Consolidation: De Facto Control, Options and Goodwill on a Step Acquisition
P Ltd has held 10% of Q Ltd since 2021, carried at ₹12,00,000. On 1 July 2024 P acquired a further 45% for ₹90,00,000 cash. Q's equity capital is ₹1,00,00,000 (10,00,000 shares of ₹10) and its reserves on 1 July 2024 were ₹40,00,000. On that date plant was revalued upward by ₹12,00,000 and a probable environmental claim of ₹3,00,000, not previously recognised, was reliably measured. P also holds call options over a further 8% of Q, exercisable immediately at a fixed price. Q's board has five directors; P appoints three under the shareholders' agreement, which also gives P the right to appoint the CEO and approve the annual budget. The remaining 45% is held by R Ltd (30%) and small investors. The fair value of P's original 10% on 1 July 2024 was ₹16,00,000. P measures non-controlling interest at fair value, estimated at ₹70,00,000.
1. Assess whether P controls Q and how the investment should be classified in the consolidated financial statements.
Read the worked answer
Control requires power over the relevant activities, exposure to variable returns, and the ability to use that power to affect returns. Three indicators point to control:
- Board control. P appoints three of five directors, giving it a majority and the ability to direct operating and financial policies.
- Shareholders' agreement. The right to appoint the CEO and approve the annual budget gives P power over the most significant decisions, independent of the shareholding percentage.
- Voting rights. P holds 55% directly (10% + 45%). The 8% call options are currently exercisable and are therefore considered in assessing control; they would raise P to 63%.
The 30% holding of R Ltd is not sufficient, alone or with dispersed holders, to outvote P's 55%. P therefore has de facto and contractual control.
The holding is classified as an investment in a subsidiary, consolidated line by line from 1 July 2024. The 8% options do not change the accounting until exercised; they are a control indicator, not a present ownership interest. Q is not an associate, because significant influence is subsumed by control.
2. Compute goodwill on acquisition if NCI is measured at fair value. State the alternative measurement and its effect.
Read the worked answer
Net assets of Q at acquisition (fair value).
| Item | ₹ |
|---|---|
| Equity capital | 1,00,00,000 |
| Reserves | 40,00,000 |
| Revaluation uplift on plant | 12,00,000 |
| Environmental claim recognised | (3,00,000) |
| Total | 1,49,00,000 |
Goodwill - NCI at fair value. Consideration for 45% = 90,00,000 Fair value of previously held 10% = 16,00,000 NCI at fair value = 70,00,000 Less: fair value of net assets = (1,49,00,000) Goodwill = ₹27,00,000
Alternative - NCI at proportionate share. NCI = 45% × 1,49,00,000 = ₹67,05,000. Goodwill = 90,00,000 + 16,00,000 + 67,05,000 − 1,49,00,000 = ₹24,05,000. The difference of ₹2,95,000 is the goodwill attributable to NCI that is recognised only under the fair-value method; it is not a gain or loss.
Both methods are permitted elections for each business combination, but the election must be applied consistently to the components of NCI.
3. Explain the treatment of the previously held 10% interest and of the environmental claim. What changes if the group reports under AS 21 rather than Ind AS 110?
Read the worked answer
Step acquisition. On obtaining control, the previously held 10% is remeasured to fair value. Carrying amount ₹12,00,000, fair value ₹16,00,000, giving a gain of ₹4,00,000 recognised in profit or loss. That gain is not part of goodwill; it is the result of holding the investment before it became a subsidiary.
Environmental claim. Because it is probable and reliably measurable, it is recognised at fair value as part of the identifiable net assets acquired. It therefore reduces net assets and increases goodwill. A contingent liability that is only possible, or cannot be measured reliably, would not be recognised and would instead be disclosed.
Under AS 21. AS 21 does not permit remeasuring a previously held interest at fair value on gaining control; the cost of the investment is the aggregate carrying amount, ₹12,00,000 + ₹90,00,000 = ₹1,02,00,000. NCI is measured only at its proportionate share of net assets. Goodwill would be 1,02,00,000 + 67,05,000 − 1,49,00,000 = ₹20,05,000, and the ₹4,00,000 step-up gain would not arise. The classification as a subsidiary is the same, but the measurement outcome differs materially.