accounting for these arrangements should not affect how an entity should attribute
comprehensive income to the parent and the non-controlling interests.
[IFRS 10.BCZ162-164].
These requirements in IFRS 10 in respect of loss-making subsidiaries have been carried
forward from those introduced by the IASB when IAS 27 was amended in 2008, and
differ from the requirements formerly included in IAS 27. However, a transitional issue
that arose when IAS 27 was amended in 2008 that may still have been relevant for
certain entities applying IFRS 10 relates to loss-making subsidiaries at the time of
transition to IAS 27 (as amended in 2008). [IFRS 10.C6]. Since IFRS 1 – First-time
Adoption of International Financial Reporting Standards – also has a similar transitional
exception for measurement of non-controlling interests, [IFRS 1.B7], (see Chapter 5
at 4.8), this issue may also be relevant for entities that applied IFRS 10 (rather than
IAS 27, as amended in 2008) on first-time adoption. This issue is discussed in Chapter 7
at 6.1 of EY International GAAP 2016.
6
CALL AND PUT OPTIONS OVER NON-CONTROLLING
INTERESTS
Some business combinations involve options over some or all of the outstanding shares.
For example, the acquirer might have a call option, i.e. a right to acquire the outstanding
shares at a future date for a particular price. Alternatively, the acquirer might have
granted a put option to the other shareholders whereby they have the right to sell their
shares to the acquirer at a future date for a particular price. In some cases, there may
be a combination of such call and put options, the terms of which may be equivalent or
may be different.
IFRS 3 gives no guidance as to how to account for such options in a business
combination. Therefore, when determining the appropriate accounting in the
consolidated financial statements in such situations, IFRS 10, IAS 32, and IFRS 9 need
to be considered. The accounting for call and put options depends on whether or not
the acquirer has obtained present access to returns associated with the ownership
Consolidation procedures and non-controlling interests 511
interest in the shares of the acquiree subject to the call and/or put option. Potential
voting rights that represent a present ownership interest are discussed in general at 2.2
and 5.5 above but specific considerations for call and/or put options are discussed at 6.1
and 6.2 below.
While the discussion below deals with options, similar considerations to those discussed
at 6.1 and 6.2 below apply where the acquirer entered into a forward purchase contract
for the shares held by the other shareholders (see 6.3 below).
Although the discussion at 6.1 and 6.2 below focuses on call and put options entered
into at the same time as control of the subsidiary is gained, an entity may enter into the
options with non-controlling shareholders after gaining control. As indicated at 6.4
below, the appropriate accounting in the consolidated financial statements will still be
based on the discussions in 6.1 and 6.2 below.
6.1
Call options only
Call options are considered when determining whether the entity has obtained control,
as discussed at Chapter 6 at 4.3.4. Where it is determined that an entity has control over
another entity, the proportions of profit or loss, other comprehensive income and
changes in equity allocated to the parent and non-controlling interests are based on
present ownership interests, and generally do not reflect the possible exercise or
conversion of potential voting rights under call options. [IFRS 10.21, 24, B89, B94]. The
eventual exercise of potential voting rights under the call option are reflected in the
proportion of profit or loss, other comprehensive income and changes in equity only if
in substance the entity already has access to the returns associated with that ownership
interest. [IFRS 10.21. 24, B90, B94]. This assessment depends on the terms of the call option,
and judgement is required.
6.1.1
Options giving the acquirer present access to returns associated with
that ownership interest
A call option is likely to give the acquiring entity present access to returns associated
with the ownership interest in the shares subject to the call in limited circumstances,
for example:
• when the option price is fixed with a low exercise price and it is agreed between
the parties that either no dividends will be paid to the other shareholders or the
dividend payments lead to an adjustment of the option exercise price; or
• when the terms are set such that the other shareholders effectively receive only a
lender’s return.
This is because any accretion in the fair value of the underlying ownership interest
under the option (for example, due to improved financial performance of the acquiree
subsequent to the granting of the call option) is likely to be realised by the acquirer.
If a call option gives the acquiring entity present access to returns over all of the
shares held by non-controlling shareholders, then there will be no non-controlling
interest presented in equity. The acquirer accounts for the business combination as
though it acquired a 100% interest. The acquirer also recognises a financial liability
for the present value of the exercise price to be paid to the non-controlling
512 Chapter
7
shareholders under the call option. Changes in the carrying amount of the financial
liability are recognised in profit or loss, in accordance with IFRS 9. If the call option
expires unexercised, then the acquirer has effectively disposed of a partial interest
in its subsidiary in return for the amount recognised as the ‘liability’ at the date of
expiry and accounts for the transaction as a change in ownership interest without a
loss of control, as discussed at 4 above.
6.1.2
Options not giving the acquirer present access to returns associated
with that ownership interest
A call option may not give present access to the returns associated with the ownership
interest in the shares subject to the call where the option’s terms contain one or more
of the following features:
• the option price has not yet been determined or will be the fair value of the shares
at the date of exercise (or a surrogate for such a value);
• the option price is based on expected future results or net assets of the subsidiary
at the date of exercise; or
• it has been agreed between the parties that, prior to the exercise of the option, all
retained profits may be freely distributed to the existing shareholders according to
their current shareholdings.
If a call option does not give present access to the returns associated with the
ownership interest in the shares subject to the call, IFRS 10 requires that the
instruments containing the potential voting rights be accounted for in accordance
with IFRS 9. [IFRS 10.21, B91]. Derivatives on an interest in a subsidiary are accounted
for as financial instruments unless the derivative meets the definition of an equity
instrument of the entity in IAS 32. [IFRS 9.2.1(a)]. The accounting by the parent in its
<
br /> consolidated financial statements depends on whether the call option meets the
definition of a financial asset or an equity instrument:
• Financial asset – A call option is initially recognised as a financial asset at its fair
value, with any subsequent changes in its fair value recognised in profit or loss. If
the call option is exercised, the fair value of the option at that date is included as
part of the consideration paid for the acquisition of the non-controlling interest
(see 4 above). If it lapses unexercised, any carrying amount is expensed in profit
or loss.
• Equity instrument – A call option is accounted for in a similar way to a call option
over an entity’s own equity shares, as discussed in Chapter 43 at 11.2.1. This is
because it is an option over the non-controlling interest in the consolidated
financial statements, and IFRS 10 regards the non-controlling interest as ‘equity’ in
those financial statements. Because such a call option over the non-controlling
interest’s shares will be gross-settled, the initial fair value of the option is
recognised as a debit to equity. If the call option is exercised, this initial fair value
is included as part of the consideration paid for the acquisition of the non-
controlling interest (see 4 above). If a call option lapses unexercised, there is no
entry required within equity.
Consolidation procedures and non-controlling interests 513
The above discussion addresses the initial debit entry on recognising the call option at
fair value (as a financial asset, or within equity). However, the related initial credit entry
will depend on the transactions giving rise to the call option. For example, the entity
may have paid consideration for the option in a separate transaction or as part of a
larger transaction (such as where a business combination involves an outright purchase
of shares as well as the acquisition of a call option over the remaining shares).
6.2
Put options only
Under current IFRS, it is not clear how to account for put options that are granted to
holders of non-controlling interests (‘NCI puts’) at the date of acquiring control of a
subsidiary (or, indeed, after gaining control). There is a lack of explicit guidance in IFRS
and potential contradictions between the requirements of IFRS 10 and IAS 32.
This issue has been the subject of much debate over the years. Although it is clear that,
under current IFRS, the NCI put itself gives rise to a liability representing the exercise price
(see 6.2.1 below for a discussion of the measurement of this liability), there are a number
of decisions that must be made in order to account for the arrangements, including:
• whether or not the terms of the NCI put mean that it gives the parent a present
ownership interest in the underlying securities (see 6.2.2 below); and
• where the parent does not have a present ownership interest, whether or not a non-
controlling interest continues to be recognised, i.e. should the parent recognise both
the non-controlling interest and the financial liability for the NCI put.
In the latter case, there are a number of additional decisions that must be made, in
particular the basis on which the non-controlling interest is recognised.
Although the Interpretations Committee unequivocally confirmed as early as 2006 that
an NCI put with an exercise price to be settled in cash is itself a financial liability,19 the
nature of the financial liability remains controversial and has been discussed by the
Interpretations Committee and the IASB on a number of occasions. In June 2014, the
IASB decided that this issue will be considered as part of the broader project looking at
the distinction between liabilities and equity – the Financial Instruments with
Characteristics of Equity (‘FICE’) project.20 In June 2018, the IASB issued Discussion
Paper – Financial instruments with Characteristics of Equity. The FICE project is
discussed further at 7.4 below.
The previous deliberations have been in the context of an NCI put that is required to
be settled for cash. The Interpretations Committee has also considered a request
in 2016 regarding how an entity accounts for an NCI put in its consolidated financial
statements where the NCI put has a strike price that will be settled by delivery of a
variable number of the parent’s own equity instruments. Specifically, the
Interpretations Committee was asked to consider whether, in its consolidated financial
statements, the parent recognises:
(a) a financial liability representing the present value of the option’s strike price – in
other words, a gross liability; or
(b) a derivative financial liability presented on a net basis measured at fair value.
514 Chapter
7
The Interpretations Committee was also asked whether the parent applies the same
accounting in its consolidated financial statements for NCI puts for which the parent
has the choice to settle the exercise price either in cash or by way of delivery of a
variable number of its own equity instruments to the same value.
However, on the basis of its previous discussions and the IASB’s FICE project, the
Interpretations Committee decided in November 2016 not to add this issue to its
agenda.21
Given that the Interpretations Committee did not conclude on this matter, in our view,
both approaches are acceptable.
These developments are discussed further at 6.5 below.
Like the previous deliberations of the Interpretations Committee and the IASB, the
discussion that follows relates to NCI puts that are required to be settled in cash.
6.2.1
The financial liability for the NCI put
As indicated at 5.1 above, IFRS 10 regards the non-controlling interest as ‘equity’ in
the consolidated financial statements. Under current IFRS, any contractual
obligation to purchase non-controlling interests – such as a put option granted to
non-controlling interests – gives rise to a financial liability measured at the present
value of the redemption amount (for example, for the present value of the forward
repurchase price, option exercise price or other redemption amount). Subsequently,
the financial liability is measured in accordance with IFRS 9 (see Chapter 43 at 5.3
and 11.3.2). [IAS 32.23, AG27(b)].
IAS 32 offers no guidance as to how the financial liability should be measured if the
number of shares to be purchased and/or the date of purchase are not known. In
our view, it would be consistent with the requirement of IFRS 13 that liabilities with
a demand feature such as a demand bank deposit should be measured at not less
than the amount payable on demand [IFRS 13.47] (see Chapter 43 at 5.3 and Chapter 14
at 11.5), to adopt a ‘worst case’ approach. In other words, it should be assumed that
the purchase will take place on the earliest possible date for the maximum number
of shares.
The accounting for the remaining aspects of the put option is discussed below;
this depends in part upon an assessment of the terms of the transaction and, in
some areas, involves a choice of accounting policy which, once selected, must be
applied consistently.
Figure 7.2 below summarises the an
alysis that we believe should be performed, the
questions to be addressed and the approaches that apply.
Consolidation procedures and non-controlling interests 515
Figure 7.2
Decision tree for accounting for put options over non-controlling
interest
Does the parent
have a present
ownership interest
Yes
in the shares
subject to the put?
Approach 1: No NCI
• Shares subject to the put are accounted for as acquired
No
• Changes in IFRS 9 put liability subsequently recognised in
profit or loss
Which standard is
IAS 32
• If option expires unexercised, account as disposal of
assessed as taking
portion of business (without loss of control)
precedence?
Approach 2: Full recognition of NCI
IFRS 10
• NCI continues to receive an allocation of profit or loss
• Liability is an immediate reduction of other equity (not NCI)
Recognise NCI upon
• Changes in IFRS 9 put liability subsequently recognised in
acquisition
profit or loss
Policy
Approach 3: Partial recognition of NCI
Share
choice
• NCI continues to receive an allocation of profit or loss
Fair
of net
• NCI is reclassified as liability at the end of the reporting
value
assets
period, as if the acquisition took place at that date
• Changes in the amount reclassified are recognised in equity
Approach 4: NCI is subsequently derecognised
• Acquisition of NCI gives rise to an equity adjustment
• Changes in IFRS 9 put liability subsequently recognised in
profit or loss
• If option expires unexercised, reinstate NCI as if nothing
happened
The diagram above indicates that, under approaches 1, 2 and 4, changes in the IFRS 9
financial liability subsequent to initial recognition are recognised in profit or loss. This
would be the case regardless of whether the financial liability is subsequently
remeasured at amortised cost or at fair value through profit or loss under IFRS 9.
However, if the financial liability is designated at fair value under IFRS 9, the fair value
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