Step acquisition, control, and goodwill with NCI measurement choice
Taeyang Co. has held a 20% equity interest in Luna Co. for three years, accounted for as an associate with a carrying amount of ₩950 million. On 1 October 20X5, Taeyang acquires an additional 45% for ₩2,700 million cash, giving it 65%. The shareholders' agreement requires Taeyang to obtain approval from a minority shareholder holding 25% for annual budgets and senior management appointments. Taeyang appoints four of seven directors; the minority appoints two; one is independent. Historically, budgets proposed by Taeyang have been approved without amendment. The previously held 20% has a fair value of ₩1,200 million at acquisition. Luna's identifiable net assets at acquisition have a fair value of ₩4,500 million; carrying amount is ₩3,600 million. Taeyang elects to measure NCI at fair value, estimated at ₩1,650 million. The purchase agreement includes contingent consideration of up to ₩400 million payable if Luna's 20X6 EBITDA exceeds ₩800 million; Taeyang estimates fair value at ₩250 million and assesses the target as probable. Transaction costs of ₩80 million are incurred.
1. Assess whether Taeyang controls Luna and should consolidate it.
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Control under IFRS 10 requires power over relevant activities, exposure to variable returns, and the ability to use power to affect those returns. Taeyang has 65% of voting rights and appoints four of seven directors, giving it board control. The minority approval right for budgets and senior management appointments must be assessed as substantive or protective. A right that merely protects the minority's financial interests is protective and does not prevent control. Here, the history of budgets being approved without amendment and Taeyang's board majority indicate that the approval right does not prevent Taeyang from directing relevant activities. Conclusion: Taeyang controls Luna and consolidates it from 1 October 20X5. If the approval right were substantive and required for all relevant operating decisions, the conclusion could differ, so the judgement should be documented.
2. Calculate goodwill using the fair value option for NCI and explain the step acquisition accounting.
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Consideration transferred = cash ₩2,700m + fair value of contingent consideration ₩250m + fair value of previously held interest ₩1,200m = ₩4,150m. Add NCI at fair value ₩1,650m. Less fair value of identifiable net assets ₩4,500m. Goodwill = ₩4,150m + ₩1,650m − ₩4,500m = ₩1,300m. The previously held 20% is remeasured to fair value, giving a gain of ₩1,200m − ₩950m = ₩250m in profit or loss. Transaction costs of ₩80m are expensed. Contingent consideration is a financial liability measured at fair value through profit or loss; subsequent fair value changes go to profit or loss and are not adjusted against goodwill.
3. How would goodwill differ if Taeyang measured NCI at its proportionate share of Luna's net assets?
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NCI at proportionate share = 35% × ₩4,500m = ₩1,575m. Goodwill = ₩4,150m + ₩1,575m − ₩4,500m = ₩1,225m. This is ₩75m lower than under the fair value option. The difference represents NCI's share of goodwill. The choice between the fair value option and the proportionate share option is made separately for each business combination. The step acquisition gain, contingent consideration treatment, and expensing of transaction costs are unchanged.