IFRS 3 — Mandatory purchase of NCI

Date recorded:

The IFRS Interpretation Committee had originally received the request to address the accounting for mandatory purchases of non-controlling interests (NCI) in business combinations. There are two questions:

  1. Should the initial acquisition of the controlling stake and the subsequent mandatory tender offer (MTO) be treated as separate transactions or as a single acquisition (i.e. linked transactions)?
  2. Should a liability be recognised for the MTO at the date that the acquirer obtains control of the acquiree?

On the first issue, back in November 2012, the Committee tentatively agreed that the initial acquisition of the controlling stake and the subsequent MTO be treated as a single transaction. The Committee tentatively decided to propose to the IASB to amend IFRS 3.

The second issue was also discussed at the November 2012 and it was concluded that no liability should be recognised for the MTO. However, the Committee has subsequently received some feedback disagreeing with that conclusion.

In the light of the feedback, the Staff have performed a further analysis and brought the issue to the Board at the May 2013 meeting. On the basis of that analysis, the Staff made the following proposals in respect of both questions:

  1. Single acquisition – unchanged as above. In terms of the process, the Committee recommended to amend IFRS 3 through Annual Improvements.
  2. Whether the liability should be recognised for the MTO – the Staff has reached a different conclusion; namely that the liability should be recognised in a manner consistent with IAS 32 at the date the acquirer obtains control. In terms of the process, the issue could be addressed as part of the Board’s post-implementation review (PIR) of IFRS 3 (i.e. separately from Issue 1). 

Measurement of the liability has not been addressed pending the conclusion on its recognition.

Most Board members agreed with the conclusions reached by the Staff (although one Board member believed that it was an IAS 37 liability that should be measured on a net basis). It was mentioned that there might be a variety of situations in practice; sometimes there would be a time lag between the acquisition and the MTO.

One Board member wanted to clarify the accounting implications of the above conclusions. The response was that if the transactions were considered linked, then the debit side of the entry for the liability would go to goodwill (vs. as a reduction in equity).

Following the above discussion, one Board member pointed that this issue should be discussed together with NCI puts as the issues were related.

Another Board member believed that it would be unhelpful to separate discussions on the two issues (i.e. linkage and liability) and that they should be dealt with at the same time.  

The Board decided to address both issues (linkage and liability) within the NCI puts project and not to wait for the PIR of IFRS 3.  

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