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IFRS 3 — Mandatory purchase of non-controlling interest in business combination obtaining control of listed entity

Date recorded:

The Committee considered a request to address the accounting for the mandatory purchase of non-controlling interests (NCI) in business combinations in sequence transactions in which an acquirer obtains control (or, in some cases, a significant interest) over another entity but is obliged shortly thereafter (by regulatory requirement as a result of the initial acquisition) to offer to purchase all remaining interests. The submitter noted that IFRS 3 does not specifically address the accounting for such sequence transactions. The core issues that arise in addressing the issue include:

  • whether the initial and subsequent acquisitions should be treated as separate transactions or as a single acquisition (linked transaction). The answer to this question has implications on the amount of goodwill recognised if the entity chooses the option permitted by IFRS 3 to measure the NCI at the present ownership instruments’ proportionate share in the recognised amount of the acquiree’s identifiable net assets, as opposed to the fair value of the NCI.
  • whether a liability should be recognised at the date in which the acquirer obtains control over another entity.

On the first issue of whether the initial and subsequent acquisition should be treated as linked transactions, a couple Committee members saw the transactions as not linked. These members noted that each transaction is economically justified and separately negotiated. Conversely, multiple Committee members saw the transactions as linked. They noted the secondary offer to purchase all remaining interests is a mandatory securities law requirement triggered by the acquisition of the original interest. As the acquirer cannot avoid making the secondary offer, they viewed it as one linked transaction.

When put to a vote, a clear majority of Committee members believed the transactions were linked (and therefore, the acquisition of the initial and subsequent acquisitions should be accounted for as a single transaction that is completed over a period of time).

The Committee then considered the second issue of whether a liability should be recognised at the date in which the acquirer obtains control over another entity. A few Committee members believed that a liability should be recognised. In their view, the statutory obligation to offer to purchase remaining interests was no different from a put option granted to NCI (obliged to pay cash in return for shares held by the NCI). As such, they believed a financial liability should be recognised based on the present value of expected payments. However, other Committee members believed no liability should be recognised until the tenders are accepted. These Committee members noted that no contract has been created until an NCI accepts the tender offer (citing the definition of a financial instrument in IAS 32). They also noted that no liability should be recognised under IAS 37 since neither party has performed on its obligations (related to the subsequent acquisition of remaining interests) at the time in which the acquirer obtains control over another entity.

When put to a vote, a clear majority of Committee members believed that no liability should be recognised at the date in which the tender to purchase the remaining interests is extended.

The staff originally proposed to amend the application guidance in IFRS 3 to clarify the accounting treatment for such transactions. However, as a result of the Committee’s tentative decisions, certain amendments are required to the staff’s proposals. As such, the Committee Chair directed the staff to reconsider its proposed amendments in light of today’s discussions for subsequent presentation to the Committee.

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