CHANGES IN GROUP STRUCTURE

Interim Acquisition of a Subsidiary

When a parent acquires control of a subsidiary mid-year, it will be necessary to pro-rata the results of the
subsidiary for the year to identify the net assets at the date of acquisition.

BUSINESS COMBINATIONS ACHIEVED IN STAGES (PIECEMEAL ACQUISITIONS)

.
A parent company may acquire a controlling interest in the shares of a subsidiary as a result of several
successive share purchases, rather than by purchasing the shares all on the same day. Business combinations
achieved in stages may also be known as 'piecemeal acquisitions'.

There are three possible types of business combinations achieved in stages:

(a) A previously held interest, say 10%, with no significant influence (accounted for under IFRS 9) is
increased to a controlling interest of 50% or more.
(b) A previously held equity interest, say 35%, accounted for as an associate under IAS 28, is increased to a
controlling interest of 50% or more.
(c) A controlling interest in a subsidiary is increased, say from 60% to 80%. This is regarded as a transaction
between equity holders and goodwill is not re-calculated.
FORWARD
Under the revised IFRS 3 a business combination occurs only when one entity obtains control over another,
which is generally when 50% or more has been acquired.
Under the revised IFRS 3 a business combination occurs only when one entity obtains control over another,
which is generally when 50% or more has been acquired.
When this happens, the original investment – whether an investment in equity instruments with no
significant influence, or an associate – is treated as if it were disposed of at fair value and re-acquired at fair
value.

The cost of acquiring control will be the fair value of the previously held equity interest plus the cost of
the most recent purchase of shares at acquisition.

If the 50% boundary is not crossed, as when the interest in a subsidiary is increased, the event is treated as a
transaction between owners. Whenever you cross the 50% boundary, you revalue, and a gain or loss is reported
in profit or loss for the year. If you do not cross the 50% boundary, no gain or loss is reported; instead there is
an adjustment to the parent's equity.

PIECEMEAL ACQUISITION EXAMPLE

Good, whose year end is 30 June 2019 has a subsidiary, Will, which it acquired in stages. The details of the
acquisition are as follows.
Holding Retained earnings Purchase
Date of acquisition acquired at acquisition consideration
% $m $m
1 July 2017 20 270 120
1 July 2018 60 450 480

The share capital of Will has remained unchanged since its incorporation at $300m. The fair values of the net
assets of Will were the same as their carrying amounts at the date of the acquisition. Good did not have
significant influence over Will at any time before gaining control of Will. The group policy is to measure non-
controlling interest at its proportionate share of the fair value of the subsidiary's identifiable net assets.

REQUIRED
(a) Calculate the goodwill on the acquisition of Will that will appear in the consolidated statement of
financial position at 30 June 20X9.
(b) Calculate the profit on the de-recognition of any previously held investment in Will to be reported in
group profit or loss for the year ended 30 June 20X9.
SOLUTION:

a) Goodwill (at date control obtained)

$m $m
Consideration transferred 480
NCI (20% 750) 150
Fair value of previously held equity interest ($480m × 20/60) 160
790
Fair value of identifiable assets acquired and liabilities assumed:
Share Capital 300
Retained Earnings 450
(750)
40
b) Profit on de-recognition of investment
$m
Fair value at date control obtained (see part (a)) 160
Cost (120)
40

In this short example, the figures for goodwill and profit on de-recognition are the same. In the more
complicated examples, they may different because the investment (an investment in equity instruments) may be
revalued before or after control was obtained.

DISPOSAL OF SHARES IN AN ENTITY

During the year, the parent may dispose some or all of its shares in the subsidiary:

Possible scenarios include:

1) The disposal of all the shares in the subsidiary;

2) The disposal of part of the shares, leaving a controlling interest after the sale;
3) The disposal of part of the shares, leaving a residual interest after the sale (an associate);
4) The disposal of part of the shares, leaving a residual interest after the sale (a trade investment)

Investing Entity’s Records

In all the above scenarios, the gain on disposal in the investing entity’s accounts is calculated as
follows:
$
Sale Proceeds XX
Less Carrying amount of shares sold (XX)
XX
Less Taxation (XX)
Net Gain to Parent XX

The carrying amount is usually the cost of the shares. The tax forms part of part of the investing
(parent) company’s tax and therefore group tax.
DISPOSAL OF SHARES IN GROUP ACCOUNTS

Accounting for the sale of the shares in the group accounts depends on whether or not the
transaction causes control to be lost or is still maintained.
Where control is lost, there will be a gain or loss to the group which must be included in the group
income statement for the year. Additionally, there will be a de-recognition of the assets and
liabilities of the subsidiary disposed of, together with elimination of goodwill and NCI from the group
accounts. The income statement of the subsidiary will be consolidated up to the date of disposal.

Where control in the subsidiary is retained, there is no gain or loss to be recorded in the group
accounts. The transaction is regarded as one between equity shareholders, the end result being an
increase in NCI. The group continues to recognise the goodwill, assets and liabilities of the subsidiary
at the year end, and consolidates the income statement of the subsidiary.

ACCOUNTING FOR A DISPOSAL WHERE CONTROL IS LOST

This is where the subsidiary is completely disposed of or becomes an associate or a trade

investment:

The parent recognises:

-The consideration received

-Any investment retained in the former subsidiary at fair value on date of disposal

The parent derecognises:

-The assets and liabilities of the subsidiary at the date of disposal

-Unimpaired goodwill in the subsidiary
-The NCI at the date of disposal (including NCI’s share of comprehensive income)
In the group income statement, it will be necessary to pro-rata the results of the subsidiary for the
year into pre-disposal for consolidation and post disposal as an associate or simple investment as
appropriate.

Exceptional Item

The gain/loss is reported as an exceptional item on the face of the income statement after the
operating profit in two ways:

1) Time apportioned line by line in the same way as subsidiary’s results that had been acquired
part way through the year;
2) Time apportioned and treated as a discontinued operation in accordance with IFRS 5-
Accounting for Non-Current Assets and Discontinued Operations if the subsidiary qualifies as
a discontinued operation. The pre-disposal results are aggregated and presented in a single
line on the face of the income statement immediately after profit after tax from continuing
operations.

IFRS 5 Requirements

A discontinued operation is a component of an entity that either has been disposed of or is classified
as held for sale, and
 1) Represent a major line of business or geographical area of operations:
2) Is part of a single co-ordinated plan to dispose of as a separate major line of business or ,
geographical area of operations; or
3) Is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of
control

Calculate a group profit or loss on disposal of the subsidiary as follows:

$m
Proceeds X
Add: Fair value of investment retained X
Add: Non-controlling interest X
Total X
Less: net assets at disposal (X)
Less: Unimpaired goodwill at disposal (X)
Total X
Group profit or loss on disposal X

GROUP DISPOSAL: SUBSIDIARY TO ASSOCIATE

This is where the disposal results in the subsidiary becoming an associate (e.g. a 90% holding
reduced to a 35% holding).

Group Disposal: Subsidiary to Associate

If the disposal results in loss of control but leaves a residual interest that gives the parent significant
influence, the associate relationship will result from the date of disposal and will be time
apportioned accordingly.

After the disposal, the income, expenses, assets and liabilities of the former subsidiary can no longer
be consolidated on a line by line basis. They must be accounted for under the equity method as
follows:

1) With a single amount in the Income Statement and Statement of Comprehensive Income for
the share of the after-tax profits for the period after disposal and
2) With a single amount in the Statement of Financial Position for the fair value of the
investment retained plus the share of the post-acquisition retained profits.

In the Consolidated Income Statement/Comprehensive Income;

 Pro-rata and consolidate the subsidiary results of up to the date of disposal and equity
account for the results after the date of disposal with the share of the after-tax profits for
the period after disposal and include the group gain on part disposal
In the Consolidated Statement of Financial Position;

 Account for the associate under the equity method based on the fair value of the associate
at the disposal date (the fair value of the investment retained plus the share of the post-
acquisition retained profits)

Example (p 143)

Hague has held a 50% shareholding

ACCOUNTING FOR A DISPOSAL WHERE CONTROL IS NOT LOST

Where there is a disposal of shares and the parents retains control, in essence, this is an increase in
the NCI. In such a case:

1) No gain or loss on disposal is calculated;

2) No adjustment is made to the carrying amount of goodwill

The difference between the proceeds received and change in NCI is accounted for as follows:

Sale Proceeds X
NCI % increase x (Net Assets at date of change + Unimpaired Goodwill) (X)
Difference transferred to equity X

ACCOUNTING FOR A DISPOSAL WHERE CONTROL IS LOST (TRADE INVESTMENT)

If there is a significant disposal of shares such that the interest retained is not even that of a
subsidiary or associate, it becomes a trade investment (e.g. a 90% shareholding is reduced to a 10%
holding)

In the Consolidated Income Statement/Comprehensive Income

 Pro rata and consolidate the subsidiary’s results up to the date of disposal and include
dividend income from the trade investment after disposal and include the group gain on the
part disposal.

In the Consolidated Statement of Financial Position

 Recognise the residual interest as an investment, measured at fair value in accordance with
IFRS 9

THE END