Consolidated and Separate Financial Statements (now reflected in IFRS 10), the
difference described should be recognised in equity, whereas applying IFRIC 17 by
analogy, the difference should be recognised in profit or loss (see 3.7 above).
The Interpretations Committee noted that the requirements of the then IAS 27 (now
reflected in IFRS 10), deal solely with the difference between the carrying amount of
the non-controlling interest and the fair value of the consideration given; this difference
is required to be recognised in equity. These requirements do not deal with the
difference between the fair value of the consideration given and the carrying amount
of such consideration. [IFRS 10.24, B96]. The difference between the fair value of the assets
transferred and their carrying amount arises from the derecognition of those assets.
IFRSs generally require an entity to recognise, in profit or loss, any gain or loss arising
from the derecognition of an asset.16
4.4 Transaction
costs
Although IFRS 10 is clear that changes in a parent’s ownership interest in a subsidiary
that do not result in the parent losing control of the subsidiary are equity transactions
(i.e. transactions with owners in their capacity as owners), [IFRS 10.23], it does not
specifically address how to account for related transaction costs. Only incremental costs
directly attributable to the equity transaction that otherwise would have been avoided
qualify as transaction costs. [IAS 32.37].
In our view, any directly attributable incremental transaction costs incurred to acquire
an outstanding non-controlling interest in a subsidiary, or to sell a non-controlling
interest in a subsidiary without loss of control, are deducted from equity. This is
regardless of whether the consideration is in cash or shares. This is consistent with both
guidance elsewhere in IFRS regarding the treatment of such costs, [IAS 32.35, 37, IAS 1.109],
and the view expressed by the Interpretations Committee.17 Although where shares are
given as consideration there is no change in total consolidated equity, there are two
transactions – an issue of new equity and a repurchase of existing equity. The entity
accounts for the transaction costs on the two elements in the same manner as if they
had occurred separately. The tax effects of transaction costs of equity instruments are
discussed in Chapter 29 at 10.3.5.
IFRS does not specify where to allocate the costs in equity – in particular, whether to
the parent (who incurred the costs) or to the non-controlling interest (whose equity was
issued/repurchased). Therefore, the parent may choose where to allocate the costs
within equity, based on the facts and circumstances surrounding the change in
ownership, and any legal requirements of the jurisdiction.
Consolidation procedures and non-controlling interests 501
Regardless of the account in equity to which the charge is allocated, the amount is not
reclassified to profit or loss in future periods. Consequently, if the costs are allocated to
the non-controlling interest, this amount must be separately tracked. Therefore, if a
subsidiary is later sold in a separate transaction (i.e. loss of control), the transaction costs
previously recognised directly in equity to acquire or sell the non-controlling interest
are not reclassified from equity to profit and loss, because they do not represent
components of other comprehensive income.
4.5
Contingent consideration on purchase of a non-controlling
interest
IFRS 10 does not provide guidance on accounting for remeasurement of contingent
consideration relating to the purchase of a non-controlling interest. The question arises
as to whether the remeasurement should be accounted for in profit or loss, or in equity
(on the grounds that it is related to the purchase of the non-controlling interest – see 4
above). This discussion assumes that the purchase of the non-controlling interest is
separate from the business combination. It is not uncommon for a written put and/or a
purchased call option over non-controlling interest to be put in place at the time of a
business combination. The accounting for such transactions (including forward
contracts to sell non-controlling interest) is discussed in 6 below.
IFRS 3 addresses the accounting for remeasurement of contingent consideration
recognised by the acquirer in a business combination. Contingent consideration is
initially recognised at its fair value. Contingent consideration classified as equity is not
remeasured and its subsequent settlement is accounted for within equity. Contingent
consideration not classified as equity that is within the scope of IFRS 9 is measured at
fair value at each reporting date and changes in its fair value are recognised in profit or
loss in accordance with IFRS 9. Contingent consideration not within the scope of
IFRS 9 is also recognised in profit or loss. [IFRS 3.58(b), IFRS 9.4.2.1(e)]. See Chapter 9 at 7.1.
The purchase of non-controlling interest is not a business combination and,
consequently, IFRS 3 requirements do not apply. In practice, most contingent
consideration meets the definition of a financial liability and would fall within the scope
of IFRS 9.
In our view, a distinction should be drawn between the initial recognition of the
contingent consideration classified as a financial liability, which is a transaction with
the non-controlling interest, and its subsequent measurement. On initial recognition,
contingent consideration is recognised at its fair value, the non-controlling interest
purchased is derecognised (and any balancing adjustment is reflected in parent equity).
Subsequent movements in contingent consideration classified as a financial liability are
recognised in accordance with IFRS 9 (in profit or loss, as explained below) rather than
regarded as relating to a transaction with the non-controlling interest (and recognised
in equity). If the contingent consideration is classified as an equity instrument, it will
not be remeasured.
Depending on the terms and conditions, the contingent consideration may be classified
as a financial liability at amortised cost, or at fair value through profit or loss.
[IFRS 9.4.2.1-4.2.2]. In both cases, subsequent remeasurements for any changes in estimated
contractual cash flows or fair value, or on final settlement of the financial liability are
502 Chapter
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recognised in profit or loss (except for any fair value movements attributable to own
credit risk required to be recognised in other comprehensive income, where the
financial liability is designated at fair value through profit or loss). See Chapter 44 at 3,
4 and 7, and Chapter 46 at 2.2, 2.4 and 3.
5 NON-CONTROLLING
INTERESTS
5.1
The definition of non-controlling interests
IFRS 10 defines a non-controlling interest as ‘equity in a subsidiary not attributable,
directly or indirectly, to a parent.’ [IFRS 10 Appendix A]. The principle underlying accounting
for non-controlling interests is that all residual economic interest holders of any part of
the consolidated entity have an equity interest in that consolidated entity. Consequently,
non-controlling
interests relate to consolidated subsidiaries, and not to those investments
in subsidiaries accounted at fair value through profit or loss in accordance with IFRS 9 by
an investment entity (see Chapter 6 at 10.3). [IFRS 10.31-33]. This principle applies regardless
of the decision-making ability of that interest holder and where in the group that interest
is held. Therefore, any equity instruments issued by a subsidiary that are not owned by
the parent (apart from those that are required to be classified by IAS 32 – Financial
Instruments: Presentation – as financial liabilities in the consolidated financial statements,
as discussed at 5.4 below) are non-controlling interests, including:
• ordinary shares;
• convertible debt and other compound financial instruments;
• preference shares that are classified as equity (including both those with, and
without, an entitlement to a pro rata share of net assets on liquidation);
• warrants;
• options over own shares; and
• options under share-based payment transactions.
Options and warrants are non-controlling interests, regardless of whether they are
vested and of the exercise price (e.g. whether they are ‘in-the-money’).
IAS 32 defines an equity instrument as ‘any contract that evidences a residual interest in
the assets of an entity after deducting all of its liabilities’. [IAS 32.11]. This is the same as the
definition of ‘equity’ in the IASB’s Conceptual Framework for Financial Reporting
published in 2018. [CF 4.63-4.64]. Hence, the reference to ‘equity’ in the definition of a non-
controlling interest refers to those ‘equity instruments’ of a subsidiary that are not
attributable, directly or indirectly, by its parent. This also means that financial instruments
that are not classified within equity in accordance with IAS 32 (e.g. total return swaps) are
not included within the definition of a non-controlling interest.
Consolidation procedures and non-controlling interests 503
5.2
Initial measurement of non-controlling interests
5.2.1
Initial measurement of non-controlling interests in a business
combination
IFRS 3 requires any non-controlling interest in an acquiree to be recognised,
[IFRS 3.10], but there are differing measurement requirements depending on the type of
equity instrument.
There is a choice of two measurement methods for those components of non-
controlling interests that are both present ownership interests and entitle their holders
to a proportionate share of the entity’s net assets in the event of a liquidation (‘qualifying
non-controlling interests’). They can be measured at either:
(a) acquisition-date fair value (consistent with the measurement principle for other
components of the business combination); or
(b) the present ownership instruments’ proportionate share in the recognised
amounts of the acquiree’s identifiable net assets.
The choice of method is to be made for each business combination on a transaction-
by-transaction basis, rather than being a policy choice. This choice of measurement is
discussed in Chapter 9 at 8.
However, this choice is not available for all other components of non-controlling
interests, which are required to be measured at their acquisition-date fair values, unless
another measurement basis is required by IFRSs. [IFRS 3.19].
Of the items listed in 5.1 above, entities are only given a choice of proportionate share
of the acquiree’s identifiable net assets or fair value for ordinary shares or preference
shares that are entitled to a pro rata share of net assets on liquidation.
Another measurement basis (referred to as a ‘market-based measure’) is required by
IFRS 3 for share-based payment transactions classified as equity in accordance with
IFRS
2 – these are measured in accordance with the method in IFRS
2.
[IFRS 3.30, B62A, B62B]. The accounting for replaced and not replaced share-based payment
transactions in a business combination is discussed in Chapter 9 at 7.2 and 8.4 and in
Chapter 30 at 11.2 and 11.3.
The other items listed in 5.1 above, e.g. the equity component of convertible debt or
other compound financial instruments, preference shares classified as equity without
an entitlement to a pro rata share of net assets upon liquidation, warrants and options
over own shares, must be measured at fair value.
These issues are discussed in more detail in Chapter 9 at 8.
The measurement of non-controlling interests in a business combination is illustrated
in Example 7.15 below.
504 Chapter
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Example 7.15: Initial measurement of non-controlling interests in a business
combination (1)
Parent acquires 80% of the ordinary shares of Target for €950,000 in cash. The total fair value of the equity
instruments issued by Target is €1,165,000 and the fair value of its identifiable net assets is €850,000. The
fair value of the 20% of the ordinary shares owned by non-controlling shareholders is €190,000. In addition,
the subsidiary has also written gross settled call options over its own shares with a fair value of €25,000,
which are considered equity instruments under IAS 32.
Option 1 – Non-controlling interests at fair value
The impact of the business combination and the measurement of non-controlling interests are as follows:
€’000 €’000
DR CR
Fair value of identifiable net assets
850
Goodwill (€950,000 + €215,000 – €850,000)
315
Cash
950
Non-controlling interests (€190,000 + €25,000)
215
The non-controlling interests are measured at the fair value of all equity instruments issued by Target that
are not owned by the parent (i.e. ordinary shares and gross settled call options).
Option 2 – Qualifying non-controlling interests are measured at proportionate share of identifiable net assets
The impact of the business combination and the measurement of non-controlling interests are as follows:
€’000 €’000
DR CR
Fair value of identifiable net assets
850
Goodwill (€950,000 – (80% × €850,000) + €25,000)
295
Cash
950
Non-controlling interests (20% × €850,000 + €25,000)
195
The non-controlling interests that are present ownership interests and entitle their holders to a proportionate
share of the Target’s net assets in the event of liquidation (i.e. the ordinary shares) are measured at the non-
controlling interests’ proportionate share of the identifiable net assets of Target. The non-controlling interests
that are not present ownership interests or do not entitle their holders to a proportionate share of the Target’s
net assets in the event of liquidation (i.e. the gross settled call options) are measured at their fair value.
Reconciliation of goodwill
Goodwill as determined under the two methods can be reconciled as follows:
€’000
Option 2: Goodwill (€950,000 – (80% × €850,000) + €25,000)
295
Goodwill related to the non-controlling interest in ordinary
shares
(€190,000 – 20% × €850,000)
20
Option 1: Goodwill (€1,165,000 – €850,000)
315
This makes clear that Option 2 effectively ignores the goodwill related to ordinary shares that are held by
non-controlling shareholders.
In Example 7.15 above, under Option 2, the computation of the non-controlling
interests represented by the ordinary shares was based solely on the fair value of the
identifiable net assets; i.e. no deduction was made in respect of the other component of
Consolidation procedures and non-controlling interests 505
non-controlling interests. IFRS 3 does not state whether this should be the case. An
alternative view would be that such other components of non-controlling interests
should be deducted from the value of the net identifiable net assets acquired based on
their acquisition-date fair value (or market-based measure) or based on their liquidation
rights, as illustrated in Example 7.16 below.
Example 7.16: Initial measurement of non-controlling interests in a business
combination (2)
Option 3 – Qualifying non-controlling interests are measured at proportionate share of identifiable net assets
net of other components of non-controlling interests
The impact of the business combination and the measurement of non-controlling interests are as follows:
€’000 €’000
DR CR
Fair value of identifiable net assets
850
Goodwill (€950,000 – 80% × (€850,000 – €25,000))
290
Cash
950
Non-controlling interests ((20% × (€850,000 – €25,000)) + €25,000)
190
The difference between goodwill of €295,000 (Option 2 in Example 7.15 above) and €290,000 is 20%
of €25,000, i.e. the amount attributable to the non-controlling interest in the call options.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 100