BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements

Piecemeal acquisition

CHAPTER 4
IFRS 10 / MFRS 10 Consolidated Financial Statements
Piecemeal acquisition

For basic principles in preparing consolidated financial statements, please refer to

BBFA2023’s notes on group accounts.
For examples:
-Elimination of URP, intra-group balances. Intra-group sales/purchases
-Contingent consideration
-Deferred consideration
-Share exchange
- FV adjustment and additional/reduced depreciation
-etc.

1.0 Introduction

Definitions

Consolidated financial statements are the financial statements of a group in which the
assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries
are presented as those of a single economic entity.

A group is a parent and all its subsidiaries.

A parent is an entity that has one or more subsidiaries.

A subsidiary is an entity that is controlled by another entity.

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BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements
Piecemeal acquisition

2.0 Acquisition of a subsidiary in stages (Piecemeal acquisition of shares in

subsidiary)
Sometimes, a parent company may not acquire a controlling interest in the shares of a
subsidiary at one-off purchase, but rather through several stages. Business combinations
that are done in stages are known as “piecemeal or step acquisition”.

There are three possible types of business combinations in stages.

(a) A previously held interest, say 10%, with no significant influence (accounted under
IFRS 9) is increased to a controlling interest of 50% or more (e.g. to 60%).
(b) A previously held equity interest, say 35%, accounted for (under equity method) as
an associate under IAS 28, is increased to a controlling interest of 50% or more
(e.g. to 85%).
(c) A controlling interest in a subsidiary is increased, say from 60% to 80%.

2.1 Investment or associate becomes a subsidiary

The accounting treatment is based the concept of “substance over form” i.e. an investment
(or associate) has been “sold” and a subsidiary has been “purchased”.

Calculation of gain/loss on derecognition

Whenever an ordinary investment/associate becomes a subsidiary, the original investment
would be treated as if it were disposed of at fair value and re-acquired at fair value. This
gives rise to a gain/loss being reported in profit or loss unless the investment previously held
was an investment in equity and the election was made to hold the investment at fair value
through other comprehensive income.

If it was previously held as an ordinary investment, the gain/loss is calculated as follows:-

RM
Fair value at date control obtained X
Carrying amount (e.g Cost) (X)
X
If it was previously held as an associate, the gain/loss is calculated as follows:-
RM
Fair value at date control obtained X
Associate's share of carrying value (A)
X
Equity method:
Cost of investment in associate xx
Share of post-acquisition reserves xx
A

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BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements
Piecemeal acquisition

Calculation of goodwill
When an ordinary investment or associate becomes a subsidiary, a subsidiary has been
“purchased” and the previously held investment is re-measured to fair value with
goodwill calculated as follows:-
RM

Consideration transferred X
Fair value of acquirer's previously held equity interest at the date control obtained X
Non-controlling interest (at share of FV of net assets or "full" FV)  Note 1 X

Less: Fair value of identifiable assets acquired and liabilities assumed (X)
Goodwill X

Note 1: Measurement of NCI:

Method 1 (Partial goodwill method): At proportionate share of the fair value of net assets
Method 2 (Full goodwill method): At fair value

Illustration I
On 1 January 20x1, Ark acquired 10% of Coe for $700,000 when Coe’s reserves were
$2,400,000. The 10% interest did not give Ark any control or significant influence over the
running of Coe’s activities. Both companies are listed in the stock market.

A further 50% interest was acquired on 31 December 20x2 for $4,800,000 (equivalent to the
fair value of $12 per share on that date) giving Ark control over Coe. Coe’s reserves at that
date were $4,800,000.

Summarised statement of financial position as at 31 December 20x3

Ark Coe
$'000 $'000
Non-current assets
Property, plant and equipment 38,370 7,600
Investment in Coe at cost 5,500 -
43,870 7,600
Current assets 13,600 2,200
57,470 9,800

Equity
Ordinary shares 10,200 800
Reserves 39,820 7,900
50,020 8,700
Liabilities 7,450 1,100
57,470 9,800

Coe has 800,000 shares in issue. The Group policy is to measure non-controlling interests at
date of acquisition at their proportionate share of the fair value of the identifiable assets
acquired and liabilities assumed.

Required:
Prepare the consolidated statement of financial position of Ark Group as at 31 December
20x3.

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BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements
Piecemeal acquisition

Solution

W1 Group structure

W1 Group structure

Ark

10% (1/1/x1)

Coe ＋ 50% (31/12/x2)

= 60%
ordinary investment subsidiary
obtain control:
- calculate goodwill
- calculate gain/loss on derecognising of 10% interest

W2 Goodwill
$'000 $'000
Consideration transferred
Fair value of Ark's previously held interest
Non-controlling interest

Less: Fair value of net assets at date control

obtained
Share capital
Reserves

W3 Consolidated reserves
Upon derecognition of 10% investment:
$'000
Fair value at date control obtained
Carrying amount (at cost)

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BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements
Piecemeal acquisition

Ark Coe
$'000 $'000
Per question
Gain on derecognition of investment
Pre-acquisition reserves

Coe - Share of post-acquisition reserves

W4 Non-controlling interests (NCI)

NCI at acquisition (W2)

NCI share of reserves post control

Ark Group
Consolidated statement of financial position as at 31 December 20x3
$'000
Non-current assets
Property, plant and equipment
Goodwill (W2)

Current assets

Equity attributable to owners of the parent

Share capital
Reserves (W3)

Non-controlling interests (W4)

Liabilities

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BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements
Piecemeal acquisition

Illustration II
On 1 Jan 20x2, Ace acquired 25% of Bee for $2,200,000 when Bee’s reserves were
$5,800,000. The 25% interest in Bee gave Ace significant influence over the financial and
operating decisions of Bee. Both companies are listed in the stock market.

A further 35% interest was acquired on 30 September 20x3 for $4,200,000 (equivalent to the
fair value of $15 per share on that date) giving Ace control over Bee. Bee’s reserves at that
date were $7,800,000.

Summarised statement of financial position as at 31 Dec 20x3

Ace Bee
$'000 $'000
Non-current assets
Property, plant and equipment 38,370 7,600
Investment in Bee (cost) 6,400 -
44,770 7,600
Current assets 12,700 2,200
57,470 9,800

Equity
Ordinary shares 10,200 800
Reserves 39,820 7,900
50,020 8,700
Liabilities 7,450 1,100
57,470 9,800

Bee has 800,000 shares in issue. The Group policy is to measure non-controlling interests at
date of acquisition using “full goodwill” method.

Required:
Prepare the consolidated statement of financial position of Ace Group as at 31 December
20x3.

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BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements
Piecemeal acquisition

Solution

W1 Group structure

Ace

25% (1/1/x2)

Bee ＋ 35% (30/09/x3)

= 60%
associate subsidiary
obtain control
- calculate goodwill
- calculate gain/loss on derecognising of 25% interest

W2 Goodwill
$'000 $'000

Consideration transferred
Fair value of Ace's previously held interest
Non-controlling interest (NCI)

Less: Fair value of net assets

at the date control obtained
Share capital
Reserves

W3 Consolidated reserves
Upon derecognition of 25% associate:
$'000
Fair value at date control obtained
Ace's share of carrying value

Ace's share of carrying value

Cost of investment in associate
Share of post-acquisition reserves
(reserves earned from 1/1/x2 to
30/9/x3) x 25%

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BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements
Piecemeal acquisition

Ace Bee Bee

$'000 $'000 $'000
25% 60%
Per question
Gain on derecognition of investment
Reserves at acquisition

Share of post-acquisition reserves:

Bee - 25%
Bee - 60%

W4 Non-controlling interests (NCI)

$'000
NCI at acquisition (W2)
NCI share of reserves post control

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BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements
Piecemeal acquisition

Ace Group
Consolidated statement of financial position as at 31 December 20x3

$'000
Non-current assets
Property, plant and equipment
Goodwill (W2)

Current assets

Equity attributable to owners of the parent

Share capital
Reserves (W3)

Non-controlling interests (W4)

Liabilities

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BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements
Piecemeal acquisition

2.2 Increase in previously held controlling interest (Subsidiary to subsidiary)

When there is an increase in the parent’s shareholding in an existing subsidiary through the
purchase of additional shares, the accounting treatment is driven by the concept of substance
over form:

• In substance, there is no acquisition of because the entity is still a subsidiary.

• Instead, this is a transaction between group shareholders (ie the parent is buying
from the non-controlling interests).

Therefore, it is recorded in equity as follows:

(a) Decrease non-controlling interests in the consolidated SOFP

(b) Recognise the difference between the consideration paid and the decrease in NCI
as adjustment to equity.

The calculation is as follows:-

$
Fair value of consideration paid (X)
Decrease in NCI X
Adjustment to parent's equity (X)

Illustration III
(Continuation from Illustration II)
Assuming that Ace acquired an additional 10% interest in Bee on 1 January 20x4 for cash
consideration of $1,500,000, prepare the consolidated financial statements of Ace Group as at
1 January 20x4.

Solution
Workings:
W1

60% + 10% = 70%

31/12/x3 1/1/x4

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BBFA3044 Advanced Accounting Practice CHAPTER 4 Consolidated financial statements
Piecemeal acquisition

W2
Non-controlling interests (NCI)

$'000
NCI at acquisition (W2)
NCI share of reserves post control
(100 x 40%)

Decrease in NCI

W3
Adjustment to parent's equity
$'000
Fair value of consideration paid
Decrease in NCI's net assets and goodwill
Adjustment to parent's equity

W4
Consolidated reserves
Per consolidated SOFP in illustration 2
Adjustment to parent's equity

Ace Group
Consolidated statement of financial position as at 1 January 20x4
$'000
Non-current assets
Property, plant and equipment
Goodwill

Current assets

Equity attributable to owners of the parent

Share capital
Reserves

Non-controlling interests

Liabilities

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