Consolidation, Business Combinations and Associates
Control, goodwill and equity method
This domain tests control under IFRS 10, the acquisition method under IFRS 3, non-controlling interests, step acquisitions, and significant influence and equity accounting under IAS 28. Control requires power over the investee, exposure to variable returns, and the ability to use power to affect those returns. Consolidate all subsidiaries, eliminate intra-group balances, income and expenses, and apply uniform accounting policies.
- Goodwill = consideration transferred + NCI + previously held interest − net identifiable assets acquired, all at acquisition-date fair value.
- NCI may be measured at fair value or at its proportionate share of identifiable net assets.
- Acquisition-related costs are expensed; contingent consideration is measured at fair value.
- Step acquisition: remeasure the previously held interest at fair value through profit or loss.
- Associates: significant influence is presumed at 20%; use the equity method and test for impairment under IAS 36.
Worked example
Parent pays 800,000 for 80% of Sub. Sub's identifiable net assets at fair value are 900,000. Proportionate NCI is 20% × 900,000 = 180,000. Goodwill is 800,000 + 180,000 − 900,000 = 80,000. If NCI is measured at fair value of 200,000, goodwill is 100,000. The NCI measurement choice is made for each business combination.
Traps
- Treating significant influence as control because of a 30% holding.
- Expensing goodwill or amortising it.
- Forgetting to fair value previously held interests in a step acquisition.
- Eliminating balances but not unrealised profits in upstream or downstream transactions.