Step Acquisition Accounting and Remeasurement of Previously Held Interests

✦ A step acquisition occurs when an investor gradually acquires control of a company through multiple purchases over time.

✦ Under both US GAAP and IFRS, once control is obtained, the acquirer must remeasure any previously held equity interest at fair value on the acquisition date.

✦ The remeasurement can result in a gain or loss in earnings, and full acquisition accounting is applied from the control date onward.

✦ This approach ensures consistency with business combination principles and reflects the fair value of the total investment at the time control is achieved.

We’ll detail the accounting treatment, journal entries, measurement requirements, and disclosure expectations for step acquisitions and remeasurement under ASC 805 and IFRS 3.

1. What Is a Step Acquisition?

A step acquisition (also known as staged acquisition or piecemeal acquisition) occurs when:

✦ An investor increases ownership in an investee over time.

✦ The final transaction gives the investor control—typically crossing the 50 % threshold or obtaining voting control.

✦ The investor may go from: 

• Passive investment → significant influence 

• Significant influence → control 

• Joint control → control

From the control point forward, the acquirer must apply business combination accounting.

2. Remeasurement of Previously Held Interest

Under ASC 805-10-25-10 (US GAAP) and IFRS 3, paragraph 42, the previously held interest must be remeasured at fair value on the acquisition date.

✦ Any difference between this fair value and the carrying amount of the investment is recognized as a gain or loss in the income statement.

✦ This ensures all components of the acquisition are measured consistently using acquisition-date fair values.

3. Journal Entry Example — Step from 40 % to 100 %

Scenario

• Company A held a 40 % equity interest in Company B, accounted for under the equity method.

• The carrying amount of the 40 % stake is $60 million.

• Company A acquires the remaining 60 % for $150 million.

• On acquisition date, the fair value of the previously held 40 % interest is $80 million.

• Fair value of identifiable net assets of Company B = $200 million.

Step 1: Remeasure 40 % stake

Dr. Investment in B – $20 million

Cr. Gain on Remeasurement – $20 million

(to recognize the $20 million gain from revaluing the original investment to fair value)

Step 2: Record acquisition

Dr. Identifiable Net Assets – $200 million

Cr. Investment in B (previously held) – $80 million

Cr. Cash – $150 million

Cr. Goodwill – $30 million (plug to balance)

4. Measurement of Goodwill

Goodwill is calculated as:

✦ Total consideration transferred (fair value of all interests + cash paid)

✦ Minus fair value of identifiable net assets acquired

In the example above:

• Total consideration = $80m (previous 40 %) + $150m (new 60 %) = $230m

• Less: Net assets = $200m

• Goodwill = $30m

5. Treatment of Prior Periods

✦ Do not retrospectively adjust prior financial statements.

✦ The gain or loss on remeasurement is recognized in the income statement of the period when control is obtained.

✦ From that date forward, consolidate the investee using full-line consolidation.

6. IFRS vs. US GAAP — Alignment

✦ Both standards require fair value remeasurement of previously held interests upon gaining control.

✦ Under IFRS 3, if the previously held stake had been accounted for at fair value through profit or loss (FVTPL), no remeasurement gain/loss may arise.

✦ If significant influence existed under IAS 28 (equity method), remeasurement gain/loss is recognized in profit or loss.

7. Disclosures Required

✦ Nature and date of gaining control.

✦ Fair value of consideration transferred, including the remeasured prior interest.

✦ Amount of gain or loss recognized on remeasurement.

✦ Valuation techniques used to measure fair value.

✦ Goodwill recognized and reasons for it.

✦ Revenue and profit/loss contributed by the acquiree post-acquisition.

8. Special Considerations

✦ If control is obtained in stages but fair value can't be reliably measured, the acquirer may need to defer gain/loss until measurement becomes reliable.

✦ Acquisition-related costs (e.g., legal, due diligence) are expensed as incurred under both standards.

✦ Step-up in basis applies only at the date control is obtained—not retroactively to earlier investments.