Ch. 12: Changes in group structures: step acquisitions

Question 1

What is a Step Acquisition?

and

How does it affect the accounts?

Answer 1

A parent company may build up its shareholding with several successive share purchases rather than purchasing the shAres all on the same day.

Where a controlling interest in a subsidiary is built up over a period, IFRS-3 refers to this as a ‘business combination achieved in stages’. This may be also be known as a ‘step acquisition’ or ‘piecemeal acquisition’.

How does this affect the accounts?

For any change in group structure:

SPLOCI:-

• The entity’s status (investment, subsidiary, associate) DURING the year will determine the accounting treatment in the (SPLOCI) (pro-rate accordingly).

SOFP:-

• The entity’s status at the year-end will determine the accounting treatment in the (SOFP) (never pro-rate).

Question 2

What are the 4 Types of Step Acquisitions?

Answer 2

1. Equity Investment/Financial Asset (IFRS 9) >>>>> Associate (IAS 28)
   
   • e.g 10% share holding to 30%
2. Equity Investment/Financial Asset (IFRS 9) >>>>> Subsidiary
   
   • ​​e.g 10% Share holding to 51%
3. Associate >>>> Subsidiary
   
   • ​e.g 20% or 50% Share Holding to 51%​
4. Subsidary >>>> to bigger/increased share holding​
   
   • e.g 51% Share Holding to 90%

Question 3

How is an Investment to associate (eg 10% to 40%) accounted for

Answer 3

a) Investment to associate (eg 10% to 40%)
Where an investment in equity instruments becomes an associate,

It can be done via two Methods:

• *IFRS 3 - the original investment is remeasured at F.V, and is treated as part of the cost of the associate.**
• *^{_{( remeasure on a date significant control is achieved via whichever way it was previously measured FVTPL OR FVTOCI)}}**

or

IAS 28 - the original investment at H.C is added to the cost of associate.

Presentation

SPLOCI - During the Year.

• Equity account as an associate from the date of significant influence
  
  • ​Include a Line for post control share of Profits

SOFP - Reporting date

• Equity account as an associate

Question 4

How is an Equity Investment moving to a Subsidiary accounted for?

Eg 1 - 19% to 51% and over

Answer 4

Investment to subsidiary (eg 10% to 80%)

The concept of substance over form drives the accounting treatment.

The legal form is that some shares have been purchased. However, the substance, which should be reflected in the group accounts, is that because the control boundary has been crossed:

A) - An investment has been ‘sold’ - the investment previously held is remeasured to F.V at the date of control (a gain or loss reported P/L or OCI*)

B) A subsidiary has been ‘purchased’ - goodwill is calculated including the fair value of the investment previously held

SPLOCI

• Remeasure the investment to fair value at the date of control.
  
  • ^{_{<strong>​Recognise gain in parent accounts</strong>}}
• Consolidate as a subsidiary from the date the parent achieves control ^{(Include prorated revenue and expenses in the P/)}

SOFP

• Calculate goodwill at the date the parent achieves control (add f.v of original Investment)
• Consolidate as a subsidiary at the year-end

Question 5

How is the following step acquisition accounted for

Associate >>>> Subsidiary

​e.g 20% or 50% Share Holding to 51%

Answer 5

SPLOCI

Account for as an associate up until the date of control then consolidate income and expenses as a sub.

• _{Equity account as an associate to the date control is achieved}
  
  • ​Include the share of profits in associate before control as a line item.
• Remeasure the associate to F.V at the date control is achieved.
  
  • ​Recognise the Gain or loss in P’s own P/L
• ​Consolidate as a subsidiary from the date control is achieved
  
  • ​Include revenue and profits from the date of control

SOFP

• Calculate goodwill at the date the parent obtains control
  
  • ​With the additional item, pre-step-Acq: Investment in associate value as consideration transferred.
• Group Workings should show an extra column to calculate pre-step acq share of Associate R.E and post-step Acq Sub R.E
• Consolidate as a subsidiary at the year-end

Question 6

How is an increase in a subsidiary shareholding accounted for?

Answer 6

In substance, there has been no acquisition because the entity is still a subsidiary.
This is a transaction between group shareholders (i.e the parent is buying a percentage % from the non-controlling interests).

*Therefore, it is recorded in equity as follows:*

• (A) Decrease non-controlling interests (NCI) in the consolidated SOFP
• (B) Recognise the difference between the consideration paid and the decrease in NCI as on adjustment to equity
  (post to the parent’s column in the consolidated retained earnings working)

SPLOCI

• (a) Consolidate as a subsidiary in full for the whole period - no time apportioning.
• ​(b) Time apportion Profits attributable to NCI based on percentage before and after the additional acquisition.

SOFP

• As there has been no business combination, there’s no new goodwill to account for.
• But the Parents purchase of shares from the NCI is accounted as a change in equity.

Step 3 - Goodwill accounted for on the original date of control as a SUB

Step 4 - R.E of the parent is adjusted in the own accounts for the purchase
Calculated as: - Consideration Paid Less: Reduction in NCI

Step 5 - NCI Calculated to the point of new ACQ and then decreased by the portion sold to the parent