Change in Group Structure

Table of Content

 Step Acquisition
 IFRS 3 and IAS 27
 Disposal
 Control to Non- control

Learning Outcome

 Understanding of change in group structure

 Meaning of step acquisition
 Cost of investment for goodwill calculation
 Accounting Treatment of disposal
 Control to non-control

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 This chapter deals not only with business combinations where control is achieved
through two or more separate transactions (referred to as ‘business combinations
achieved in stages’ or ‘step acquisitions’), but also with other partial acquisition and
disposal situations.

These types of transactions are significantly affected by the 2008 revisions to IFRS 3
and IAS 27. The underlying principles are explained in chapter 2 of this guide.

Changes in Group Structure

Step Acquisition / Piecemeal Acquisition Disposal

Step Acquisition

Three situations:

• Basic investment becomes a subsidiary

• Associate becomes a subsidiary

• Increases stake in subsidiary

Basic Principles Piecemeal acquisition

Acquisition in stages resulting in control Guidance is provided by IFRS3 which

requires the recalculation of goodwill when an enterprise becomes a subsidiary
whatever its previous status i.e., where a subsidiary is acquired in stages, its reserves
should not be capitalized until control is achieved. Basic investment becomes a
subsidiary .An investment becomes a subsidiary on the date when control passes to

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its new parent company. On this date goodwill arising on consolidation has to be
ascertained as under:

Partial Full

Rs. Rs.

Acquisition date fair value of acquirer’s

Previously held equity interest X X

Acquisition date fair value of consideration

Transferred X X

Proportionate share/fair value of

non-controlling interest X X

XX XX

Fair value of net assets at the

Acquisition date (X) (X)

Goodwill at the date of acquisition XX XX

The gain/loss on re-measurement of previously held equity interest should be

transferred to income statement of the parent.

An associate becomes a subsidiary

When an investment is treated as an associate, a proportion of its profits (post

acquisition) would have been included within the consolidated accumulated profits
and consolidated statement of financial position under equity method. The
investment in associate has also been tested annually for impairment (IFRS3/IAS28).
IFRS3 states that goodwill should be calculated and separately recognized when the
control is obtained neither before nor after. The above formula will be used for
calculation of goodwill. The difference between the fair value of previously held
equity interest and carrying value of investment under IAS-28 will be transferred to
income statement.
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Parent increases stake in subsidiary

IFRS3 states that when a group increases its shareholding in a company that is
already its subsidiary; the goodwill will not change and remain the same as of the
date of acquisition. IAs-27 states that changes in a parent’s ownership interest in a
subsidiary that do not result in a loss of control are accounted for as equity
transactions (i.e. transactions with owners in their capacity as owners). In such
circumstances the carrying amounts of the controlling and non-controlling interests
shall be adjusted to reflect the changes in their relative interests in the subsidiary.
Any difference between the amount by which the non-controlling interests are
adjusted and the fair value of the consideration paid or received shall be recognized
directly in equity and attributed to the owners of the parent

Step Acquisition:

1. Trade Investment to Non Control

Apply Equity Accounting if change result in Associate from the date of change

2. Trade Investment/Non Control to Control

On the date of control which is to be considered as acquisition date:

(A) Re-measure the previously held interest to fair value

(B) Transfer any gain/loss to parent’s income statement (& so to retained

earnings)

(C) Investment will be classified as subsidiary & Acquisition accounting will be

used

(a) Consolidated income, expenses, assets & liabilities in full on line by line basis

(b) Recognise – Goodwill & NCI

Cost of Investment for calculation of goodwill:

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Fair Value of: previously held interest plus additional interest

3. Control to Control

(A) Transfer within equity

(B) Purchase of shares from NCI shareholders

(C) Transaction between owners of the group, Parent’s share increasing and
NCI’s share decreasing

(D) No change in goodwill

(E) Income, expenses, assets & liabilities will continue to be consolidated line by
line

(F) No gain/loss as this is a transaction between owners

(G) In mid-year acquisition, time apportion the profits when determining share of
profits

(H)Adjustment to parent’s equity will be done:

Cash Paid X

Less: Transfer from NCI to reduce NCI (X)

Difference to Equity X

Positive figure will reduce the equity as this is a loss and vice versa.

Disposal

(B) Partial
(A) Complete

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Disposal of a controlling interest but retaining a non-controlling residual interest

Adjustments on loss of control

IAS 27 details the adjustments made when a parent loses control of a subsidiary,
based on the date when control is lost:

• derecognize the carrying amount of assets (including goodwill), liabilities and

non-controlling interests;

• recognize the fair value of consideration received;

• recognize any distribution of shares to owners;

• recognize the fair value of any residual interest;

• reclassify to profit or loss any amounts (i.e. the entire amount, not a proportion)
relating to the subsidiary’s assets and liabilities previously recognized in other
comprehensive income as if the assets and liabilities had been disposed of directly;
and

• recognize any resulting difference as a gain or loss in profit or loss attributable to

the parent.

Subsequent accounting for a residual interest

The fair value of any residual interest on the date that control is lost becomes the fair
value on initial recognition of the resulting financial asset under IAS 39, associate
under IAS 28, or jointly controlled entity under IAS 31.

Disposal of an associate or a jointly controlled entity but retaining a financial

asset

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The principle adopted in IAS 27 that a change in accounting basis is recognized as a
disposal and re-acquisition at fair value is extended by consequential amendments
in IAS 27 to two other Standards:

• IAS 28 is amended such that on the loss of significant influence, the investor
measures at fair value any investment the investor retains in the former associate
and

• IAS 31 is amended such that when an investor ceases to have joint control, the
investor measures at fair value any investment the investor retains in the former
jointly controlled entity.

This reflects the Board’s view that the loss of control, loss of significant influence and
loss of joint control are economically similar events which should be accounted for
similarly.

In each case, the fair value of any retained interest becomes the initial carrying
amount for the retained asset as a financial asset, associate or jointly controlled entity
under the appropriate Standard.

Disposal:

(A) Complete – Control is lost

(B) Partial

(B) (1) Control to Trade Investment – Control is lost

(B) (2) Control to Non Control – Control is lost

(B) (3) Control to Control – Control is retained

Particulars Control is Lost Control is Retained

Group Gain/Loss Calculated & included in CSCI for the year No Gain/Loss is calculated
CSCI Consolidation Consolidated upto the date of disposal Consolidated fot the year
CSFP Consolidation No Consolidation Consolidated at the year end
Goodwill Eliminated Same
NCI Eliminated NCI is increased

Note: In Parent’s Financial Statement, Gain/Loss on disposal will be calculated as:

Sale Proceeds minus Carrying Amount of Shares Sold

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Control is Lost

Recognize the:

1. Consideration received

2. Retained investment at fair value on date of disposal

Derecognize:

1. Assets & Liability of Subsidiary

2. Unimpaired Goodwill

3. NCI

Difference between the above mentioned amounts are Group Gain/Loss which will
be recorded in CSCI and calculated as:

Group Gain/Loss
Proceeds X
Fair value of retained investment X
X
Less: Carrying Amount at disposal date:
Net Asset X
Unimpaired Goodwill X
Less: NCI X X
Group Gain/Loss recorded in CSCI after Operating Profit X

Control to Trade Investment

CSCI

1. Time apportion subsidiary’s result up to the date of disposal

Only include dividend income after the date of disposal

Consolidate the result line by line up to the date of disposal

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 2. Recognise the Group gain/loss on part disposal

CSFP

Recognise the remaining investment at fair value & apply IAS 39 subsequently

Control to Non Control

CSCI

1. Time apportion subsidiary’s result up to the date of disposal

Consolidate the result line by line up to the date of disposal

Apply Equity Accounting after the date of disposal

2. Recognise the Group gain/loss on part disposal

CSFP

Recognise the remaining investment at fair value as per Equity Accounting (Fair
Value of Investment + Share of Post-Acquisition Profit)

Control to Control

1. No Group Gain/Loss

2. No adjustment to Goodwill

3. Increase in NCI & subsequent reduction in equity

Cash proceed received X

Less: Transfer to NCI to increase NCI (X)

Difference to Equity X

Positive figure will increase the equity as this is a gain and vice versa.

CSCI

1. Consolidate the subsidiary result for the whole year

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 2. Calculate the NCI share of profit on time apportion basis relating to the
period before & after the disposal separately and then add together both these
amount

CSFP

1. Consolidate with increase in NCI

2. Increase the Equity by Gain & reduce it by loss as the case may be.

Chapter summary

This chapter deals with business combinations where control is achieved through
two or more separate transactions (referred to as ‘business combinations achieved in
stages’ or ‘step acquisitions’), and with other partial acquisition and disposal
situations.

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