Advanced Accounting — Changes in Control: Step Acquisitions, Additional Purchases, Disposals and Common Control

The last chapter of advanced accounting deals with the moment a control relationship changes. The K-IFRS principle is simple. Gaining or losing control is a significant event that changes the economic entity, so interests are remeasured at fair value and a gain or loss is recognized. Changes in ownership while control is retained are transactions between owners and are dealt with in equity. The basics of business combinations were covered in chapter 1.

1. Step acquisitions

When an acquirer that already holds an interest in the acquiree buys more and obtains control, it remeasures its previously held interest at fair value at the acquisition date and recognizes the difference in profit or loss (in OCI if the previous interest was an equity instrument at FVOCI). That fair value is added to the consideration transferred in calculating goodwill.

Company II held a 20% interest in Company J under the equity method with a carrying amount of ₩3 million. At the start of 20X1 it bought a further 40% for ₩9 million and obtained control. At the acquisition date the fair value of the existing 20% interest is ₩4.5 million, and the fair value of J’s identifiable net assets is ₩20 million. Non-controlling interests are measured at their proportionate share.

• Remeasurement gain on the existing interest: $450 - 300 = 150$ (₩10,000), i.e. ₩1.5 million (profit or loss)
• Non-controlling interests: $2{,}000 \times 40\% = 800$ (₩10,000)
• Goodwill: $900 + 450 + 800 - 2{,}000 = 150$ (₩10,000)

Any OCI recognized while J was an associate is reclassified or transferred to retained earnings on the same basis as if J had disposed of the related assets directly.

2. Changes in ownership with control retained: equity transactions

Buying more shares or selling some while retaining control gives rise to no gain or loss. The carrying amount of non-controlling interests is adjusted, and the difference from the consideration paid or received is recognized directly in equity attributable to owners of the parent. Goodwill is not recalculated either.

After section 1, II bought a further 10% of J for ₩4 million at the start of 20X2. If the carrying amount of non-controlling interests (40%) was then ₩9 million, the 10% share of ₩2.25 million is removed from non-controlling interests and the difference of $225 - 400 = -175$ (₩10,000) is deducted from equity. There is no effect on profit or loss.

3. Loss of control

On losing control, the following are dealt with together.

1. Derecognize the subsidiary’s assets (including goodwill), liabilities and non-controlling interests.
2. Recognize the consideration received and the fair value of any retained interest.
3. Recognize the difference as profit or loss attributable to the parent.
4. Reclassify OCI relating to the subsidiary (such as foreign operation translation differences) or transfer it to retained earnings, as if the items had been disposed of directly.

The retained 20% becomes an investment in an associate, and the equity method starts afresh with its ₩6 million fair value as cost. The retained interest is also remeasured at fair value on the date control is lost because the investment has changed in nature (subsidiary → associate) and is treated as a newly acquired asset.

4. Business combinations under common control

A business combination in which the same ultimate party controls the combining entities both before and after the combination, and that control is not transitory, is excluded from the scope of K-IFRS 1103. Mergers between group affiliates and transfers of shares in the course of converting to a holding company are typical.

Because K-IFRS has no explicit requirements, the entity develops an accounting policy under K-IFRS 1008. In Korea, practice generally uses the book value method, drawing on Korea Accounting Standards Board interpretations and chapter 32 of the Korean Accounting Standards for non-public entities (common control transactions). The assets and liabilities of the combined entity are taken over at their carrying amounts in the ultimate controlling party’s consolidated statements, and the difference from the consideration is taken to equity, such as capital surplus. No new goodwill or disposal gain or loss arises.

Check your understanding

Company KK is the parent of Company L with an 80% interest. At the end of 20X3, the carrying amount of L’s net assets (including goodwill) is ₩30 million and the carrying amount of non-controlling interests (20%) is ₩5.6 million. KK sells 60% of L for ₩27 million and keeps 20%, whose fair value is ₩9 million. The cumulative foreign operation translation difference relating to L is a gain of ₩1 million. What gain or loss on disposal does KK recognize?

Consideration received of ₩27 million, fair value of the retained interest of ₩9 million and non-controlling interests derecognized of ₩5.6 million total ₩41.6 million. Deducting the ₩30 million of net assets derecognized leaves ₩11.6 million. Reclassifying the parent’s ₩1 million share of the translation difference to profit or loss gives a gain on disposal of ₩12.6 million. The retained 20% becomes an investment in an associate with a cost of ₩9 million.

References

• Korea Accounting Standards Board, K-IFRS 1110 Consolidated Financial Statements (changes in control)
• Korea Accounting Standards Board, K-IFRS 1103 Business Combinations (step acquisitions, scope)
• Korea Accounting Standards Board, Korean Accounting Standards for non-public entities, chapter 32 Common Control Transactions