Change in group
structure
Nicholaus, MASAWE
Introduction
A group structure can change if the parent company either
buys additional shares in an entity or
Sells shares of an entity
This is achieved through Step acquisition or Disposal
Step acquisition
No control-to-control | Control to control
Introduction
A step acquisition occurs when the parent entity acquires
control over the subsidiary in stages.
This is achieved by buying blocks of shares at different times.
Forms of step acquisition
1. No control-to-Control
2. Control-to-Control
No control -to- Control
No Control-to-Control
This happens when an entity acquires additional shares in an entity to
gain control over the acquiree
Accounting treatment prior to
control
Any pre-existing equity interest in an entity is accounted for according to:
(i) IFRS 9 in the case of simple investments
(ii) IAS 28 in the case of associates and joint ventures
(iii) IFRS 11 in the case of joint arrangements
Accounting treatment
on the date the control is attained
At the date when equity interest is increased and control achieved:
(i) re-measure the previously held equity interest to fair value
(ii) recognize any resulting gain or loss in profit or loss
(iii) calculate goodwill and NCI on either a partial (i.e. proportionate)
or full (i.e. fair value) basis in accordance with IFRS 3 (Revised).
The cost of acquiring control will be the fair value of the previously held equity
interest plus the cost of the most recent purchase of shares at acquisition date.
Goodwill and Gain of old investment
Goodwill (Full goodwill method) Goodwill (Partial Goodwill method)
Cost of additional XX Cost of additional XX
investment investment
FV of existing XX Faire Value of existing XX
investment investment
FV of NCI@ acquisition XX P’ share of FV of S’s NA (XX)
@ acquisition
FV of S’s NA (XX) Goodwill @ acquisition XX
@acquisition
Goodwill @acquisition XX
Gain/loss from disposal of an old
stake
Compare FV of an old investment vs Carrying Value of an old
investment
Gain/Loss should be sent to the P&L
NCI-computation
This depends on how NCI is valued
1. If NCI is valued by Fair value approach
NCI=(Controlling interest % × Subsidiary’s net assets at the end of
the reporting period) + NCI share of Goodwill (after accounting
for IL); OR
NCI= FV of NCI on acquisition + NCI % of subsidiary’s post
acquisition profit
2. If Non Controlling interest is valued by proportionate
approach
NCI=(Controlling interest % × Subsidiary’s net assets at the end of
the reporting period)
Illustration I
H Ltd holds a 10% investment in S Ltd at $24,000 in accordance with
IFRS 9. On 1 June 2015, it acquires a further 50% of S Ltd’s equity
shares at a cost of $160,000.
On this date fair values are as follows:
S Ltd’s net assets – $200,000
The non-controlling interest – $100,000
The 10% investment – $26,000
The NCI is to be valued using the full goodwill method.
Required
How do you calculate the goodwill arising in S Ltd.
Illustration I
H Ltd holds a 10% investment in S Ltd at $24,000 in accordance with
IFRS 9. On 1 June 2015, it acquires a further 50% of S Ltd’s equity
shares at a cost of $160,000.
On this date fair values are as follows:
S Ltd’s net assets – $200,000
The non-controlling interest – $100,000
The 10% investment – $26,000
The NCI is to be valued using the full goodwill method.
Required
How do you calculate the goodwill arising in S Ltd.
Control-to-Control
(Change in ownership)
Control-Control
No change in control
No further goodwill is calculated
Cash goes out
NCI goes down
NOTE that the money paid out may not be similar to the decrease in
NCA. IFRS 3 requires the difference between cash paid and decrease in
NCI to be recognized in the reserves
Illustration II
A owns 75% of B on 31 December 2023 when the NCI has a Carrying
Value of Tshs. 75m, it then buys the remaining 25% for TZS 100m
Required
Compute the balance to be reported in the reserve
Disposals
Control-to-control | Control-to-No Control
During the year, one entity may sell some or all of its shares in
another entity
Forms of disposal
1. Control is retained (Control-to-Control)
2. Control is lost (Control-to-No Control)
Control-Control
(Control is maintained)
Control-to-Control
This is just a change in ownership
NCI goes up
Cash goes up
The company still consolidates the subsidiary
Illustration III
B owned 100% of the equity shares of P before it then sold 10% of the
subsidiary on 31-12-2015 for $50 million
The net asset at the date of disposal of the shares was $ 350m and the
goodwill on acquisition of the original holding was $ 50 million
Assume that the goodwill is ‘’full’’ goodwill
Required
Prepare the journal entry to record the change in ownership from
100%-90%
Control-to-No Control
(Control is Lost)
Control is lost
No consolidation any more
Goodwill, NCI and Net assets of the subsidiary are written off against
Sale Proceeds & FV of the remaining stake….gain/loss is sent to P&L
Gain/Loss as a result of the lost
control
Sales Proceeds XX
FV of the remaining stake XX
Less: Subsidiary sold
S’s Net assets XX
Goodwill XX
NCI XX (XX)
Gain/Loss XX
Illustration IV
S owned 90% of M before it decided to sell a 50% stake of its
investment on 31-12-2015 for $ 120m
The NCI at that date was $53m and the FV of the remaining 40% is
$96m
The goodwill on acquisition of the original 90% was $38m and the net
asset at that date of disposal were $201m
Required
Compute gain/loss as a result of the lost control