Changes in ownership no loss of control

Changes in ownership no loss of control – Changes in a parent’s ownership interest that do not result in a change in control of the subsidiary that is a business are accounted for as equity transactions (through other comprehensive income). Thus, if the parent maintains control, it will recognize no gain or loss in profit or loss upon selling shares of a subsidiary. Similarly, the parent will not record any additional acquisition adjustments to reflect its subsequent purchases of additional shares in a subsidiary if there is no change in control.

Instead, the carrying amount of non-controlling interests (NCI) will be adjusted to reflect the change in the NCI’s ownership interest in the subsidiary. Any difference between the amount by which the NCI is adjusted and the fair value of the consideration paid or received is recognized in equity/Additional paid-in shares and attributed to the equity holders of the parent in accordance with IFRS 10 B96.

NCI is recorded at fair value [or proportionate share for IFRS companies, if chosen] only at the date of the business combination. Subsequent purchases or sales of ownership interests when control is maintained are recorded at the NCI’s proportionate share of the net assets, including goodwill. Changes in ownership no loss of control

A subsidiary may issue shares to a third party, thereby diluting the controlling interest’s ownership percentage. Additional instruments of the subsidiary, such as preferred shares, warrants, puts, calls, and options may also dilute the controlling interest’s ownership percentage when issued or exercised. If this dilution does not result in a change in control, it is accounted for as an equity transaction. Changes in ownership no loss of control

The following eight examples (up to the section Parent company accounting for an equity-classified freestanding written call option on subsidiary’s shares) demonstrate changes in ownership interest where control of a business does not change.

IFRS companies that elect the proportionate share method will record the NCI initially at a lower value than if they had elected the fair value method. Therefore, subsequent purchases of the NCI for these companies may result in a larger percentage reduction of the controlling interest’s equity on the transaction date.

This is illustrated in the examples EXAMPLE Change in controlling ownership interest of a business—initial acquisition of controlling interest—proportionate share method and EXAMPLE – Change in controlling ownership interest of a business that does not result in loss of control—acquisition of additional shares—proportionate share method used to measure the NCI in a business combination.

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EXAMPLE – Change in controlling ownership interest of a business—initial acquisition of controlling interest—fair value method used to measure the NCI in a business combination

Company A acquires Company B by purchasing 60% of its equity for CU300 million in cash. The fair value of NCI is determined to be CU200 million.1 The net aggregate value of the identifiable assets and liabilities, as measured in accordance with IFRS 3 Business Combinations, is determined to be CU370 million. Changes in ownership no loss of control

How should Company A recognize the acquisition of a controlling interest using the fair value method?

Analysis Changes in ownership no loss of control

The acquirer would recognize at the acquisition date (1) 100% of the identifiable net assets, (2) NCI at fair value, and (3) goodwill, calculated as the excess of (a) over (b):

  1. The aggregate of (1) the consideration transferred as measured in accordance with IFRS 3 Business Combinations, which generally require acquisition-date fair value; (2) the fair value of any non-controlling interest in the acquiree; and (3) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree
  2. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, as measured in accordance with IFRS 3 Business Combinations

The journal entry recorded on the acquisition date for the 60% interest acquired would be as follows (in millions):

Changes in ownership no loss of control

Identifiable net assets Changes in ownership no loss of control

CU370¹

Harvested products
Changes in ownership no loss of control

Goodwill Changes in ownership no loss of control

CU130²

Changes in ownership no loss of control

Cash Changes in ownership no loss of control

CU300³

Changes in ownership no loss of control

NCI1

CU200°

Notes:

1. The value of 100% of the identifiable net assets of Company B is recorded in accordance with IFRS 3 Business Combinations

2. The full amount of goodwill is recorded (in millions): Changes in ownership no loss of control

Fair value of consideration transferred Changes in ownership no loss of control

CU300

Fair value of the NCI Changes in ownership no loss of control

200

Fair value of previously held equity interest Changes in ownership no loss of control

n/a

Subtotal

500

Lease equipment

Recognized value of 100% of the identifiable net assets, measured in accordance with IFRS 3 Business Combinations

(370)

Goodwill recognized Changes in ownership no loss of control

CU130

3. Cash paid for the 60% interest acquired in Company B Changes in ownership no loss of control

o. Fair value of the 40% NCI is recognized in equity Changes in ownership no loss of control

EXAMPLE – Change in controlling ownership interest of a business that does not result in loss of control—acquisition of additional shares

Two years after the transaction in the example above, Company A purchases the outstanding 40% interest from the subsidiary’s non-controlling shareholders for CU300 million in cash. The goodwill of CU130 million from the acquisition of the subsidiary is assumed to not have been impaired.

The carrying value of the 40% NCI is CU260 million (original value of CU200 million, plus CU60 million, assumed to be allocated to the NCI over the past two years for its share in the income of the subsidiary and its share of accumulated other comprehensive income).

How should Company A account for the change in ownership interest?

Analysis Changes in ownership no loss of control

A change in ownership interests that does not result in a change of control is considered an equity transaction. The identifiable net assets remain unchanged and any difference between the amount by which the NCI is adjusted and the fair value of the consideration paid is recognized directly in equity/APIC (additional paid-in capital) and attributed to the controlling interest in accordance with IFRS 10 B96.

The journal entry recorded for the 40% interest acquired would be as follows (in millions):

Changes in ownership no loss of control

NCI Changes in ownership no loss of control

CU260¹

Changes in ownership no loss of control

Equity / Additional paid in capital

CU40²

Changes in ownership no loss of control

Cash Changes in ownership no loss of control

CU300³

Notes:

1. Elimination of the carrying value of the 40% NCI on Company A’s books. Changes in ownership no loss of control

2 Difference in NCI: consideration paid less the carrying value of NCI (CU300 – CU260) Changes in ownership no loss of control

3 Cash paid for the 40% interest acquired in the subsidiary Changes in ownership no loss of control

EXAMPLE – Change in controlling ownership interest of a business that does not result in loss of control—sale of shares, control is maintained

Three years after the transaction in the the example above, Company A sells a 20% interest in the subsidiary to outside investors for CU200 million in cash. Company A still maintains an 80% controlling interest in the subsidiary. The carrying value of the subsidiary’s net assets is CU600 million, including goodwill of CU130 million from the initial acquisition of the subsidiary.

How should Company A account for the change in ownership interest?

Analysis Changes in ownership no loss of control

A change in ownership interests that does not result in a change of control is considered an equity transaction. The identifiable net assets remain unchanged and any difference between the amount by which the NCI is recorded, and the fair value of the consideration received, is recognized directly in equity and attributed to the controlling interest in accordance with IFRS 10 B96. NCI is recognized at fair value only at the date of the business combination. For subsequent changes in ownership interest that do not result in a change of control, the change in the NCI is recorded at its proportionate interest of the carrying value of the subsidiary.

The journal entry recorded on the disposition date for the 20% interest sold would be as follows (in millions):

Changes in ownership no loss of control

Cash Changes in ownership no loss of control

CU200¹

Changes in ownership no loss of control

NCI Changes in ownership no loss of control

CU120²

Equity / Additional paid in capital

CU80³

Notes:

1 Cash received for the 20% interest sold. Changes in ownership no loss of control

2 Recognition of the 20% NCI at its proportionate interest in the carrying value of the subsidiary (CU600 × 20%)

3 Fair value of the consideration received less the recorded amount of the NCI (CU200 – (CU600 × 20%))

EXAMPLE – Change in controlling ownership interest of a business—initial acquisition of controlling interest—proportionate share method

Company A acquires Company B by purchasing 60% of its equity for CU300 million in cash. The net aggregate value of the identifiable assets and liabilities, as measured in accordance with IFRS 3 Business Combinations, is determined to be CU370 million. Company A chooses to measure NCI using the proportionate share method for this business combination.

How should Company A recognize the acquisition of a controlling interest using the proportionate share method?

Analysis Changes in ownership no loss of control

The acquirer would recognize 100% of the identifiable net assets on the acquisition date. The NCI would be recorded at its proportionate share of the recognized amount of the identifiable net assets in accordance with IFRS 3 19. Goodwill would be recognized at the acquisition date as the excess of (a) over (b):

  1. The aggregate of (1) the consideration transferred, as measured in accordance with IFRS 3 Business Combinations, which generally requires acquisition-date fair value; (2) the amount of any non-controlling interest in the acquiree (measured as the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets); and (3) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree Changes in ownership no loss of control
  2. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, as measured in accordance with IFRS 3 Business Combinations

The journal entry recorded on the acquisition date for the 60% interest acquired would be as follows (in millions):

Identifiable net assets Changes in ownership no loss of control

CU370¹

Goodwill Changes in ownership no loss of control

CU78²

Cash Changes in ownership no loss of control

CU300³

NCI Changes in ownership no loss of control

CU148°

Notes:

1. The value of 100% of the identifiable net assets of Company B is recorded in accordance with IFRS 3 Business Combinations

2. Since NCI is recorded at its proportionate share of Company B’s identifiable net assets, only the controlling interest’s portion of goodwill is recognized, and there is no goodwill recognized for the NCI. Goodwill is calculated as follows:

Fair value of consideration transferred

CU300

Fair value of the NCI

148

Fair value of previously held equity interest

n/a

Subtotal

448

Recognized value of 100% of the identifiable net assets, measured in accordance with IFRS 3 Business Combinations

(370)

Goodwill recognized

CU78

3. Cash paid for the 60% interest acquired in Company B

o. Recognition of the 40% NCI at its proportionate share of the identifiable net assets (CU370 × 40%)

EXAMPLE – Change in controlling ownership interest of a business that does not result in loss of control—acquisition of additional shares—proportionate share method used to measure the NCI in a business combination

Two years after the transaction in the example above, Company A purchases the outstanding 40% interest from the subsidiary’s non-controlling shareholders for CU300 million in cash. The goodwill of CU78 million from the acquisition of the subsidiary is assumed to not have been impaired.

The carrying value of the 40% NCI is CU208 million (original value of CU148 million plus CU60 million assumed to be allocated to the NCI over the past two years for its share in the income of the subsidiary and its share of accumulated other comprehensive income).

How should Company A account for the change in ownership interest?

Analysis

A change in ownership interests that does not result in a change of control is considered an equity transaction. The identifiable net assets remain unchanged, and any difference between the amount by which the NCI is adjusted and the fair value of the consideration paid is recognized directly in equity and attributed to the controlling interest in accordance with IFRS 10 B96.

The journal entry recorded for the 40% interest acquired would be as follows (in millions):

NCI

CU208¹

Equity / Additional paid in capital

CU92²

Cash

CU300³

Notes:

1 Elimination of the carrying value of the 40% NCI on Company A’s books

2 Difference in NCI: fair value of the consideration paid less the carrying value of NCI (CU300 – CU208)

3 Cash paid for the 40% interest acquired in the subsidiary

Because Company A chose the proportionate share method over the fair value method, it would recorded a lower value for the NCI on the acquisition date. This resulted in Company A recording a larger reduction to the controlling interest’s equity than under the fair value method when it acquired additional interests. However, the change in total equity (CU300 million) is the same for both methods.

EXAMPLE – Change in controlling ownership interest of a business that does not result in loss of control—sale of shares, control is maintained—proportionate share method used to measure the NCI in a business combination

Three years after the transaction in in the example above, Company A sells a 20% interest in Company B to outside investors for CU200 million in cash. Company A still maintains an 80% controlling interest in the subsidiary. The carrying value of the subsidiary’s net assets is CU548 million. This includes the goodwill of CU78 million from the initial acquisition of the subsidiary (refer to Example 6-12).

How should Company A account for the change in ownership interest?

Analysis

A change in ownership interests that does not result in a change of control is considered an equity transaction. The identifiable net assets remain unchanged, and any difference between the amount by which the NCI is recorded and the fair value of the consideration received is recognized directly in equity and attributed to the controlling interest in accordance with IFRS 10 B96.

The journal entry recorded on the disposition date for the 20% interest sold would be as follows (in millions):

Cash

CU200¹

NCI

CU110²

Equity / Additional paid in capital

CU90³

Notes:

1 Cash received for the 20% interest sold

2 Recognition of the 20% NCI at its proportionate interest in the carrying value of the subsidiary (CU548 × 20%)

3 Fair value of the consideration received less the value of the NCI (CU200 – (CU548 × 20%))

The accounting result is different than in the example above because NCI was originally recorded using the proportionate share method; therefore, no goodwill was recognized for the NCI (i.e., the carrying value of the subsidiary is lower in Example Change in controlling ownership interest of a business that does not result in loss of control—sale of shares, control is maintained).

EXAMPLE – Change in controlling ownership interest of a business that does not result in loss of control—sale of additional shares by subsidiary, dilution of controlling interest’s ownership percentage, control is maintained

On December 31, 20X1, Company A owns 90 shares (90%) of Subsidiary Z. On January 1, 20X2, Subsidiary Z sells an additional 20 shares to Company C (an unrelated party) for CU200 million in cash. Assume the following facts on December 31 and January 1 (CU’s in millions unless otherwise noted):

December 31 (pre-sale)

January 1 (post-sale)

Total shares outstanding—subsidiary Z

100 shares

120 shares

Company A’s ownership percentage in subsidiary Z

90%2

75%3

Company A’s basis in subsidiary Z

CU3704

CU4585

Subsidiary Z’s net equity

CU411

CU611

For purposes of this example, it is assumed that there is no basis difference between Company A’s

investment in Subsidiary Z and Subsidiary Z’s net equity.

How should Company A account for the change in ownership interest?

Analysis

Company A’s ownership percentage of Subsidiary Z has been diluted from 90% to 75%. This is a change in Company A’s ownership interest that does not result in a change of control and, therefore, is considered an equity transaction. Any difference between the amount by which the carrying value of Company A’s basis in Subsidiary Z would be adjusted and the fair value of the consideration received recognized directly in equity and attributed to the controlling interest in accordance with IFRS 10 B96.

In its consolidated accounts, Company A would records the following journal entry (in millions):

Cash

CU200¹

Equity / Additional paid in capital

CU88²

NCI

CU112³

Notes:

1 Cash received for the 20 shares sold by Subsidiary Z to Company C

2 Company A’s share of the fair value of the consideration received (CU200 × 75%) less the change in Company A’s basis in

Subsidiary Z (CU411 × (90% – 75%))

3 The change in the recorded amount of NCI represents:

NCI’s share of the fair value of the consideration received (CU200 × 25%)

CU50

Change in NCI’s basis in Subsidiary Z (CU411 × 15%)

62

CU112

Alternatively, the journal entries can be recorded in the separate accounts of Subsidiary Z and Company A as follows (in millions):

Recorded by Subsidiary Z:

Changes in ownership no loss of control

Cash

CU200ª

Changes in ownership no loss of control

Equity

CU200

Note

a Cash received for the 20 shares sold to Company C

Recorded by Company A:

Changes in ownership no loss of control

Cash

CU88°

Changes in ownership no loss of control

Equity / Additional paid in capital

CU88

Note

o Company A’s share of the fair value of the consideration received (CU200 × 75%) less the change in Company A’s basis in Subsidiary Z (CU411 × (90% – 75%))

In consolidation, Company A will eliminate its investment in Subsidiary Z of CU458 million, Subsidiary Z’s equity of CU611 million, and recognize the NCI of CU153 million in Subsidiary Z

(CU112 + CU41 (10% of the original investment)).

This example assumes that the cash will stay in Subsidiary Z. In other cases, if the cash is transferred to the parent, the accounting for this transaction may be different.

EXAMPLE – Change in controlling ownership interest of a business that does not result in loss of control—accounting for the indirect decrease in an interest in an investee through the sale of shares of an intermediate subsidiary—proportionate share method used to measure the NCI in a Business Combination

Company A owns 100% of Company B, a substantive operating company, which owns 30% of an equity-method investee, Company Z. The carrying amount of Company A’s investment in Company B is CU160, which includes the carrying amount of Company B’s investment in Company Z of CU60. Company A sells a 40% interest in Company B for CU100 to an unrelated third party, out of which CU40 is allocated to the indirect disposal of an interest in Company Z.

How should Company A account for the change in ownership interest?

Analysis

A change in ownership interests that does not result in a change in control is considered an equity transaction. The identifiable net assets remain unchanged and any difference between the amount by which the NCI is recorded, and the fair value of the consideration received, is recognized directly in equity and attributed to the controlling interest in accordance with IFRS 10 23.

The journal entry recorded on the disposition date for the 40% interest sold is as follows (in millions):

Changes in ownership no loss of control

Cash

CU100¹

Changes in ownership no loss of control

NCI

CU64²

Changes in ownership no loss of control

Equity / Additional paid in capital

CU36³

Notes:

1 Cash received for the 40% interest in Company B sold by Company A to an unrelated third party

2 Recognition of the 40% NCI at its proportionate interest in the carrying value of Company B (CU160 × 40%)

3 Fair value of the consideration received less the recorded amount of NCI (CU100 – (CU160 × 40%))

Alternatively, if Company B was a shell company with no other investments, Company A would effectively own only an equity investment in Company Z. Therefore, if Company A sold a partial interest in Company B it would, in substance, be akin to Company A disposing of a portion of its equity investment in Company Z.

In this case, gain recognition in earnings for the difference between the portion of the consideration received attributable to the investment in Company Z and the carrying amount of the disposed interest in Company Z generally would be appropriate in accordance with IAS 28.

Parent company accounting for an equity-classified free-standing written call option on subsidiary’s shares

Equity-classified free-standing written call option on subsidiary’s shares issued by parent

A free-standing written call option (including an employee stock option) on a subsidiary’s shares (that is a business) issued by a parent that qualifies for equity classification should be accounted for by the parent as non-controlling interest for the amount of consideration received for the written call option.

However, during the period the option is outstanding, the option holder should not be attributed any profit or loss of the subsidiary. The non-controlling interest remains in existence until the option expires.

If the option is exercised and the parent retains control of the subsidiary, the change in the parent’s

ownership interest should be accounted for as an equity transaction in accordance with IFRS 10 23. Upon exercise, the newly issued shares should be reported as non-controlling interest equal to the non-controlling interest holder’s proportionate share of the parent’s basis in the subsidiary’s equity. Conversely, if the option expires, the carrying amount of the written option should be reclassified from non-controlling interest to the equity of the controlling interest in accordance with IAS 32 when no other non-controlling interest is outstanding.

The following example illustrates this guidance.

EXAMPLE – Accounting for a free-standing written call option on a subsidiary’s shares (that is a business) issued by a parent

Company A issues a warrant (written call option) to purchase 10% of wholly-owned Subsidiary’s shares with an exercise price of CU150 to Investor B for CU60. Before and after Investor B’s exercise of the warrant, Company A’s carrying amount in Subsidiary, including goodwill, is CU1,000. There are no basis differences between Company A’s investment in Subsidiary and Subsidiary’s equity. There is no other existing non-controlling interest.

How should Company A account for the freestanding written call option?

Analysis

In consolidation, Company A would record the following journal entries:

To record the issuance of the warrant

Cash

CU60

Non-controlling interest

CU60

To record the exercise of the warrant

Cash

CU150

Non-controlling interest

CU40¹

Additional paid in capital

CU110²

To record the exercise of the warrant

1 Company A’s basis in Subsidiary’s equity after exercise of warrant

CU1,000

Liquidity ratio

Investor B’s ownership percentage

X 10%

Non-controlling interest after exercise

100

Less: non-controlling interest prior to exercise

-60

Increase in non-controlling interest

CU40

2 Warrant consideration received by Company A

CU60

Plus: Exercise price

150

Total consideration received by Company A

210

Less: 10% of Company A’s basis in Subsidiary’s equity

-100

Change in Company A’s additional paid in capital

CU110

If the warrant was not exercised but expires, Company A would record the following entry to reclassify the premium received for the warrant in accordance with IAS 32:

To account for the expiration of the warrant

Non-controlling interest

CU60

Additional paid in capital

CU60

Equity-classified freestanding written call option on subsidiary’s shares issued by subsidiary

A freestanding written call option (including an employee stock option) on a subsidiary’s shares issued by the subsidiary that qualifies for equity classification should also be accounted for by the parent as non-controlling interest for the amount of consideration received for the written call option. During the period the option is outstanding, the option holder should not be attributed any profit or loss of the subsidiary. The non-controlling interest remains in existence until the option expires.

If the option is exercised and the parent maintains control of the subsidiary, the change in the parent’s ownership interest should be accounted for as an equity transaction. Upon exercise, the newly issued shares should be reported as non-controlling interest equal to the non-controlling interest holder’s proportionate share of the parent’s investment in the subsidiary’s equity. Conversely, if the option expires, the parent should record a reduction in the non-controlling interest for the parent’s proportionate share of the carrying amount of the written option in accordance with IFRS 10 23.

The following example illustrates this guidance.

EXAMPLE – Accounting for a freestanding written call option (including an employee stock option) on a subsidiary’s shares (that is a business) issued by the subsidiary

Subsidiary, which is wholly-owned and controlled by Company A, issues a warrant (written call option) to purchase 10% of Subsidiary’s shares with an exercise price of CU150 to Investor B for CU60. After Investor B’s exercise of the warrant, Subsidiary’s equity, including goodwill, is CU1,210 (CU1,000 of net assets plus CU60 of cash received for issuance of the warrant and CU150 received for the exercise price). There are no basis differences between Company A’s investment and Subsidiary’s equity. There is no other existing non-controlling interest.

How should Company A account for the freestanding written call option?

Analysis

In consolidation, Company A would record the following journal entries:

To record the issuance of the warrant

Cash

CU60

Non-controlling interest

CU60

To record the exercise of the warrant

Cash

CU150

Changes in ownership no loss of control

Non-controlling interest

CU61¹

Additional paid in capital

CU89²

To record the exercise of the warrant

1 Company A’s basis in Subsidiary’s equity after exercise of warrant

CU1,210

Investor B’s ownership percentage

X 10%

Non-controlling interest after exercise

121

Less: Non-controlling interest prior to exercise

-60

Increase in non-controlling interest

CU61

2 Subsidiary’s carrying amount of net assets after exercise

CU1,210

Company A’s ownership percentage after exercise

x 90%

Company A’s ownership in Subsidiary’s net assets after exercise

1089

Company A’s ownership investment in Subsidiary before exercise

-1,00

Change in Company A’s ownership interest

CU89

If the warrant was not exercised but expires, Company A would record the following entry to reclassify the premium received for the warrant in accordance with IAS 32:

To account for the expiration of the warrant

Non-controlling interest Changes in ownership no loss of control

CU60

Additional paid in capital Changes in ownership no loss of control

CU60

To account for the expiration of the warrant

Note that the change in interest calculation may be more complex if there is an existing non-controlling interest prior to the issuance of the option, or if there is a basis difference between the parent’s investment in the subsidiary and the equity in the subsidiary’s separate financial statements.

Parent company accounting for employee stock option issued by a subsidiary

An employee stock option issued by the subsidiary that is a business that qualifies for equity classification should be accounted for by the parent as non-controlling interest (recorded as the option vests) totaling the grant date fair value based measure of the employee stock option. However, during the period the option is outstanding, the non-controlling interest related to the option holder should not be attributed any profit or loss of the subsidiary.

Even though a portion of the profit or loss is compensation expense related to the NCI, until the option is exercised, the non-controlling interest related to the option is not an actual equity interest in the entity. Therefore, there is no attribution of profit or loss to the NCI.

If the option is exercised and the parent maintains control of the subsidiary that is a business, the change in the parent’s ownership interest should be accounted for as an equity transaction. Upon exercise, the newly issued shares should be reported as non-controlling interest equal to the non-controlling interest holder’s proportionate share of the parent’s basis in the subsidiary’s equity. Subsequent to exercise, the NCI would be attributed profit or loss of the business.

Conversely, if the option expires, the parent should record a reduction in the non-controlling interest and an increase to controlling equity/APIC for the parent’s proportionate share of the carrying amount of the employee stock option in accordance with IFRS 10 23.

Accounting for a transaction in which a non-controlling interest in a wholly owned subsidiary is exchanged for a controlling interest in another entity If an entity exchanges a non-controlling interest in its wholly owned subsidiary that is a business for an interest in an unrelated entity and the interest obtained in the unrelated entity is a controlling interest, the transaction is accounted for as a business combination. The acquiring entity would record 100% of the assets acquired and liabilities assumed of the acquired entity in accordance with IFRS 3 10. As part of the business combination, the acquiring entity would also measure the non-controlling interest held by the acquiree at its fair value [or at its proportionate share for IFRS companies who choose this option].

As discussed Accounting for changes in ownership interest that do not result in loss of control, changes in ownership interests in a business that do not result in loss of control should be accounted for as equity transactions. Therefore, when an entity sells/exchanges a non-controlling interest in its wholly owned subsidiary, it creates a non-controlling interest in that subsidiary which should be accounted for as an equity transaction.

The non-controlling interest would be reflected at the non-controlling interest’s proportionate share of the net equity of the subsidiary, and no gain or loss would be recognized by the entity that relinquished the non-controlling interest in its subsidiary. The acquiring entity’s controlling interest in its existing subsidiary may need to be adjusted to reflect the change in ownership interest in the subsidiary.

The non-controlling interest in the acquiring entity’s consolidated financial statements would comprise the sum of the non-controlling interest’s share of the fair value [or proportionate share for IFRS companies who choose this option] in the acquired business and the non-controlling interest’s share in the proportionate interest of the net equity of the subsidiary exchanged in the transaction.

The following example illustrates this guidance.

EXAMPLE – Accounting for a transaction in which NCI in a subsidiary that is a business is exchanged for a controlling interest in another entity—fair value method

Company A enters into a venture with Company X where each company will contribute a subsidiary, each representing a business, into a NewCo in a series of planned and integrated transactions.

Company A forms the NewCo and transfers an existing subsidiary (Subsidiary A) into the NewCo. NewCo then issues 46% of its common shares to Company X in return for 100% of Company X’s subsidiary (Target). Company A maintains control of the NewCo with an ownership interest of 54%, and Company X owns 46%. Economically, this transaction is an exchange of 46% of Company A’s interest in Subsidiary A for a 54% controlling interest in Target.

Fair and book values for Target and Subsidiary A are as follows:

Target fair value Changes in ownership no loss of control

CU690

Subsidiary A net equity Changes in ownership no loss of control

CU300

Subsidiary A fair value Changes in ownership no loss of control

CU810

How should Company A account for the transaction?

Analysis

Company A’s interest in NewCo would be equal to the sum of (1) 54% of its historical cost of Subsidiary A plus (2) the fair value of 54% of Target (which is equal to 46% of the fair value of Subsidiary A’s business). Company A’s retained interest in Subsidiary A’s business is recorded at carryover basis. In Company A’s consolidated financial statements, all of the assets and liabilities of Target would be recorded and measured in accordance with IFRS 3 Business Combinations. The non-controlling interest of Newco is the combination of the fair value of the non-controlling interest in Target and the non-controlling interest in the net equity of Subsidiary A’s business.

Company A would record net assets acquired of CU690 (100% of Target’s fair value) and non-controlling interest of CU455 (46% of Target’s fair value of CU690 plus 46% of the net equity of Subsidiary A of CU300).

Company A would record the following journal entry to account for the acquisition:

Target net assets acquired Changes in ownership no loss of control

CU690

Non-controlling interest Changes in ownership no loss of control

CU455

Additional paid in capital—controlling interest Changes in ownership no loss of control

CU235¹

2 The change in ownership interest is calculated in accordance with ASC 810-10-45-23 as follows:

NewCo equity before acquisition of Target Changes in ownership no loss of control

CU300

NewCo equity issued to acquire Target Changes in ownership no loss of control

690

Total NewCo equity after acquisition of Target

CU990

Company A’s ownership interest in NewCo after acquisition of Target Changes in ownership no loss of control

x 54%

Company A’s investment in NewCo after acquisition of Target Changes in ownership no loss of control

CU535

Company A’s investment in NewCo before acquisition of Target Changes in ownership no loss of control

-300

Change in Company A’s ownership interest in NewCo Changes in ownership no loss of control

CU235

Accumulated other comprehensive income considerations

Comprehensive income or loss is allocated to the controlling interest and the NCI each reporting period. Upon a change in a parent’s ownership interest, the carrying amount of accumulated other comprehensive income (AOCI) is adjusted to reflect the change in the ownership interest in the subsidiary through a corresponding charge or credit to equity attributable to the parent in accordance with IFRS 10 B98. AOCI is reallocated proportionately between the controlling interest and the NCI. For financial statement purposes, the line item titled “Accumulated Other Comprehensive Income” is generally attributed entirely to the controlling interests. AOCI related to the NCI is typically included in the NCI balance.

Changes in ownership interest that do not result in a change of control should be accounted for as equity transactions. The following example demonstrates the accounting for a reallocation of accumulated other comprehensive income upon a change in ownership that does not result in a change of control.

EXAMPLE – Reallocation of accumulated other comprehensive income

Company A owns 80% of a subsidiary that is a business. Company A acquires an additional 10% of the subsidiary (i.e., 50% of the NCI) for CU35 million in cash. The carrying value of the 20% NCI is CU50 million, which includes CU4 million of accumulated other comprehensive income.

How should Company A account for the acquisition of the additional 10% interest?

Analysis

A change in ownership interests of a business that does not result in a change of control is considered an equity transaction. The identifiable net assets remain unchanged, and any difference between the amount by which the NCI is adjusted and the fair value of the consideration paid is recognized directly in equity and attributed to the controlling interest [IFRS 10 B96].

The journal entry to record the acquisition of the 10% interest would be as follows (in millions):

Non-controlling interest Changes in ownership no loss of control

CU25¹

Equity / Additional paid in capital Changes in ownership no loss of control

CU10²

Cash Changes in ownership no loss of control

CU35³

Notes:

1 Elimination of the carrying value of the 10% NCI (CU50 × 50%). This adjustment effectively includes CU2 of accumulated other comprehensive income (CU4 × 50%).

2 Consideration paid less the change in the carrying value of NCI (CU35 – CU25)

3 Cash paid for the 10% interest acquired in the subsidiary

Company A would adjust the carrying value of the accumulated other comprehensive income to reflect the change in ownership through an adjustment to equity (e.g., additional-paid-in capital) attributable to Company A.

Equity / Additional paid in capital Changes in ownership no loss of control

CU2ª

Accumulated other comprehensive income Changes in ownership no loss of control

CU2ª

Note: Changes in ownership no loss of control

a Reallocation of accumulated other comprehensive income to the controlling interest (CU4 × 50%)

Accumulated other comprehensive income considerations when the parent disposes of a group of assets in a consolidated foreign entity

A parent may sell a group of assets that constitute a business within a consolidated foreign entity while retaining ownership of the foreign entity. Alternatively, the group of assets may be sold directly by the foreign entity.

Under IFRS, a parent must reclassify to profit and loss the proportionate share of the cumulative amount of exchange differences recognized in other comprehensive income upon loss of control of a foreign operation through an entire or partial disposal of an interest in a subsidiary in accordance with IAS 21 48. The loss of control provisions of IFRS 10 apply to a group of assets that constitute a business if it is considered to be a foreign operation, as well as to the loss of control of a subsidiary. See Loss of control 5.6.2 for further information.

The following example demonstrates the accounting for the cumulative translation adjustment (CTA) in a foreign entity under IFRS when a group of assets which qualifies as a business is disposed.

EXAMPLE – Disposal of a portion of a foreign entity—release of CTA in a foreign entity into earnings

Company A owns 100% of two branches (X and Y). Branch X and Y are individual businesses with different functional currencies and are reported to Company A separately and translated directly into Company A’s group consolidation.

Company A’s carrying amount of branch X is CU20 exclusive of a credit balance of CU 2 for CTA related to branch X. Company A disposes of branch X for CU24 in cash, which is remitted to Company A.

How should Company A account for the disposal of a portion of a foreign entity?

Analysis

Under IAS 16.71 a gain is recognized on the disposal of the business for the amount received that is greater than the carrying amount of the business. Under IAS 21 48, the CTA related to Branch X should be released into profit and loss as the branch is a separate foreign operation.

Company A’s journal entry to record the disposal of the Branch X would be as follows (in millions):

Cash Changes in ownership no loss of control

CU24¹

Accumulated other comprehensive income Changes in ownership no loss of control

CU2²

Disposal group of assets Changes in ownership no loss of control

CU20³

Gain on disposal of net assets Changes in ownership no loss of control

CU6º

Notes

1 Cash received for the group of assets disposed of

2 CTA attributable to Branch X

3 Carrying amount of disposal group of assets that constitutes a business, exclusive of CTA

o Sum of the gain on disposal of the group assets (CU24 – CU20 = CU4) and the portion of CTA released into earnings (CU2).

Acquisition of a non-controlling interest through a business combination

A change in a parent’s ownership interest in an entity that is a business where control is maintained is accounted for as an equity transaction in accordance with IFRS 10 23. When an additional non-controlling interest is obtained indirectly through the acquisition of a controlling interest in another entity, which owns the non-controlling interest, the transaction should be accounted for as two separate transactions.

The following example demonstrates the accounting for the acquisition of a controlling interest in an entity and indirectly obtaining an additional interest in a controlled entity.

EXAMPLE – Acquisition of additional non-controlling interest in a business through a business combination

Company A owns a 90% controlling interest in Subsidiary B that is a business. Company C holds the 10% non-controlling interest with a carrying value of CU70 million in Company A’s consolidated financial statements and a fair value of CU100 million. Company A acquires Company C in a business combination for CU1,000 million, which includes the indirect acquisition of the non-controlling interest in Subsidiary B for CU100 million.

How should Company A account for the acquisition of additional non-controlling interest?

Analysis

The accounting for the acquisition of Company C and the acquisition of the non-controlling interest in Subsidiary B should be treated as separate transactions. The consideration transferred would be allocated between the business acquired and the purchase of the non-controlling interest based on their fair values. The fair value of the consideration transferred would be allocated to the fair value of the acquired business of CU900 million and the fair value of the non-controlling interest in Subsidiary B of CU100 million in accordance with IAS 16 24.

Through this transaction, Company A obtained an additional interest in and maintained control of Subsidiary B. A change in ownership interest that does not result in a change of control is considered an equity transaction. The identifiable net assets of Subsidiary B remain unchanged and the CU30 million excess amount paid over the carrying amount of the non-controlling interest in Subsidiary B in Company A’s financial statements would be recorded in equity in accordance with IFRS 10 23.

Company A would also recognizes and measures the other identifiable assets acquired and liabilities assumed of Company C at the acquisition date in accordance with IFRS 3 Business Combinations, generally at fair value. In this example, it is assumed that there is no excess between the net value of the assets and liabilities acquired and the consideration paid that would need to be recorded as goodwill or shortfall that would be recorded as a bargain purchase gain.

Company A would record the following journal entry to account for the transaction (in millions):

Identifiable net assets of Company C Changes in ownership no loss of control

CU900¹

non-controlling interest of Subsidiary B Changes in ownership no loss of control

CU70²

Equity/Additional paid in capital Changes in ownership no loss of control

CU30³

Cash Changes in ownership no loss of control

CU1,000º

Notes

1 The value of 100% of the identifiable net assets of Company C is recorded, as measured in accordance with IFRS 3 Business Combinations

2 Elimination of the carrying value of the 10% NCI on Company A’s books

3 Difference in NCI: consideration paid less the carrying value of NCI (CU100 – CU70)

o Cash paid for the 100% interest in Company C

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