FAC3704
LEARNING UNIT 6
CHANGES IN OWNERSHIP
Group Financial Reporting
164
, FAC3704/MO 001
9 LEARNING UNIT 6
Changes in ownership
Learning outcome 6
After studying this learning unit, you should be able to apply consolidation procedures to
prepare the consolidated annual financial statements for a group where there has been a
change in ownership.
OVERVIEW OF THE LEARNING UNIT
The learning unit consists of the following sections:
6.1 Introduction
6.2 Piecemeal acquisition of interests in investees
6.3 Sale of interest in an investee
6.4 Changes resulting from the issue of additional shares by investees
6.5 Assessment criteria
STUDY
Refer to the chapters on changes in ownership in Group statements.
6.1 INTRODUCTION
A company investing in another company exercises a certain degree of ownership
(control) over the acquired company’s financial and operating policies. The principles of
IFRS 3 should be applied at the acquisition date, which is the date that control is obtained.
A change in status implies that either there was control over a company which no longer
exists after the change in ownership (decrease in degree of control) or that there was no
control before the change in ownership and thereafter there is control (increase in the
degree of control).
6.1.1 Occurrences of changes in ownership
Changes in ownership can occur in many different ways, including the following:
(a) Increase of interest (increase in degree of control) by means of the following:
• Additional shares are bought in a step acquisition whereby an investment in the
acquired company becomes an investment exercising significant influence or gaining
control over the acquired company (in stages). (Resulting in a change in status.)
165
, • Additional equity shares in the acquired company are bought from the other investors
or from a share issue of the acquired company. This will increase the already existing
degree of control or significant influence. (Not resulting in a change in status.)
• The investing company exercises its allocated rights of the rights issue of the
acquired company and thereby increases its interest. This will occur if the ratio of its
exercised rights is greater than the ratio of the exercised rights of the other investors.
(This could result in a change in status, depending on the ratio in which shares are
eventually taken up.)
• Contractual changes.
LECTURER’S COMMENT
Bear in mind that a rights issue of the acquired company will not
always result in an increase in the degree of control. If the non-
controlling shareholders take up more rights than the acquiring
company, then the interest of the acquiring company will decrease.
(b) Decrease of interest by means of the following:
• Shares in a subsidiary are sold to either become an ordinary IFRS 9 investment or an
associate. (Resulting in a change in status, namely loss of control.)
• Shares in a subsidiary are sold, but the acquired company still remains a subsidiary
while the parent has a smaller interest in the subsidiary’s net identifiable assets and
liabilities. (Not resulting in a change in status, which means the parent is still the
controlling party.)
• The investing company partially exercises its allocated rights of the rights issue of the
acquired company and thereby decreases its interest. This will occur if the ratio of its
exercised rights is smaller than the ratio of the exercised rights of the other investors.
(The non-controlling interests exercise some or all of their rights.) (May or may not
result in a change in status, depending on the ratio in which the shares are eventually
taken up.)
• Contractual changes.
(c) No change in the degree of control
This is the result when both the parent and the non-controlling interests take up all their
rights in a subsidiary’s rights issue in the original ratio that they accrued to the investors, or
when neither of the parties exercise the rights that accrued to them.
NOTE:
A joint arrangement is an arrangement of which two or more parties have joint control
and can be either a joint venture or a joint operation. (Refer to learning unit 5 and the
relevant chapter in Group statements, volume 2).
Changes in ownership, increase or decrease between joint ventures and subsidiaries,
associates and simple investments (IFRS 9) form part of this learning unit.
Changes in the status of a joint operation will not be tested in FAC3704.
166
, FAC3704/MO 001
6.2 PIECEMEAL ACQUISITION OF INTERESTS IN INVESTEES
Different scenarios where there is an increase in the degree of control
Firstly, we look at scenarios where there will be a difference in status before and after the
change of ownership.
(a) Examples of scenarios where there was a change in status (no control changed
to having control)
• associate or joint venture becomes a subsidiary
• investment becomes a subsidiary
In these cases apply the steps of the acquisition process (refer to learning unit 1). On the
acquisition date (the date when control is obtained over the investee), recognise the
previously held interest at its fair value through profit and loss. If there were any fair value
adjustments recognised through equity relating to the investment before the acquisition
date, they will be reclassified from equity to profit and loss.
LECTURER’S COMMENT
Goodwill or gain on bargain purchase is recognised only on the
acquisition date, that is the date when control is obtained, and NOT
again on any date thereafter should additional interests in the
subsidiary be acquired.
(b) In the following examples there is a change in the degree of control, but not a
change in status:
• investment becomes an associate or a joint venture
• associate or joint venture becomes a greater associate or joint venture
In these cases we must apply the requirements of IAS 28. There are no requirements in
terms of IAS 28 to remeasure the fair value of any previously held interest on the date on
which significant influence is obtained over the associates operating and financing
activities.
On every date an interest in an investee is obtained, goodwill or gain on bargain purchase
will be calculated and appropriately recognised in the consolidated financial statements.
LECTURER’S COMMENT
This differs from the case of a subsidiary, when goodwill or gain on
bargain purchase is only recognised at acquisition date (the date on
which control is obtained).
167
LEARNING UNIT 6
CHANGES IN OWNERSHIP
Group Financial Reporting
164
, FAC3704/MO 001
9 LEARNING UNIT 6
Changes in ownership
Learning outcome 6
After studying this learning unit, you should be able to apply consolidation procedures to
prepare the consolidated annual financial statements for a group where there has been a
change in ownership.
OVERVIEW OF THE LEARNING UNIT
The learning unit consists of the following sections:
6.1 Introduction
6.2 Piecemeal acquisition of interests in investees
6.3 Sale of interest in an investee
6.4 Changes resulting from the issue of additional shares by investees
6.5 Assessment criteria
STUDY
Refer to the chapters on changes in ownership in Group statements.
6.1 INTRODUCTION
A company investing in another company exercises a certain degree of ownership
(control) over the acquired company’s financial and operating policies. The principles of
IFRS 3 should be applied at the acquisition date, which is the date that control is obtained.
A change in status implies that either there was control over a company which no longer
exists after the change in ownership (decrease in degree of control) or that there was no
control before the change in ownership and thereafter there is control (increase in the
degree of control).
6.1.1 Occurrences of changes in ownership
Changes in ownership can occur in many different ways, including the following:
(a) Increase of interest (increase in degree of control) by means of the following:
• Additional shares are bought in a step acquisition whereby an investment in the
acquired company becomes an investment exercising significant influence or gaining
control over the acquired company (in stages). (Resulting in a change in status.)
165
, • Additional equity shares in the acquired company are bought from the other investors
or from a share issue of the acquired company. This will increase the already existing
degree of control or significant influence. (Not resulting in a change in status.)
• The investing company exercises its allocated rights of the rights issue of the
acquired company and thereby increases its interest. This will occur if the ratio of its
exercised rights is greater than the ratio of the exercised rights of the other investors.
(This could result in a change in status, depending on the ratio in which shares are
eventually taken up.)
• Contractual changes.
LECTURER’S COMMENT
Bear in mind that a rights issue of the acquired company will not
always result in an increase in the degree of control. If the non-
controlling shareholders take up more rights than the acquiring
company, then the interest of the acquiring company will decrease.
(b) Decrease of interest by means of the following:
• Shares in a subsidiary are sold to either become an ordinary IFRS 9 investment or an
associate. (Resulting in a change in status, namely loss of control.)
• Shares in a subsidiary are sold, but the acquired company still remains a subsidiary
while the parent has a smaller interest in the subsidiary’s net identifiable assets and
liabilities. (Not resulting in a change in status, which means the parent is still the
controlling party.)
• The investing company partially exercises its allocated rights of the rights issue of the
acquired company and thereby decreases its interest. This will occur if the ratio of its
exercised rights is smaller than the ratio of the exercised rights of the other investors.
(The non-controlling interests exercise some or all of their rights.) (May or may not
result in a change in status, depending on the ratio in which the shares are eventually
taken up.)
• Contractual changes.
(c) No change in the degree of control
This is the result when both the parent and the non-controlling interests take up all their
rights in a subsidiary’s rights issue in the original ratio that they accrued to the investors, or
when neither of the parties exercise the rights that accrued to them.
NOTE:
A joint arrangement is an arrangement of which two or more parties have joint control
and can be either a joint venture or a joint operation. (Refer to learning unit 5 and the
relevant chapter in Group statements, volume 2).
Changes in ownership, increase or decrease between joint ventures and subsidiaries,
associates and simple investments (IFRS 9) form part of this learning unit.
Changes in the status of a joint operation will not be tested in FAC3704.
166
, FAC3704/MO 001
6.2 PIECEMEAL ACQUISITION OF INTERESTS IN INVESTEES
Different scenarios where there is an increase in the degree of control
Firstly, we look at scenarios where there will be a difference in status before and after the
change of ownership.
(a) Examples of scenarios where there was a change in status (no control changed
to having control)
• associate or joint venture becomes a subsidiary
• investment becomes a subsidiary
In these cases apply the steps of the acquisition process (refer to learning unit 1). On the
acquisition date (the date when control is obtained over the investee), recognise the
previously held interest at its fair value through profit and loss. If there were any fair value
adjustments recognised through equity relating to the investment before the acquisition
date, they will be reclassified from equity to profit and loss.
LECTURER’S COMMENT
Goodwill or gain on bargain purchase is recognised only on the
acquisition date, that is the date when control is obtained, and NOT
again on any date thereafter should additional interests in the
subsidiary be acquired.
(b) In the following examples there is a change in the degree of control, but not a
change in status:
• investment becomes an associate or a joint venture
• associate or joint venture becomes a greater associate or joint venture
In these cases we must apply the requirements of IAS 28. There are no requirements in
terms of IAS 28 to remeasure the fair value of any previously held interest on the date on
which significant influence is obtained over the associates operating and financing
activities.
On every date an interest in an investee is obtained, goodwill or gain on bargain purchase
will be calculated and appropriately recognised in the consolidated financial statements.
LECTURER’S COMMENT
This differs from the case of a subsidiary, when goodwill or gain on
bargain purchase is only recognised at acquisition date (the date on
which control is obtained).
167
