Step Acquisitions

Step Acquisitions: Business Combinations

A step acquisition (also called piecemeal acquisition) is a business combination in which an investor obtains control over an investee through multiple transactions. When the investor obtains control of the investee, it remeasures any investment previously held to fair value and consolidates the investee going forward.

While most business combination occur when the investor purchases sufficient voting rights at once, there are instances when the investor establishes control in steps by purchasing chunks of the investee company at different dates. Such acquisitions are called step acquisitions.

Subsidiaries and associates are consolidated / equity accounted for from the date control, or significant influence is gained.

Application of Achieving Control in Stages

When control is achieved, the following treatment should be followed:

  • Any previously held equity shareholding should be treated as if it had been disposed of and then re-acquired at fair value at the acquisition date

  • Any gain or loss on remeasurement to fair value should be recognised in profit or loss in the period.

Calculation of Goodwill

Goodwill should be calculated as follows:

GOODWILL in a STEP ACQUISITION  
  Total (£)
Fair Value of Consideration paid to acquire control X
Non-controlling interest (valued using either fair value or proportion of net assets) X
Fair Value of previously held interest at acquisition date X
  X
Fair value of net assets of acquiree (X)
Goodwill X / (X)

Adjs. on Achieving Control (e.g. Unrealised Gains)

One of the consequences of any previously held equity being treated as disposed is that any unrealised gains become realised at the acquisition date.

E.g.:

Equity previously classified as an Available For Sale investment

  • Any gains of Available for Sale assets previously recognised in other comprehensive income should be reclassified into profit and loss

Equity previously classified in an Equity Accounted Associate

  • Any revaluation surpluses recognised in respect of PPE should be transferred from the revaluation surplus to retained earnings

Acquisitions not resulting in a change in control

Where an entity increases its investment in an existing subsidiary:

  • No gain or loss is recognised
  • Goodwill is not remeasured
  • The difference between the fair value of consideration paid and the change in the non-controlling interest is recognised directly in equity attributable to owners of the parent

Practical Examples

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