Step Acquisitions and Decreases in Ownership: Mastering Consolidated Financial Statements

5.8 Step Acquisitions and Decreases in Ownership

In the realm of consolidated financial statements and business combinations, understanding the nuances of step acquisitions and decreases in ownership is crucial for accounting professionals. These transactions can significantly impact the financial reporting and accounting treatment of investments in subsidiaries. This section delves into the accounting implications of increasing or decreasing ownership stakes in subsidiaries, providing you with the knowledge needed to navigate these complex scenarios effectively.

Understanding Step Acquisitions

Step acquisitions occur when an entity acquires additional shares in an existing investee, thereby increasing its ownership interest. This process can lead to changes in the level of control and influence over the investee, which in turn affects the accounting treatment. The key accounting considerations for step acquisitions include:

1. Reassessment of Control: When an entity increases its ownership stake, it must reassess whether it has obtained control over the investee. Control is typically defined as the power to govern the financial and operating policies of an entity to obtain benefits from its activities. Under IFRS 10, control is achieved when the investor has power over the investee, exposure or rights to variable returns, and the ability to use its power to affect those returns.

2. Revaluation of Previously Held Interests: If control is obtained through a step acquisition, the previously held equity interest must be remeasured to its fair value at the acquisition date. Any resulting gain or loss is recognized in profit or loss. This remeasurement ensures that the entire investment is reflected at fair value in the consolidated financial statements.

3. Goodwill Calculation: The acquisition of additional shares may result in the recognition of goodwill. Goodwill is calculated as the excess of the consideration transferred, the fair value of any previously held interest, and the fair value of non-controlling interests over the fair value of identifiable net assets acquired.

4. Non-Controlling Interests (NCI): The accounting for NCI is crucial in step acquisitions. When control is achieved, NCI is measured at fair value or at the proportionate share of the acquiree’s identifiable net assets.

Practical Example of Step Acquisitions

Let’s consider a practical example to illustrate the accounting treatment of step acquisitions:

Scenario: Company A initially holds a 30% interest in Company B, which it accounts for using the equity method. On January 1, 2024, Company A acquires an additional 40% interest, bringing its total ownership to 70% and gaining control over Company B.

Accounting Treatment:

• Reassessment of Control: Company A must reassess its control over Company B. With a 70% ownership, Company A now has control.
• Revaluation of Previously Held Interest: The 30% previously held interest is remeasured to its fair value at the acquisition date. Any gain or loss from this remeasurement is recognized in profit or loss.
• Goodwill Calculation: Goodwill is calculated based on the consideration transferred for the additional 40% interest, the fair value of the previously held 30% interest, and the fair value of NCI.
• Consolidation: Company A consolidates Company B’s financial statements from the acquisition date.

Decreases in Ownership

Decreases in ownership occur when an entity reduces its stake in a subsidiary. This can happen through the sale of shares or other transactions that dilute the parent’s interest. The accounting implications depend on whether control is retained or lost:

1. Retaining Control: If the parent retains control after the decrease in ownership, the transaction is accounted for as an equity transaction. No gain or loss is recognized in profit or loss. Instead, the carrying amount of the NCI is adjusted to reflect the change in ownership interests.

2. Loss of Control: If the parent loses control, the transaction is treated as a disposal. The parent derecognizes the assets and liabilities of the subsidiary and recognizes any retained interest at fair value. The difference between the fair value of consideration received and the carrying amount of the subsidiary’s net assets is recognized as a gain or loss in profit or loss.

Practical Example of Decreases in Ownership

Consider the following example to understand the accounting treatment of decreases in ownership:

Scenario: Company C holds an 80% interest in Subsidiary D. On June 30, 2024, Company C sells a 30% interest, reducing its ownership to 50%.

Accounting Treatment:

• Retaining Control: Since Company C retains control with a 50% interest, the decrease is treated as an equity transaction. The carrying amount of NCI is adjusted, and no gain or loss is recognized in profit or loss.
• Disclosure: Company C must disclose the change in ownership interest and its impact on the financial statements.

Regulatory Considerations

In Canada, the accounting treatment for step acquisitions and decreases in ownership is guided by International Financial Reporting Standards (IFRS) as adopted by the Canadian Accounting Standards Board (AcSB). Key standards include:

• IFRS 10: Consolidated Financial Statements: Provides guidance on control, consolidation procedures, and accounting for changes in ownership interests.
• IFRS 3: Business Combinations: Addresses the accounting for acquisitions, including step acquisitions and the recognition of goodwill.
• IAS 28: Investments in Associates and Joint Ventures: Relevant for entities that hold significant influence but not control.

Challenges and Best Practices

Accounting for step acquisitions and decreases in ownership can be challenging due to the complexity of fair value measurements, control assessments, and the calculation of goodwill. Here are some best practices to consider:

• Thorough Analysis: Conduct a detailed analysis of control and influence to determine the appropriate accounting treatment.
• Accurate Fair Value Measurements: Ensure fair value measurements are accurate and reflect current market conditions.
• Clear Documentation: Maintain clear documentation of the transaction, including the rationale for control assessments and fair value calculations.
• Regular Review: Regularly review ownership interests and reassess control to ensure compliance with accounting standards.

Conclusion

Step acquisitions and decreases in ownership are critical components of consolidated financial statements and business combinations. Understanding the accounting implications of these transactions is essential for preparing accurate financial statements and ensuring compliance with Canadian accounting standards. By mastering these concepts, you will be well-equipped to handle complex ownership changes and excel in your accounting career.

Ready to Test Your Knowledge?