i.e., 180 + 520).

• The business combination accounting is reflected in Acquirer’s consolidated financial


statements.
The following table presents a consolidation worksheet complete with the journals required
to record the business combination accounting:

Consolidation worksheet Acquirer Target Journal 1 Journal 2 Journal 3 Consol


as of 1 Jan 2010

Investment in Target 700 (180) (520)


Land and building 200 200 400
Other identifiable net assets 400 400
Goodwill 30 120 150
Total identifiable net assets 700 600 950

Equity (700) (600) 150 450 (700)


Asset revaluation reserve (200) 150 (50)
Minority interest (200) (200)
Total equity (700) (600) (950)

Journal 1 (Consolidation elimination entry re: first exchange transaction)

DR – Pre-acquisition equity of Target 150 (25% x 600)


DR – Goodwill 30 [180 - (25% of 600)]
CR – Investment in Target (180)
IFRS 3: The Changes and the Consequences

Journal 2 (Re-measure Target’s land and building to FV at acquisition date)

DR – Land and building 200


CR – Asset revaluation reserve (200)

Journal 3 (Consolidation elimination entry re: second exchange transaction)

DR – Equity in Target 450 (75% of 600)


DR – Asset revaluation reserve 150 (75% of 200)
DR – Goodwill 120 [520 - (50% of 800)]
CR minority (200) (25% of 800 including 25% of
revaluation)
CR – Investment in Target (520)

Accounting under IFRS 3R – (NCI measured at share of net assets)

Calculate goodwill:

Consideration transferred for 50% 520


Fair value of pre-existing 25% 250
75% of fair value of identifiable net assets (600)
Goodwill 170
Therefore, total goodwill is 170.

Record business combination accounting

• The investment in Target is currently measured in the separate financial statements of


acquirer at cost of 700 (i.e., 180 + 520).

• The business combination accounting is reflected in Acquirer’s consolidated financial


statements.
IFRS 3: The Changes and the Consequences

The following table presents a consolidation worksheet complete with the journals required
to record the business combination accounting:

Consolidation worksheet Acquirer Target Journal 1 Journal 2 Journal 3 Consol


as of 1 Jan 2010

Investment in Target 700 70 (770)


Land and building 200 200 400
Other identifiable net assets 400 400
Goodwill 170 170
Total identifiable net assets 700 600 970

Equity (700) (600) 600 (700)


Current year profit (70) (70)
Asset revaluation reserve (200) 200
Non controlling interest (200) (200))
Total equity (700) (600) (70) (200) 600 (970))

Journal 1 (Remeasure pre-existing 25% interest to fair value at acquisition date. Excess of
FV over carrying amount is recognized as a gain in consolidated accounts)

DR – Investment in Target 70 (250 – 180)


CR – Consolidated profit or loss (70)

Journal 2 (Remeasure Target’s land and building to FV at acquisition date)

DR – Land and building 200


CR – Asset revaluation reserve (200)

Journal 3 (Consolidation elimination entry)

DR – Pre-acquisition equity of Target 600 (100% of 600)


DR – Asset revaluation reserve 200 (100% of 200)
DR – Goodwill 170
CR – Investment in Target (770) (180 + 520 + 70)
CR – non controlling interest 200
IFRS 3: The Changes and the Consequences

Accounting under IFRS 3R – (NCI measured at fair value)

Calculate goodwill:

Consideration transferred for 50% 520


Fair value of Non controlling interest (25%) 260
Fair value of pre-existing 25% 250
100% of fair value of identifiable net assets (800)
Goodwill 230
Therefore, total goodwill is 230.

In comparison to the measurement of the NCI at share of net asset, the NCI is 60 higher.

Comparison of accounting under (prior) IFRS 3 and IFRS 3R

The following table presents a comparison of the accounting under (prior) IFRS 3 and IFRS
3R:

Consolidated balance sheet (prior) IFRS IFRS 3R IFRS 3R


as of 1 Jan 2010 3 Consol Consol
Consol (NCI at (NCI at fair
share of net value)
asset)

Land and building 400 400 400


Other identifiable net assets 400 400 400
Goodwill 150 170 230
Total identifiable net assets 950 970 1,030

Equity (700) (700) (700)


Current-year profit (70) (70)
Asset revaluation reserve (50)
Minority interest/ NCI (200) (200) (260)
Total equity (950) (970) (1,030)

Observations:
• Greater amount of goodwill recognized under IFRS 3R and higher if NCI is valued at fair
value (i.e., full goodwill at acquisition date).

• Under (prior) IFRS 3, the value change in the identifiable net assets between the
exchange transactions that related to the pre-existing 25% interest was recorded in
consolidated equity (i.e., asset revaluation reserve).
IFRS 3: The Changes and the Consequences

• Under IFRS 3R, the value change in Target (including INA and goodwill) between the
exchange transactions that related to the pre-existing 25% interest was recorded as a gain
in the consolidated income statement.
IFRS 3: The Changes and the Consequences

Example 2 – Step Acquisition (from 75% to 100%)

Acquirer buys 25% of Target on 1 January 2011 for 250.


The value of the share of the assets and liabilities reflected in the consolidated balance sheet
is 25% of 800 = 200.
Fair value of 100% INA at 1 January 2011 is 1200 (25% of FV INA = 300).

Accounting under (prior) IAS 27


• the entire difference may be reflected as goodwill (the 'Parent entity extension method')
• the entire difference may be reflected as an equity transaction (the 'Entity concept
method')
• the difference may be reflected partly as goodwill – measured using the principles of
IFRS 3 (2009) – and partly as equity (effectively a 'Hybrid entity concept/parent entity
method')

Parent entity extension method:


Calculate goodwill on exchange transaction (1 January 2011):

Cost 250
25% of fair value of identifiable net assets 200 (25% of 800 = 200)
Goodwill 50

DT Minority interest (share in net assets) 200


DT Goodwill 50
CR Cash 250

Accounting under revised IAS 27R


Acquisition of non controlling interest is reflected as an equity transaction.
DT Minority interest (share in net assets) 200
DT equity 50
CR Cash 250
IFRS 3: The Changes and the Consequences

The following table presents a comparison of the accounting under (prior) IAS 27 and IAS 27
R:

Consolidated balance sheet (prior) IAS IAS27 R IAS 27R


as of 1 Jan 2011 27 Consol Consol
Consol (NCI at (NCI at fair
share of net value)
asset)

Land and building 400 400 400


Other identifiable net assets 400 400 400
Goodwill 200 170 230
Total identifiable net assets 1000 970 1,030

Equity (700) (700) (700)


Current-year profit (70) (70)
Asset revaluation reserve
Reserves 100 40
Minority interest/ NCI
Total equity (700) (670) (730)

Loan (300) (300) (300)


Total equity and liabilities (1000) (970) (1,030)

Observations:
• No impact on goodwill when NCI is acquired after gaining control.
• Greater amount of goodwill recognized under (prior) IAS 27 of acquisition of minority
possible.

• The revaluation reserve is released to P&L under (prior) IAS 27 (i.e., asset revaluation
reserve).