IFRS 3 Business combinations achieved in stages

IFRS 3 Business combinations achieved in stages – Additional guidance for applying the acquisition method to particular types of business combinations Business combinations achieved in stages.

A ‘business combination achieved in stages’ (step acquisition) is a business combination in which the acquirer obtains control of an acquiree in which it held a non-controlling equity interest immediately before the date of acquisition. [IFRS 3 41]

In a step acquisition: IFRS 3 Business combinations achieved in stages

• the previously held non-controlling equity interest is remeasured to its fair value at the date of acquisition, with any resulting gain or loss recognised in profit or loss;
• the acquirer derecognises the previously held non-controlling equity interest and recognises 100 percent of the acquiree’s identifiable assets acquired and liabilities assumed; and
• any amounts recognised in OCI related to the previously held equity interest are recognised on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest. [IFRS 3 32(a)(iii), IFRS 3 42, IFRS 3 BC384]

Equity accounted investment

There is no specific guidance on the accounting when an investment becomes an equity-accounted investee. In our view, there are two possible approaches to accounting for a step acquisition to achieve significant influence or joint control: IFRS 3 Business combinations achieved in stages

• Under the re-measurement approach, the previously held interest is remeasured to fair value through profit or loss for the period and any available-for-sale revaluation reserve is reclassified to profit or loss.
• Under the cost approach, one acceptable approach is that the newly incurred additional cost is added to the cost of the previously held financial instrument and any available-for-sale revaluation reserve is transferred to retained earnings.

Acquisition of additional interests

It is considered common practice, an existing interest should not be remeasured if an acquisition of additional interests does not change the classification as an associate or as a joint venture. We believe that reserves, such as the cumulative foreign currency translation reserve, should not be reclassified to profit or loss or transferred to retained earnings. [IAS 28 24]

There is no specific guidance on the accounting for an additional interest while continuing to apply equity accounting. In our view, an entity should apply an ‘allocation’ approach similar to that applied when an interest is acquired in a new equity-accounted investee, whereby goodwill is calculated on the incremental interest acquired as a residual after valuing the incremental share of identifiable net assets at fair value. This results in identifiable net assets being valued on a mixed measurement basis.

Summary of accounting for changes in ownership interests in businesses

Change in ownership interest	Result	Impact
Partial acquisition: control is obtained, but less than 100% of business is acquired	Consolidate as of date control is obtained Recognize the NCI in equity	Recognize 100% of identifiable assets and liabilities Fair value method (if chosen): Recognize the NCI at fair value Recognize 100% of the goodwill Proportionate share method (if chosen): Recognize the NCI at its proportionate share of the recognized amount of the identifiable net assets, excluding goodwill Recognize the goodwill attributable to controlling interest
Step acquisition: control is obtained where there is a previously held equity interest IFRS 3 Business combinations achieved in stages IFRS 3 Business combinations achieved in stages IFRS 3 Business combinations achieved in stages IFRS 3 Business combinations achieved in stages	Change classification and measurement of previously held equity interest Consolidate as of date control is obtained Recognize a gain or loss on any previously held equity interest in profit or loss If less than 100% acquired, recognize the NCI in equity	Recognize 100% of the identifiable assets and liabilities Remeasure the previously held equity interest to fair value and recognize any difference between the fair value and carrying value as a gain or loss in the income statement Recognize 100% of the goodwill if all equity interests are acquired If less than 100% interest is acquired: Fair value method (if chosen): Recognize the NCI at fair value Recognize 100% of the goodwill Proportionate share method (if chosen): Recognize the NCI at its proportionate share of the recognized amount of identifiable net assets, excluding goodwill Recognize the goodwill attributable to controlling interest
Additional interest obtained: control is maintained	Account for as an equity transaction IFRS 3 Business combinations achieved in stages	Do not recognize a gain or loss in the income statement Recognize the difference between the fair value of the consideration paid and the related carrying value of the NCI acquired in the controlling entity’s equity/additional paid-in capital Reclassify the carrying value of the NCI obtained from the NCI to the controlling entity’s equity
Reduction in parent’s ownership interest: control is maintained¹	Account for as an equity transaction IFRS 3 Business combinations achieved in stages	IFRS 3 Business combinations achieved in stages IFRS 3 Business combinations achieved in stages
Reduction in parent’s ownership interest: control to non-controlling investment² IFRS 3 Business combinations achieved in stages	Change classification and measurement of investment Cease consolidation accounting and begin accounting for investment under other applicable guidance Recognize the gain or loss on disposal and gain or loss on the retained non-controlling investment in the income statement	Deconsolidate investment Remeasure any retained non-controlling investment at fair value Recognize the gain or loss on interest sold and the gain or loss on the retained non-controlling investment in the income statement IFRS 3 Business combinations achieved in stages

Notes

1 Reduction in a parent’s ownership interest may occur by different methods, including (1) a parent sells part of its interest in its subsidiary or (2) the subsidiary issues shares, thereby reducing the parent’s ownership in the subsidiary.

2 Loss of control by a parent may occur in different ways, including (1) a parent sells all or part of its interest in its subsidiary; (2) a contractual agreement that gave control of the subsidiary to the parent expires; (3) control is obtained by another party through a contract; (4) the subsidiary issues shares, thereby reducing the parent’s ownership in the subsidiary; or (5) the subsidiary becomes subject to the control of a government, court, administrator, or regulator [IFRS 10 B37].

Fair value method

If a partial acquisition or a step acquisition in which control is obtained is considered a business combination, then all US GAAP companies and IFRS companies choosing the fair value method will recognize the following at the acquisition date:

• 100% of the identifiable net assets, as measured in accordance with the IFRS 3 Business Combinations (including identifiable intangible assets)
• NCI at fair value
• Goodwill as the excess of (a) over (b) below in accordance with IFRS 3 32:
  1. The aggregate of (1) the consideration transferred, as measured in accordance with IFRS 3, which generally requires 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; less
  2. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed

As discussed in the acquisition method, the identifiable assets acquired and liabilities assumed are generally measured at fair value. IFRS 3 21–31 provides for limited exceptions for certain assets and

liabilities to be recognized and measured in accordance with other GAAP.

If no consideration is transferred, goodwill will be measured by reference to the fair value of the acquirer’s interest in the acquiree, determined using an appropriate valuation technique in accordance with IFRS 3 33. See Valuation techniques for further information on valuation techniques.

Under the fair value method, 100% of the goodwill of the acquiree is recognized, not just the portion attributable to the controlling interest acquired. For IFRS companies, if the company chooses to use the proportionate share method instead of the fair value method, only the controlling interest’s portion of goodwill is recognized.

Example – Accounting for a partial acquisition of a business or VIE when control is obtained: fair value method illustrates the full amount of goodwill that would be recognized in a partial acquisition by IFRS companies electing the fair value method.

Remeasurement of previously held equity interest in a business or VIE and recognition of gains and losses

A step acquisition occurs when a shareholder obtains control over an entity by acquiring an additional interest in that entity. Under IFRS, the acquirer’s previously held equity interest is remeasured to fair value at the date the controlling interest is acquired, except for the option to designate equity securities not for trading on initial recognition. This option allows an entity to make an initial irrevocable election to present subsequent changes in the fair value of the equity interest in other comprehensive income in accordance with IFRS 9 5.7.5.

When calculating the gain or loss to be recognized in the income statement, the acquirer should reclassify and include any gains or losses associated with the previously held equity interest it had recognized in other comprehensive income in prior reporting periods in accordance with IFRS 3 42.

Fair value considerations for further information on the considerations in valuing the previously held equity interest.

In a step acquisition in which control is obtained, but the acquirer does not purchase all of the remaining ownership interests, an NCI is created at the acquisition date. The NCI is recorded in equity at fair value under the fair value method or its proportionate share of the recognized amount of the acquiree’s identifiable net assets under the proportionate share method.

Examples of the fair value method

The following three examples demonstrate the acquisition date calculations for a partial acquisition and a step acquisition in which control is obtained and the fair value method is used to value the NCI.

EXAMPLE – Accounting for a partial acquisition of a business or VIE when control is obtained: fair value method

Company A acquires Company B (a business) by purchasing 60% of its equity for CU150 million in cash. The fair value of the non-controlling interest is determined to be CU100¹ million. The net aggregate value of the identifiable assets and liabilities, as measured in accordance with IFRS 3 Business Combinations, is determined to be CU50 million.

How should Company A account for the partial acquisition of Company B?

Analysis

At the acquisition date, the acquirer would recognize (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 requires 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):

	Identifiable net assets	CU50¹
	Goodwill	CU200²
	Cash		CU150³
	NCI		CU100°

Notes:

1. The value of 100% of the identifiable net assets of Company B is recorded

2. The full amount of goodwill is recorded (in millions):

Fair value of consideration transferred	CU150
Fair value of the NCI	100
Fair value of previously held equity interest	n/a
Subtotal	250
Recognized value of 100% of the identifiable net assets, measured in accordance with IFRS 3 Business Combinations	(50)
Goodwill recognized	CU200

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

o. Fair value of the 40% NCI is recognized in equity

EXAMPLE – Accounting for a step acquisition of a business or VIE when control is obtained: fair value method

Company A has a 40% previously held equity interest in Company B (a business). The carrying value of the previously held equity interest is CU20 million. Company A purchases the remaining 60% interest in Company B for CU300 million in cash. The fair value of the 40% previously held equity interest is CU200² million.

The net aggregate value of the identifiable assets and liabilities, as measured in accordance with IFRS 3 Business Combinations, is determined to be CU440 million. (For illustrative purposes, the tax consequences on the gain have been ignored.)

How should Company A account for the step acquisition of Company B?

Analysis

At the acquisition date, the acquirer would recognize (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 requires 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

Any gain or loss on the previously held equity interest is recognized in the income statement.

The journal entry recorded on the acquisition date is as follows (in millions):

	Identifiable net assets	CU440¹
	Goodwill	CU60²
	Cash		CU300³
	Equity investment		CU30°
	Gain on equity interest3		CU180ºº

Notes:

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

2. The full amount of goodwill is recorded (in millions):

Fair value of consideration transferred	CU300
Fair value of the NCI	n/a
Fair value of previously held equity interest	200
Subtotal	500
Recognized value of 100% of the identifiable net assets, measured in accordance with IFRS 3 Business Combinations	(440)
Goodwill recognized	CU60

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

o Elimination of the carrying value of the 40% previously held equity interest

oo The gain on the 40% previously held equity interest is recognized in the income statement: fair value of the previously held equity interest less the carrying value of the previously held equity interest (CU200 – CU20)

EXAMPLE – Accounting for a partial acquisition when control is obtained, but less than 100% is acquired: fair value method

Company A has a 40% previously held equity interest in Company B, with a carrying value of CU20 million. Company A purchases an additional 50% interest in Company B for CU250 million in cash. The fair value of Company A’s 40% previously held equity interest is determined to be CU200⁴ million.

he fair value of the NCI is determined to be CU50 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 CU440 million. (For illustrative purposes, the tax consequences on the gain have been ignored.)

How should Company A account for the partial acquisition of Company B?

Analysis

At the acquisition date, the acquirer would recognize (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 requires 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

Any gain or loss on the previously held equity interest is recognized in the income statement.

The journal entry recorded on the acquisition date for the 50% controlling interest acquired would be as follows (in millions):

	Identifiable net assets	CU440¹
	Goodwill	CU60²
	Cash		CU250³
	Equity investment		CU20°
	Gain on equity interest5		CU180ºº
	NCI		CU50ººº

Notes:

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

2. The full amount of goodwill is recorded (in millions):

Fair value of consideration transferred	CU250
Fair value of the NCI	50
Fair value of previously held equity interest	200
Subtotal	500
Recognized value of 100% of the identifiable net assets, measured in accordance with IFRS 3 Business Combinations	(440)
Goodwill recognized	CU60

3. Cash paid for the remaining 50% interest acquired in Company B

o Elimination of the carrying value of the 50% previously held equity interest

oo The gain on the 50% previously held equity interest is recognized in the income statement: fair value of the previously held equity interest less the carrying value of the previously held equity interest (CU200 – CU20)

ooo Fair value of the 10% NCI is recognized in equity.

EXAMPLE – Step acquisition

On December 31, 20×5, Konin Corporation owns 5% of the 30,000 outstanding voting common shares of Henan Corporation. In Konin Corporation’s December 31, 20×5 statement of financial position, it classified its investment in Henan Corporation as at fair value through other comprehensive income.

On March 31, 20×6 Konin Corporation acquired additional outstanding voting common shares in Henan Corporation sufficient to provide Konin Corporation with a controlling interest in Henan Corporation and, thus become Henan Corporation’s parent company.

The table below summarises Konin Corporation’s initial holdings in Henan Corporation, the subsequent increase in those holdings and the computation of the gain on remeasurement at the acquisition date of March 31, 20×6:

			Per share		Aggregate investment		Unrealised appreciation included in accumulated OCI
Date	# of shares	Percentage interest	Cost	Fair value	Cost	Fair value
12/31/20×5	1,500	5%	€10	€16	€15,000	€24,000	€9,000
03/31/20×6	21,000	70%	€20	€20	€420,000	€420,000	–
	22,500	75%

Computation of gain (loss) on remeasurement at acquisition date
	Fair value per share on 03/31/20×6	€20
	Number of pre-acquisition shares	x 1,500
	Aggregate fair value of pre-acquisition shares on 03/31/20×6	€30,000
	Carrying amount of pre-acquisition shares on 03/31/20×6	€24,000
	Appreciation attributable to the 1st quarter of 20×6	€6,000
	Pre-20×6 appreciation reclassified from accumulated OCI	€9,000
	Gain on remeasurement of Henan Corporation stock on 03/31/20×6	€15,000

If the acquirer had previously recognised changes in the carrying value of its equity interest in the acquiree in other comprehensive income (e.g. because the investment was classified as fair value through other comprehensive income), that amount is to be reclassified and included in the computation of the acquisition date gain or loss from remeasurement.

Fair value considerations

The fair value of a non-controlling interest can be measured on the basis of market prices for the equity shares not held by the acquirer if the non-controlling interest consists of publicly traded securities. The acquirer must measure the fair value of the non-controlling interest using other valuation techniques if the securities are not publicly traded. The fair value of the previously held equity interest may also need to be similarly measured.

On a per-share basis, the fair value of the acquirer’s interest in the acquiree and the non-controlling interest may differ. This difference may be due to the inclusion of a control premium in the per-share fair value of the acquirer’s interest in the acquiree or, conversely, the inclusion of a discount for lack of control in the per-share fair value of the non-controlling interest.

A control premium represents the amount paid by a new controlling shareholder for the benefits resulting from synergies and other potential benefits derived from controlling the acquired company.

Control premiums and minority interest discounts should not be applied without considering whether the non-controlling interest will benefit in ways similar to the acquirer. For example, certain operational synergies will often impact the cash flows of the acquiree as a whole, including the non-controlling interest in the acquiree. In such a case, deducting those operational synergies (control premium) to value the non-controlling interest may not be appropriate.  Valuation techniques contains further discussion on valuation techniques and methods.

Consideration of goodwill when non-controlling interest exists

The impairment model for goodwill is different under IFRS than for US GAAP. Under IAS 36, any impairment charge is allocated between the controlling and non-controlling interests on the basis of their relative profit shares if the fair value method was used to measure the non-controlling interest on the acquisition date. The impairment charge is allocated to the controlling interest if the proportionate share method was used to measure the non-controlling interest on the acquisition date.

See Impairment of goodwill for further information on impairment testing of goodwill.

Bargain purchase in a partial or step acquisition—IFRS companies choosing the fair value method

Occasionally, an acquirer will make a bargain purchase, a business combination in which (a) the acquisition-date amounts of the identifiable net assets acquired and the liabilities assumed, as measured in accordance with IFRS 3 Business Combinations, exceeds (b) 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.

Similar to a bargain purchase in an acquisition of 100% of the equity interests, the acquirer shall reassess whether it has identified all of the assets acquired and liabilities assumed. The acquirer shall also review its valuation procedures used to measure the amounts recognized for the identifiable net assets, the NCI, the previously held equity interest, and the consideration transferred. If a bargain purchase is still indicated, the acquirer recognizes a gain in the income statement on the acquisition date in accordance IFRS 3 34 – 3.36.

In a bargain purchase, the bargain element realized by the controlling interests in the transaction is not allocated to the NCI. Therefore, the NCI is recognized at its fair value.

The example below demonstrates the accounting for a bargain purchase in a partial acquisition.

EXAMPLE – Accounting for a bargain purchase in a partial acquisition of a business

Company A acquires Company B by purchasing 70% of its equity for CU150 million in cash. The fair value of the NCI is determined to be CU69⁶ million.

The net aggregate value of the identifiable assets and liabilities, as measured in accordance with IFRS 3 Business Combinations, is determined to be CU220 million. (For illustrative purposes, the tax consequences on the gain have been ignored.)

How should Company A account for the bargain purchase gain?

Analysis

The bargain purchase gain is calculated as the excess of (a) the recognized amount of the identifiable net assets acquired, as measured in accordance with IFRS 3 Business Combinations over (b) the fair value of the consideration transferred plus the fair value of the NCI and, in a step acquisition, the fair value of the previously held equity interest.

Recognized value of 100% of the identifiable net assets, as measured in accordance with IFRS 3 Business Combinations (a)	CU220
Fair value of consideration transferred	-150
Fair value of the NCI	-69
Fair value of previously held equity interest	n/a
Less: subtotal (b)	-219
Bargain purchase gain (a – b)	CU1

The recognized amount of the identifiable net assets is greater than the fair value of the consideration transferred plus the fair value of the NCI, and there was no previously held equity interest in Company B to value. Therefore, a bargain purchase gain of CU1 million would be recognized in the income statement.

The journal entry recorded on the acquisition would be as follow:

	Identifiable net assets	CU220¹
	Cash		CU150²
	Gain on bargain purchase		CU1³
	NCI7		CU69º

Notes:

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

2. Cash paid for the 70% interest acquired in Company B

3. Gain recognized on bargain purchase: recognized amount of the identifiable net assets less fair value of consideration transferred plus the fair value of the NCI and the fair value of previously held equity interest (CU220 – (CU150 + CU69)

o Fair value of the 30% NCI is recognized in equity.

Because the NCI is required to be recorded at fair value, a bargain purchase gain is recognized only for CU1 million. The NCI is recognized at fair value, which includes embedded goodwill of CU3 million: Fair value of NCI – NCI’s share of identifiable assets (CU69 – (CU220 × 30%) = CU3). Although the NCI value includes embedded CU3 million of goodwill, the consolidated financial statements do not contain a separate goodwill line item.

Partial acquisition and step acquisition—proportionate share method

Application of the proportionate share method under IFRS is the same as the fair value method, except that NCI is recognized at its proportionate share of the recognized amount of the identifiable net assets. The acquirer measures 100% of the identifiable assets and liabilities, but recognizes only the goodwill associated with the controlling interest.

When the proportionate share method is used, goodwill is recognized, in accordance with IFRS 3.32, at the acquisition date as the difference between (a) and (b) below:

1. The aggregate of (1) the consideration transferred, as measured in accordance with IFRS 3, 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; less
2. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, as measured in accordance with IFRS 3.

If no consideration is transferred, goodwill is measured by reference to the fair value of the acquirer’s interest in the acquiree, as determined using an appropriate valuation technique. See Valuation techniques for further information on valuation techniques.

The following two examples demonstrate the calculation on the acquisition date for cases in which the proportionate share method is used to value the NCI in a partial acquisition or a step acquisition where control is obtained.

EXAMPLE – Accounting for a partial acquisition of a business—IFRS company electing proportionate share method

Company A acquires Company B by purchasing 60% of its equity for CU150 million in cash. The net aggregate value of the identifiable assets and liabilities measured in accordance with IFRS 3 Business Combinations is determined to be CU50 million. Company A chooses to measure the NCI using the proportionate share method for this business combination.

How should Company A recognize the partial acquisition under the proportionate share method?

Analysis

The acquirer would recognize 100% of the identifiable net assets on the acquisition date. 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
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	CU50¹
	Goodwill	CU120²
	Cash		CU150³
	NCI		CU20º

Notes:

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

2 Since NCI is recorded at its proportionate share of Company B’s identifiable net assets, goodwill is recognized only for the controlling interest’s portion. (That is, goodwill is not recognized for the NCI.) Goodwill is calculated as follows:

Fair value of consideration transferred IFRS 3 Business combinations achieved in stages	CU150	IFRS 3 Business combinations achieved in stages
Proportionate share of the NCI (CU50 × 40%) IFRS 3 Business combinations achieved in stages	20	IFRS 3 Business combinations achieved in stages
Fair value of previously held equity interest IFRS 3 Business combinations achieved in stages	n/a	IFRS 3 Business combinations achieved in stages
Subtotal	170	IFRS 3 Business combinations achieved in stages
Recognized value of 100% of the identifiable net assets, measured in accordance with IFRS 3 Business Combinations	(50)	IFRS 3 Business combinations achieved in stages
Goodwill recognized	CU120	IFRS 3 Business combinations achieved in stages

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 (CU50 × 40%)

EXAMPLE – Accounting for a partial acquisition of a business when control is obtained but less than 100% is acquired—IFRS company choosing proportionate share method

Company A has a 40% previously held equity interest in Company B, with a carrying value of CU20 million. Company A purchases an additional 50% interest in Company B for CU250 million in cash. The fair value of the 40% previously held equity interest is determined to be CU200⁸ million.

The net aggregate value of the identifiable assets and liabilities, as measured in accordance with IFRS 3 Business Combinations, is determined to be CU440 million. Company A chooses to measure NCI using the proportionate share method for this business combination. (For illustrative purposes, the tax consequences on the gain have been ignored.)

How should Company A recognize the partial acquisition when control is obtained using the proportionate share method?

Analysis

The acquirer would recognize 100% of the identifiable net assets on the acquisition date. In accordance with IFRS 3 19, NCI would be recorded at its proportionate share of the recognized amount of the identifiable net assets. 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
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

In accordance with IFRS 3 42, any gain or loss on the previously held equity interest would be recognized in the income statement. The journal entry recorded on the acquisition date would be as follows (in millions):

IFRS 3 Business combinations achieved in stages	Identifiable net assets	CU440¹		IFRS 3 Business combinations achieved in stages
IFRS 3 Business combinations achieved in stages	Goodwill	CU54²		IFRS 3 Business combinations achieved in stages
IFRS 3 Business combinations achieved in stages	Cash		CU250³	IFRS 3 Business combinations achieved in stages
IFRS 3 Business combinations achieved in stages	Equity investment		CU20º	IFRS 3 Business combinations achieved in stages
IFRS 3 Business combinations achieved in stages	Gain on investment9		CU180ºº	IFRS 3 Business combinations achieved in stages
IFRS 3 Business combinations achieved in stages	NCI		CU44ººº	IFRS 3 Business combinations achieved in stages

Notes:

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

2 Since NCI is recorded at its proportionate share of Company B’s identifiable net assets, goodwill is recognized only for the controlling interest’s portion. (That is, goodwill is not recognized for the NCI.) Goodwill is calculated as follows:

Fair value of consideration transferred IFRS 3 Business combinations achieved in stages	CU250	IFRS 3 Business combinations achieved in stages
Proportionate share of the NCI (CU50 × 40%) IFRS 3 Business combinations achieved in stages	44	IFRS 3 Business combinations achieved in stages
Fair value of previously held equity interest IFRS 3 Business combinations achieved in stages	200	IFRS 3 Business combinations achieved in stages
Subtotal	494	IFRS 3 Business combinations achieved in stages
Recognized value of 100% of the identifiable net assets, measured in accordance with IFRS 3 Business Combinations	(440)	IFRS 3 Business combinations achieved in stages
Goodwill recognized IFRS 3 Business combinations achieved in stages	CU54	IFRS 3 Business combinations achieved in stages

3 Cash paid for the 50% interest acquired in Company B

o Elimination of the carrying value of the 40% previously held equity interest

oo The gain on the 40% previously held equity interest is recognized in the income statement: fair value of the previously held equity interest less the carrying value of the previously held equity interest (CU200 – CU20)

ooo Recognition of the 10% NCI at its proportionate share of the identifiable net assets (CU440 × 10%)

Bargain purchase in a partial or step acquisition—proportionate share method

The process to determine a bargain purchase under the proportionate share method is the same as the fair value method. The acquirer compares (a) 100% of the identifiable net assets, as measured in accordance with IFRS 3, and (b) the fair value of the consideration transferred, plus the recognized amount of the NCI (at its proportionate share) and, in a step acquisition, the fair value of the previously held equity interest. A bargain purchase gain is recognized for the excess of (a) over (b) in accordance with IFRS 3 34.

Prior to recognizing a bargain purchase gain, the acquirer should reassess whether it has identified all of the assets acquired and liabilities assumed. The acquirer shall also review its valuation procedures used to measure the amounts recognized for the identifiable net assets, previously held equity interest, and consideration transferred. If a bargain purchase is still indicated, the acquirer recognizes a gain in the income statement on the acquisition date in accordance with IFRS 3 36.

The following example demonstrates the calculation on the acquisition date when the proportionate share method is used to value the NCI in a bargain purchase.

EXAMPLE – Accounting for a bargain purchase in an acquisition of a business—an IFRS company chooses the proportionate share method for valuing the NCI

Company A acquires Company B by purchasing 70% of its equity for CU150 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 CU220 million. Company A chooses to measure NCI using the proportionate share method for this business combination. (For illustrative purposes, the tax consequences on the gain have been ignored.)

How should Company A determine the bargain purchase to be recognized when under the proportionate share method?

Analysis

This method calculates the bargain purchase the same as under the fair value method, except that the NCI is measured as the proportionate share of the identifiable net assets. The gain is the excess of (a) the recognized amount of the identifiable net assets acquired, as measured in accordance with IFRS 3, over (b) the fair value of the consideration transferred, plus the recognized amount of the NCI (proportionate share of the identifiable net assets) and the fair value of the previously held equity interest.

Recognized value of 100% of the identifiable net assets, as measured in accordance with IFRS 3 Business Combinations (a)	CU220	IFRS 3 Business combinations achieved in stages
Fair value of consideration transferred IFRS 3 Business combinations achieved in stages	-150	IFRS 3 Business combinations achieved in stages
Amount of the NCI recognized (at proportionate share) (CU220 × 30%)	-66	IFRS 3 Business combinations achieved in stages
Fair value of previously held equity interest IFRS 3 Business combinations achieved in stages	n/a	IFRS 3 Business combinations achieved in stages
Less: subtotal (b)	-216	IFRS 3 Business combinations achieved in stages
Bargain purchase gain (a – b)	CU4	IFRS 3 Business combinations achieved in stages

Because the recognized amount of the identifiable net assets is greater than the fair value of the consideration transferred, plus the recognized amount of the NCI (at proportionate share), and there was no previously held equity interest in Company B to fair value, a bargain purchase gain of CU4 million would be recognized in the income statement.

The journal entry recorded on the acquisition date for the 70% interest acquired would be as follows (in millions):

IFRS 3 Business combinations achieved in stages	Identifiable net assets	CU220¹		IFRS 3 Business combinations achieved in stages
IFRS 3 Business combinations achieved in stages	Cash		CU150²	IFRS 3 Business combinations achieved in stages
IFRS 3 Business combinations achieved in stages	Gain on bargain purchase		CU4³	IFRS 3 Business combinations achieved in stages
IFRS 3 Business combinations achieved in stages	NCI		CU66º	IFRS 3 Business combinations achieved in stages

Notes:

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

2 Cash paid for the 70% interest acquired in Company B

3 Gain recognized on bargain purchase: recognized amount of the identifiable net assets, less the fair value of the consideration transferred, plus the recognized amount of the NCI (at proportionate share) and the fair value of the previously held equity interest (CU220 – (CU150 + (CU220 × 30%)))

o Recognition of the 30% NCI at its proportionate share of the recognized amount of the identifiable net assets (CU220 × 30%)

Under the proportionate share method, NCI is recorded at its proportionate share of the identifiable net assets, and not at fair value. Therefore, the bargain purchase gain recognized under the proportionate share method may be higher than the gain recognized under the fair value method.

IFRS 3 Business combinations achieved in stages