CA Anuj Agrawal
CA Anuj Agrawal

Once an entity obtains a significant influence (as per Ind-As-28) or Joint control (as per Ind-As-111 to fall under JV) then Equity accounting needs to be applied. There are some events when the entity subsequently acquires/ controls (control as defined in Ind-As-110) these equity accounted investments and become Parent for these entities, and requires to account for these step acquisitions (i.e. from Associate/JV to Subsidiary).

There are some notable significant points where an existing equity accounted Investment will become a subsidiary which have been summarized below after we will have a look at how this accounting will work by using an example with Journal Entries.

Firstly,

Let’s have related references from the standard which deals with these kinds of accounting situations –

Ind-As 103 – Business Combination

Para -41An acquirer sometimes obtains control of an acquiree in which it held an equity interest

immediately before the acquisition date. For example, on 31 December 20X1, Entity A holds a 35 per cent non-controlling equity interest in Entity B. On that date, Entity A purchases an additional 40 per cent interest in Entity B, which gives it control of Entity B. This Ind AS refers to such a transaction as a business combination achieved in stages, sometimes also referred to as a step acquisition.

Para- 42In a business combination achieved in stages, the acquirer shall remeasure its previously

held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss or other comprehensive income, as appropriate. In prior reporting periods, the acquirer may have recognised changes in the value of its equity interest in the acquiree in other comprehensive income. If so, the amount that was recognised in other comprehensive income shall be recognised on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest.

Now,

Let’s take an example to have a practical insight about the concept as mentioned above.

Example –

Company A has purchased an Investment in Company B on 1.04.2015 by taking its 35% of ordinary shares for an amount of INR 75,000 and classified this investment as an Associate (by establishing facts of significant influence). At the end of the year, Company A has bought additional 65% shares and take full control over the Company B by paying a cash amount of INR 425,000.

During the year 2015-2016, Company A has got below share of profit in Company B as on 31.03.2016 –

Share of profit of B for Company A
Portion- Profit & Loss            10,000
Portion-FX losses through OCI               2,000
Portion-Revaluation on Property-OCI               1,000

Equity accounted balance of for Company A as on 31.03.2016 will be calculated as below-

Equity accounted interest            88,000
  (75,000+10,000+2,000+1,000)

Fair value of the shares held i.e. 35% and overall Fair value of business has been given as below-

Fair Value of 35% previously held share          115,000
Fair value of total assets/ liab.          510,000

Now, since control has been established on 31.03.2016, a Goodwill will be calculated as per para 42 of Ind-As 103 (mentioned above) –

Goodwill Calculation:
 Cash paid for the 65% additional intt.          425,000
 Fair value of previously held shares          115,000
   
 Total value of deal (paid+ re-valued)          540,000
   
 Total fair value of assets/ Liab          510,000
Difference being GOODWILL            30,000

As per the standard, all previously held share of investment will be fair valued and resultant gain/ loss will be transferred to PL of the year when such control has been established  which has been calculated as below –

Gain on previously held shares :
 Fair value of previously held shares          115,000
Equity accounted interest            88,000
Difference            27,000
Add :
Portion-FX losses through OCI              2,000
Total Gain to credit into PL            29,000

Now,

Let’s have a Journal Entry for the transaction which has happened based on the calculations (as above)-

Journal Entry (to record Step acquisition)
Company A books
Total net assets (acquired)          510,000
Goodwill            30,000 (refer working)
Portion-FX losses through OCI              2,000 (recycle to PL)
Portion-Revaluation on Property-OCI              1,000 (non-recycle to PL)
     To Cash    425,000
     To Equity accounted interest      88,000
     To Retained Earning         1,000
     To Gain on previously held share       29,000
Total Journal          543,000     543,000

Significant changes/ notes on the step acquisition-

  1. One can clearly see that, a gain/loss will be credited/ debited to the PL in the year when such step acquisition takes place which can substantially affect the profitability of the business/KPI,
  2. FX losses in this example are considered as exchange difference while converting functional currency to presentation currency which will be reclassified into PL in the year of disposal (which is the date of acquisition),
  3. Revaluation of property (part of OCI) will never be re-classified into PL and hence it has been adjusted towards retained earnings,
  4. If there is any Minority Interest then fair value of that share will be calculated (given by a valuer) and accordingly Goodwill will be calculated (either partial or full),
  5. If you read the example carefully and assume that there is no such OCI related items then, simply your gain amount will be INR 27,000 in place of INR 29,000 which is because of additional INR 2,000 reclassified to PL (Fx losses entry) and INR 1,000 which was related to revaluation will never affect this gain calculation, further the Goodwill calculation will remain same no matter if there is any item related to OCI or not (refer example calculations)

This example is to provide an overall understanding and resulting effects of this step acquisition accounting and provide its significance over profits of the year in which such transactions takes place.

A reader will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.

One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.

(Author of this article is an experienced chartered accountant who has specialization on various GAAP conversions assignments covering different industries around different part of the world including acting as an Independent IFRS Advisor & Corporate Trainer. He can be reached via email at anuj@gyanifrs.com or Whatsapp +91-9634706933)

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4 responses to “Associate/ JV (Equity accounted) to Subsidiary- “Step Acquisition” – Ind-As/ IFRS”

  1. CA.Anuj Agrawal says:

    Dear Sir, Kindly ask anything related to accounting aspects..thanks

  2. CA.Anuj Agrawal says:

    Yes, You are right Amit, and hence all those who will be acting as auditor or those acting as client will not need to be sure about the proper compliance of these standards..

  3. CA.Amit says:

    As per a news from ET, there is a clear indication from regulators also that the compliance of these new accounting standards (INd-AS) will be ensured by them and scrutiny might be started…

  4. C.A. J.K.AGARWAL says:

    Dear Sir, can you pl. suggest the prescribed procedure for payment of Purchase Consideration by a USA base Co.for purchase of 100% Equity Shares of an Indian Company, by issuing its own shares of U.S. Co. to the Individual Share holders of the acquired Indian Co.May pl. include the FEMA / RBI procedural requirements.

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