Complex groups

Date of acquisition
Care must be taken when consolidating sub-subsidiaries, because
(usually) either:

(a) The parent company acquired the subsidiary before the subsidiary
bought the sub-subsidiary (as in the example above)

(b) The parent holding company acquired the subsidiary after the
subsidiary bought the sub-subsidiary
• Depending on whether (a) or (b) is the case, the retained earnings of
the subsidiary at acquisition will be different.
• The rule to remember here, when considering pre- and post-
acquisition profits, is that we are only interested in the consolidated
results of the parent company. We will use the example above to
demonstrate the required approach.
• Example: Sub-subsidiary acquired first
Again using the figures in Section 2.1, assume that:
(a) S Co purchased its holding in SS Co on 1 July 20X4
(b) P Co purchased its holding in S Co on 1 July 20X5
• The retained earnings figures on the respective dates of acquisition
are the same, but on the date P Co purchased its holding in S Co, the
retained earnings of SS Co were $60,000. It is the group’s policy to
measure the non-controlling interest at its proportionate share of the
fair value of the subsidiary’s net assets.
Solution
• The point here is that SS Co only became part of the P group on 1 July
20X5, not on 1 July 20X4. This means that only the retained earnings
of SS Co arising after 1 July 20X5 can be included in the post-
acquisition reserves of P Co group. Goodwill arising on the acquisition
will be calculated by comparing P's share of S's cost of the investment
by S in SS to the effective group interests acquired represented by the
share capital of SS and its retained earnings at the date P acquired S
(here $60,000).
Subsidiary acquired first: non-controlling interest at fair value