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

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Groups frequently increase ownership in an associate or joint venture to obtain control. When this happens, accounting switches from the equity method to full consolidation, with a required remeasurement of the previously held interest (PHI) to fair value at the acquisition date. IFRS 3 and US GAAP (ASC 805) are largely aligned on the core mechanics but diverge in some presentation details, NCI measurement options, and subsequent goodwill testing.

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What changes on the acquisition date and why it matters

Moving from significant influence to control transforms both measurement and presentation:

  • The investee becomes a subsidiary; assets and liabilities are recognized at acquisition-date fair values.

  • The previously held interest is remeasured to fair value, with any resulting gain or loss recognized in profit or loss.

  • Goodwill (or a bargain purchase gain) is recognized based on consideration transferred, fair value of NCI, and fair value of the PHI.

This transition can significantly affect EBITDA, leverage ratios, and KPI baselines due to fair value step-ups and elimination of equity-method earnings.

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IFRS 3 mechanics for step acquisitions

Acquisition-date steps (associate → subsidiary):

  1. Measure identifiable assets and liabilities of the acquiree at fair value.

  2. Remeasure the PHI to fair value and recognize a gain or loss in P&L.

  3. Recognize NCI either at fair value (full goodwill) or at proportionate share of net assets (partial goodwill).

  4. Recognize goodwill as the residual:

    Goodwill = (Fair value of consideration transferred

    • Fair value of NCI

    • Fair value of PHI)


      − Fair value of identifiable net assets acquired.

  5. Eliminate any prior OCI related to the associate (e.g., FVOCI equities, cash flow hedges) according to the underlying IFRS guidance (commonly reclassified or transferred within equity depending on instrument).

Journal sequence (illustrative):

  • Dr Investment in Subsidiary (net assets at FV) xx

  • Cr Identifiable Liabilities at FV xx

  • Cr Gain on Remeasurement of PHI (P&L) xx

  • Cr Cash / Equity (consideration) xx

  • Cr NCI (equity) xx

  • Dr Goodwill (balancing) xx

Note: Under IFRS, full or partial goodwill policy affects both goodwill and future impairment tests (CGU level under IAS 36).

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ASC 805 mechanics for step acquisitions

US GAAP mirrors IFRS on the core steps:

  1. Fair value the acquiree’s identifiable assets and liabilities.

  2. Remeasure PHI to fair value; recognize gain or loss in earnings.

  3. Measure NCI at fair value (US GAAP applies full goodwill only).

  4. Compute goodwill using the same residual formula (with NCI at FV by definition).

Journal sequence (illustrative):

  • Dr Identifiable Assets at FV xx

  • Cr Identifiable Liabilities at FV xx

  • Cr Cash / Equity (consideration) xx

  • Cr NCI (fair value) xx

  • Cr Gain on Remeasurement of PHI (Earnings) xx

  • Dr Goodwill (balancing) xx

Note: US GAAP requires annual goodwill impairment testing at the reporting unit level (qualitative/quantitative), with no amortization for public entities.

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Comparative framework — IFRS 3 vs ASC 805 in step acquisitions

Topic

IFRS 3

ASC 805

PHI remeasurement

To fair value, gain/loss in P&L

To fair value, gain/loss in earnings

NCI measurement

Choice: fair value (full goodwill) or proportionate share (partial)

Fair value only (full goodwill)

Goodwill

Full or partial (policy choice per transaction)

Full goodwill

Prior OCI related to associate

Reclassified/settled per underlying standard

Reclassification per ASC topics (e.g., AOCI items)

Disclosure

IFRS 3 combination disclosures incl. pro-forma

ASC 805 disclosures incl. pro-forma

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Worked example — from 30% to 80% ownership

Facts (currency: €):

  • Parent holds 30% in Company A (associate) carried at €12,000,000 (equity method carrying amount).

  • On acquisition date, fair value of the 30% PHI = €15,000,000.

  • Parent purchases an additional 50% for €40,000,000 to obtain control (80% total).

  • Fair value of identifiable net assets at acquisition date = €60,000,000.

  • Fair value of NCI (20%) = €12,000,000.

Step 1 — PHI remeasurement (IFRS & US GAAP):

Gain in P&L = FV(PHI) − Carrying amount = 15,000,000 − 12,000,000 = €3,000,000.

Step 2 — Goodwill:

Goodwill= Consideration (for new 50%) 40,000,000

  • FV of NCI (20%) 12,000,000

  • FV of PHI (30%) 15,000,000


    − FV of net assets 60,000,000


    = €7,000,000

Entries (simplified, IFRS full goodwill / US GAAP):

  • Dr Identifiable Assets at FV 60,000,000

  • Dr Goodwill 7,000,000

  • Cr Identifiable Liabilities at FV — (included in 60m net)

  • Cr Cash (new consideration) 40,000,000

  • Cr NCI (FV) 12,000,000

  • Cr Gain on Remeasurement of PHI 3,000,000

(Offsetting lines for gross assets/liabilities would be expanded in a full PPA.)

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What happens to pre-acquisition equity-method balances and OCI

  • Equity-method carrying amount is derecognized; the PHI is remeasured and forms part of the goodwill computation.

  • Equity-method OCI items (e.g., FX translation of associate, FV changes of FVOCI instruments held by the associate that were recognized in the investor’s OCI) are treated per the underlying standards:

    • Foreign currency translation related to the associate is typically reclassified to P&L when control is obtained (analogous to disposal of the associate interest).

    • Other OCI elements may be reclassified or transferred within equity depending on IFRS/GAAP topic (e.g., cash flow hedges).

Documenting these OCI recycling steps avoids double counting in the consolidation bridge.

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Post-combination consolidation and earnings pattern

After control:

  • The subsidiary’s revenues and expenses are consolidated line-by-line; prior equity-method share of profit ceases.

  • NCI receives its share of profits and OCI from acquisition date.

  • Step-up depreciation/amortization: Fair value adjustments on PPE and intangible assets increase D&A, reducing future EBIT/EBITDA compared to pre-acquisition periods.

  • Goodwill sits in the relevant CGU (IFRS) or reporting unit (US GAAP) for impairment testing.

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Special cases to watch carefully

  • Measurement period adjustments: Both frameworks allow adjustments within the measurement period when new information about acquisition-date facts emerges; these retrospectively adjust provisional amounts (and goodwill).

  • Bargain purchases: If fair value of net assets exceeds the aggregate of consideration, NCI, and PHI, recognize a bargain purchase gain in P&L after the mandatory reassessment.

  • Previously held derivatives or options: If the parent held options over the investee’s shares, those derivatives are typically remeasured to FV with changes to P&L before computing goodwill.

  • Pre-existing relationships: Settlement of pre-existing contracts between investor and investee (e.g., litigation, supply contracts) is accounted for outside the business combination and may create separate gains/losses.

  • Subsequent purchases (80% → 100%): Transactions with NCI after control are equity transactions (no further goodwill) under both frameworks; gains/losses go directly to equity.

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Disclosure package that investors expect

  • Fair values of major classes of assets and liabilities acquired and goodwill amount.

  • Gains/losses on PHI remeasurement and where they are presented in the income statement.

  • NCI measurement basis (IFRS only: whether fair value or proportionate share).

  • Pro-forma information as if acquisition occurred at the beginning of the period (revenue and profit impact).

  • Measurement period adjustments and reasons.

Clear disclosures help reconcile the step-up effects and the transition from equity-method accounting to full consolidation.

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Journal entries summary

IFRS 3 (full goodwill option):

  1. Remeasure PHI:

    • Dr Investment in Associate (to FV) 3,000,000

    • Cr Gain on Remeasurement 3,000,000

  2. Record business combination (simplified):

    • Dr Identifiable Assets at FV xx

    • Dr Goodwill xx

    • Cr Identifiable Liabilities at FV xx

    • Cr Cash (new consideration) xx

    • Cr NCI (FV) xx

    • Cr Investment in Associate (FV of PHI) xx

ASC 805:

  1. Remeasure PHI to FV through earnings.

  2. Recognize assets/liabilities at FV, NCI at FV, and goodwill as residual (same structure as above).

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Impact on financial performance and ratios

  • EBITDA/EBIT: Fair value step-up D&A can depress margins post-acquisition; analysts often adjust for PPA effects.

  • Leverage: Consolidation adds acquiree debt and leases; ratios may worsen even if enterprise value is unchanged.

  • EPS: Equity-method earnings are replaced by consolidated profit with NCI attribution; EPS path can shift materially.

  • Tax: Step-ups may create DTLs; bargain gains can be offset by deferred taxes.

Disciplined planning of valuation, PPA, and disclosure ensures a clean transition that stakeholders can model.

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