How step acquisitions from joint control to control are accounted for under IFRS 3 and ASC 805

Graziano Stefanelli
1 hour ago
4 min read

When an investor moves from joint control (joint venture) to control (subsidiary), the transaction triggers a business combination achieved in stages, also known as a step acquisition. This requires remeasuring the previously held interest (PHI) to fair value and recognizing goodwill or a bargain gain at the date control is obtained. Both IFRS 3 (Business Combinations) and US GAAP (ASC 805) prescribe similar mechanics, but they differ in NCI measurement, OCI recycling, and subsequent goodwill treatment.

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How the transition from joint control to control changes consolidation

Under joint control, the investor accounts for its interest using the equity method (IAS 28 / ASC 323). Once control is obtained, the investee becomes a subsidiary and is consolidated line by line.

Key changes occur at the acquisition date:

The previously held interest is remeasured to fair value, with gains or losses in profit or loss.
Goodwill (or bargain gain) arises from the difference between total consideration, NCI, and net assets.
Any OCI previously recognized (e.g., translation differences) is reclassified or transferred according to the relevant standard.

This remeasurement step resets the basis of the investment to reflect full control.

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IFRS 3 accounting for step acquisitions from joint control

Acquisition-date steps (Joint Venture → Subsidiary):

Derecognize the carrying amount of the joint venture investment (equity method).
Remeasure the previously held interest (PHI) to fair value, recognizing a gain or loss in profit or loss.
Measure identifiable assets and liabilities at fair value.
Recognize goodwill or bargain purchase as residual.
Reclassify any OCI related to the joint venture (FX translation, FVOCI instruments) according to underlying standards.

Goodwill formula:Goodwill = FV(PHI) + FV(Consideration Transferred) + FV(NCI) − FV(Identifiable Net Assets).

Journal sequence (illustrative):

Dr Identifiable Assets (FV) xx
Dr Goodwill xx
Cr Liabilities (FV) xx
Cr NCI (FV) xx
Cr Investment in Joint Venture (carrying amount) xx
Cr Gain on Remeasurement (FV of PHI − carrying) xx
Cr Cash (Consideration) xx

IFRS OCI treatment:

Translation reserves (IAS 21): reclassified to P&L.
FVOCI instruments (IFRS 9): transferred within equity, not to P&L.

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ASC 805 accounting for the same transition

Under US GAAP, the principles are parallel:

Remeasure PHI to fair value; record gain/loss in earnings.
Recognize identifiable assets and liabilities at fair value.
Recognize goodwill using the same residual calculation.
NCI measured at fair value (no proportionate option).
OCI reclassification: apply ASC 810/830 guidance — foreign currency translation gains/losses reclassified to earnings.

Journal sequence (simplified):

Dr Identifiable Assets (FV) xx
Dr Goodwill xx
Cr Liabilities (FV) xx
Cr NCI (FV) xx
Cr Investment in JV (carrying) xx
Cr Gain on Remeasurement xx
Cr Cash / Consideration xx

Goodwill under US GAAP: subsequently tested annually for impairment (ASC 350). IFRS permits CGU-level impairment under IAS 36.

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Comparative framework — IFRS 3 vs ASC 805

Topic	IFRS 3	ASC 805
Remeasure PHI	Yes, to FV, gain/loss in P&L	Yes, to FV, gain/loss in earnings
OCI reclassification	Reclassify per IAS 21 / IFRS 9	Reclassify per ASC 830 / relevant guidance
NCI measurement	Choice: FV or proportionate share	Fair value only
Goodwill treatment	Residual, impairment only	Residual, impairment only
Equity method investment	Derecognized on transition	Derecognized on transition
Disclosure	FV of PHI, goodwill, and remeasurement gain	FV of PHI, goodwill, and remeasurement gain

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Worked example — from joint control to control

Facts (currency: €):

Parent holds 50% in JV Alpha under joint control, equity-method carrying value €18,000,000.
FV of PHI (50%) = €22,000,000.
Parent acquires an additional 30% for €12,000,000 → total 80% (control).
FV of identifiable net assets = €30,000,000.
FV of NCI (20%) = €7,000,000.

Computation:Goodwill = FV(PHI 22) + Consideration (12) + NCI (7) − FV(Net Assets 30) = €11,000,000.

Gain on PHI remeasurement: 22 − 18 = €4,000,000.

Entries:

Dr Identifiable Assets (FV) 30,000,000
Dr Goodwill 11,000,000
Cr Liabilities —
Cr NCI 7,000,000
Cr Investment in JV 18,000,000
Cr Gain on Remeasurement 4,000,000
Cr Cash 12,000,000

Result:

Consolidated goodwill = €11m.
Gain of €4m recognized in P&L.
Full consolidation from acquisition date.

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OCI handling on transition

IFRS 3 / IAS 21:

FX translation reserve from JV → reclassified to P&L.
Cash flow hedge or FVOCI → follow underlying standard (e.g., remain in equity).

ASC 830 / 815:

Foreign currency translation → reclassified to earnings.
Other OCI items (e.g., FVOCI equivalents) → follow their US GAAP guidance.

Both require transparency about what portion of OCI was recycled or retained.

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Disclosure requirements

Disclose:

Fair value of PHI and method of determining it.
Amount of gain or loss on remeasurement and where presented in P&L.
Total goodwill and components (consideration, PHI, NCI, net assets).
Reasons the combination qualifies as business acquisition (not asset purchase).
Effects on revenue and profit as if control had existed since the beginning of the year.

Example note (IFRS/GAAP):

The Group obtained control of Alpha JV by acquiring an additional 30% interest. A gain of €4 million was recognized on remeasurement of the previously held interest. Identifiable net assets were recognized at fair value, and goodwill of €11 million was recorded.

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Journal entries summary

IFRS / GAAP — transition entry:

Dr Assets (FV) xx
Dr Goodwill xx
Cr Liabilities (FV) xx
Cr NCI (FV) xx
Cr Investment in JV xx
Cr Gain on Remeasurement xx
Cr Cash xx

Subsequent:

Regular consolidation; goodwill subject to impairment tests.
NCI recognized for minority share of net assets and profit.

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Impact on financial performance and ratios

Profit volatility: remeasurement gain can significantly lift earnings.
EBITDA: unaffected (non-operating gain).
ROA and ROE: increase in total assets from fair value step-up and goodwill.
Equity composition: higher goodwill dilutes tangible equity ratios.
EPS: gain affects one-time earnings; analysts usually adjust it out.

The transition from joint control to full control transforms the balance sheet and profit profile—aligning asset values with fair value while resetting goodwill and ownership structure for the next consolidation cycle.

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DATA STUDIOS

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