Step acquisitions (Piecemeal acquisitions)

A step acquisition occurs when the parent company acquires control over the
subsidiary in stages. This is achieved by buying blocks of shares at different times.

There are two situations in a step acquisition:

A. Acquisitions that result in change of control
B. Acquisitions that do not result in change of control

(A) Acquisitions that result in change of control

On 1 January 20X4, P acquires 40% of S. Therefore, S is an associate of P.

On 1 July 20X4, P acquires another 20% in S, giving a total holding of 60%.
Therefore, S is a subsidiary of P.
This step acquisition has resulted in a change of control, as the status of S has
changed from being an associate of P to a subsidiary.

Consolidated Statement of Financial Position

All steps are similar to a normal consolidation except for the following:
1. Revalue the existing holding to fair value at the date of second acquisition.
2. Recognise the resulting gain/loss in retained earnings.

3. Calculate goodwill on the date parent acquired control, i.e. the date of second
acquisition.
Question 1
Ayre holds a 10% investment in Byrne at RM24,000. In accordance with IFRS 9.
On 1 June 20x9, a further 50% of Byrne's equity shares at a cost of RM160,000.
On this date, the fair values are as follows:
Byrne's net assets - RM200,000
The non-controlling interest - RM100,000
The 10% investment RM26,000

Required:
Calculate the goodwill arising in Byrne, using the full goodwill method to value
the non-controlling interest.

Question 2
The statements of financial position of two companies, Major and Tom as at
31 December 20X6 are as follows: Investment Sundry net assets
Major Tom
RM000 RM000
Investments 160 -
Sundry net assets 290 222
450 222
Share capital 200 100
Reserves 250 122
450 222

Major acquired 40% of Tom on 31 December 20X1 for RM90,000. At this time, the
reserves of Tom stood at RM76,000. A further 20% of shares in Tom was acquired
by Major three years later for RM70,000. On this date the fair value of the existing
holding in Tom was RM105,000. Tom's reserves were RM100,000 on the second
acquisition date.

Required:
Prepare the consolidated statement of financial position for the Major group as
at 31 December 20X6, using the proportion of net assets method to value the
non-controlling interest.
(B) Acquisitions that do not result in change of control

On 1 January 20X4, P acquires 60% of S. Therefore, S is a subsidiary of P.

On 1 July 20X4, P acquires another 20% in S, giving a total holding of 80%.
Therefore, S is still a subsidiary of P.

This step acquisition has not resulted in a change of control, as the status of S has
been a subsidiary before and after the additional acquisition.

Consolidated Statement of Financial Position

All steps are similar to a normal consolidation taking into account the following:

1. Net assets schedule

At first At second At reporting date
acquisition acquisition
RM RM RM
Share Capital XXX XXX XXX
Retained earnings XXX XXX XXX
XXX XXX XXX

2. Calculate goodwill on the date parent acquired control, i.e. the date of first
acquisition

3. Step by step adjustment

NCI
FV of NCI OR NCI@FVNA
Holding % x (post acq up to disposal)
A
Decrease in NCI (increase%/ original%* A ) B

NCI new holding % x post acq from disposal to YE

NCI at YE

Step by step adjustment

FV of Consideration Paid
Decrease in NCI B
Charge to RE
4. Consolidated retained earnings
RM
Parent XXX
Subsidiary: 1st Holding % x Post acquisition profits up
to 2nd acquisition XXX

Subsidiary: Total Holding % x Post acquisition profits

from 2nd acquisition to reporting date XXX
Step by step adjustment XXX
Adjustments XXX
XXX
What is Step by step adjustment?
Under the revised IFRS 3, any increase in a parent’s interest in an existing subsidiary
is accounted for within equity and goodwill is not recalculated. It is treated as a
transaction between the owners. This means that the owners, as reflected by the
gain/loss calculated, review the additional acquisition to ascertain whether it is a good
investment.

Statement of profit or loss and other comprehensive income

1. The subsidiary is consolidated in full for the whole period.

2. The non-controlling interest in the statement of profit or loss and other comprehensive
income will be based on percentage before and after second acquisition, ie time
apportion.
3. There is no profit or loss on second acquisition.

Statement of financial position

1. The change (decrease) in non-controlling interests is shown as an adjustment to the

parent’s equity.
2. Goodwill on acquisition is unchanged in the CSOFP, same as the date its first obtained
control.
 Question 3
The statement of financial position of Portion and its subsidiary Slice as at 31
December 20X1 are as follows:
Portion Inc. Slice Ltd
RM000 RM000
Investment in Slice Ltd 400 -
Net assets 600 550
1,000 550
RM1 ordinary shares 200 100
Retained earnings 800 450
1,000 550

Portion Inc acquired its holding in Slice as follows:

Date Proportion Cost of Slice -
acquired investment retained
earnings
RM000 RM000 RM000
30 September 20X0 60 250 300
31 July 20X1 20 150 400

The Portion Group values the non-controlling interest using the proportion of net
assets method.

Required:
(a) Prepare the Portion group consolidated statement of financial position as at
31 December 20X1.

(b) How would the financial statements be different if the Portion Group uses the
full goodwill method to value the non-controlling interest and the fair value of
NCI at acquisition was RM163,000?

Question 4
Below are the financial statements of Top and Down as at 31 December x7,

Statements of financial position as at 31 December x7:

Top Down
RM RM
Non-current assets 380,000 470,000
Investment in Down at cost 350,000 -
Current assets 170,000 30,000
900,000 500,000

Ordinary share capital 600,000 300,000

Retained profit at 1 January x7 80,000 80,000
Profit for the year 120,000 40,000
Current liabilities 100,000 80,000
900,000 500,000
Statements of profit or loss for the year ended 31 December x7:
Top Down
RM RM
Revenue 310,000 160,000
Cost of sales (100,000) (80,000)
210,000 80,000
Expenses (40,000) (30,000)
Profit before tax 170,000 50,000
Taxation (50,000) (10,000)
Profit for the year 120,000 40,000

Additional information:

a. Top acquired 180,000 of the 300,000 issued ordinary shares of Down on 1 January x6 at a
cost of RM225,000 when the retained profit of Down was RM50,000. The fair value of one
ordinary share of Down on that date was RM 1.20.

b. On 1 April x7, Top purchased an additional 90,000 ordinary shares of Down.

c. Assume that revenue and expenses accrued evenly throughout year x7.

Required:

From the information given, prepare the consolidated financial statements.

Question 5
Given below are the statements of profit or loss of three entities for the year ended 31. 12.
x10.
Cadbury Sweets Jelly Beans
RM'000 RM'000 RM'000
Turnover 8,000 3,000 4,000
Cost of sales (4,000) (1,000) (2,000)
Expenses (1,200) (800) (1,000)
Tax (800) (200) (300)
Profit after tax 2,000 1,000 700

Ordinary dividends paid in year x10 100 - -

Retained profits at 1 January x10 500 600 200

Additional information:
a) On 1 January x8, Cadbury acquired 60 percent of the issued ordinary shares of Sweets on
which date the retained profit of Sweets was RM 150,000. The cost of the acquisition of
Sweets was RM 2.5 million and the fair value of the identifiable net assets of Sweets on
that date was RM4 million. Goodwill of RM20,000 was impaired on 31 December x9. On
1 April x10, Cadbury bought an additional 20 percent of the issued ordinary shares of
Sweets, paying RM2.6 million. The fair value of the identifiable assets of Sweets on 1 April
xl 0 was RM 12 million.

b) On 1 January x5, Cadbury had acquired 40 percent of the issued share capital of Jelly Beans
for RM600,000. The balance on the retained profits was RM150,000. On 1 April x10,
Cadbury bought another 40 percent of the ordinary shares of Jelly Beans for RM1 million.
The fair value of the initial 40 percent interest in Jelly Beans on 1 April x10 was
RM870,000.

c) The sales of Cadbury include sales to Sweets of RM1 million. These goods were invoiced
at cost plus 25 percent. Sweets still has 20 percent of these goods.

Required:
Prepare the group statement of profit or loss for the year ended 31 December x10.