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Equity interests acquired prior to obtaining control are accounted for in accordance with US GAAP guidance applicable to the investment interest. An investor that exerts significant influence over an investee accounts for that interest as an equity method investment in accordance with ASC 323. See PwC’s Equity method investments and joint ventures guide for additional information. If an investor is unable to exert significant influence over an investee, the investment is generally accounted for as an equity security in accordance with ASC 321. See LI 2 for additional information.
The purchase of the additional interest in which the company obtains control is accounted for as a business combination if it meets the requisite criteria. See BCG 1 for further information. When an acquirer obtains control of a business, its consolidated financial statements include 100% of the assets acquired, liabilities assumed, and noncontrolling interests, generally at fair value, in accordance with ASC 805. The acquirer records 100% even when less than 100% of the acquiree is obtained.

5.3.1 Fair value method (partial and step acquisitions)

If a partial acquisition or a step acquisition in which control is obtained is considered a business combination, then a reporting entity should recognize the following at the acquisition date:
  • 100% of the identifiable net assets
  • NCI at fair value
  • Goodwill as the excess of (a) over (b) below, in accordance with ASC 805-30-30-1:
  1. The aggregate of (1) the consideration transferred, which generally requires acquisition-date fair value, (2) the fair value of any noncontrolling interest in the acquiree, and (3) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree
  2. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed
As discussed in BCG 2 and BCG 5.3, the identifiable assets acquired, liabilities assumed, and noncontrolling interests are generally measured at fair value in accordance with ASC 805. ASC 805-20-25-16 and ASC 805-20-30-10 provide for limited exceptions for certain assets and liabilities to be recognized and measured in accordance with other GAAP.
If no consideration is transferred, goodwill will be measured by reference to the fair value of the acquirer’s interest in the acquiree, determined using an appropriate valuation technique in accordance with ASC 805-30-30-3. See FV 7.3 for further information on valuation techniques.
Example BCG 5-1 in BCG 5.3.3 illustrates the amount of goodwill that would be recognized in a partial acquisition.

5.3.2 Remeasurement of previously held equity interest

A step acquisition occurs when a shareholder obtains control over an entity by acquiring an additional interest in that entity. If that entity is a business (whether a VIE or not), the acquirer’s previously held equity interest is remeasured to fair value at the date the controlling interest is acquired. Any difference in the previously-held equity interest is recognized as a gain or loss in the income statement in accordance with ASC 805-10-25-10. This remeasurement is not likely to result in the recognition of a loss since companies are required to periodically evaluate their investments for impairment. Any amounts previously recorded in other comprehensive income relating to the investee should be reclassified and included in the calculation of the gain or loss as of the acquisition date.
As discussed in ASC 321-10-35-2, an investor may choose to measure an equity investment that does not have a readily determinable fair value using the measurement alternative. The measurement alternative allows the investor to measure the equity investment at cost minus any impairment, plus or minus value changes based on observable prices in orderly transactions for the identical or similar investment of the same issuer. If an investor subsequently increases its ownership in a business to a level that provides the acquirer with control, the reporting entity remeasures the previously held equity interest in the acquiree to fair value through net income at the date control is obtained.
See BCG 5.3.4 for further information on the considerations in valuing the previously held equity interest.
In a step acquisition in which control is obtained, but the acquirer does not purchase all of the remaining ownership interests, an NCI is recorded in equity at the acquisition date at fair value. See FV 7.3.5 for further detail.

5.3.3 Examples of partial and step acquisitions

Example BCG 5-1, Example BCG 5-2, and Example BCG 5-3 demonstrate the acquisition date calculations for a partial acquisition and a step acquisition in which control of a business is obtained and the NCI is recorded in equity at fair value.
EXAMPLE BCG 5-1
Accounting for a partial acquisition of a business or VIE when control is obtained
Company A acquires Company B (a business) by purchasing 60% of its equity for $150 million in cash. The fair value of the noncontrolling interest is determined to be $100 million.1 The net aggregate value of the identifiable assets and liabilities is determined to be $50 million.
How should Company A account for the partial acquisition of Company B?
Analysis
At the acquisition date, the acquirer would recognize (1) 100% of the identifiable net assets, (2) NCI at fair value, and (3) goodwill.
The journal entry recorded on the acquisition date for the 60% interest acquired would be as follows (in millions):
Dr. Identifiable net assets
$50
Dr. Goodwill
$200 2
Cr. Cash
$150
Cr. NCI 1
$100
View table
1As more fully described in BCG 5.3.4 and FV 7.3.5, the fair value of the NCI may not merely be an extrapolation of the consideration transferred for the controlling interest; therefore, the fair value of the NCI may have to be independently determined.
2 Goodwill is recorded (in millions):
Fair value of consideration transferred
$150
Fair value of the NCI
100
Fair value of previously held equity interest
n/a
Subtotal
250
Recognized value of 100% of the identifiable net assets
(50)
Goodwill recognized
$200
EXAMPLE BCG 5-2
Accounting for a step acquisition of a business (whether a VIE or not) when control is obtained
Company A has a 40% previously held equity method investment in Company B (a business). The carrying value of the previously held equity method investment is $20 million. Company A purchases the remaining 60% interest in Company B for $300 million in cash. The fair value of the 40% previously held equity method investment is $200 million.1 The net aggregate value of the identifiable assets and liabilities is determined to be $440 million. (For illustrative purposes, the tax consequences on the gain have been ignored.)
How should Company A account for the step acquisition of Company B?
Analysis
At the acquisition date, the acquirer would recognize (1) 100% of the identifiable net assets, (2) NCI at fair value (not applicable in this example), and (3) goodwill. Any gain or loss on the previously held equity method investment is recognized in the income statement.
The journal entry recorded on the acquisition date is as follows (in millions):
Dr. Identifiable net assets
$440
Dr. Goodwill
$60 2
Cr. Cash
$300
Cr. Equity method investment
$20 3
Cr. Gain on equity method investment 1
$180 4
View table
1As more fully described in BCG 5.3.4 and FV 7.3.5, the fair value of the previously held equity method investment may not merely be an extrapolation of the consideration transferred for the controlling interest; therefore, the fair value of the previously held equity method investment may have to be independently determined.
2Goodwill is recorded (in millions):
Fair value of consideration transferred
$300
Fair value of the NCI
n/a
Fair value of previously held equity method investment
200
Subtotal
500
Recognized value of 100% of the identifiable net assets
(440)
Goodwill recognized
$60
3Elimination of the carrying value of the 40% previously held equity method investment
4The gain on the 40% previously held equity method investment is recognized in the income statement: fair value of the previously held equity method investment less the carrying value of the previously held equity method investment ($200 – $20)
EXAMPLE BCG 5-3
Accounting for a partial acquisition when control is obtained, but less than 100% is acquired
Company A has a 40% previously held equity method investment in Company B, with a carrying value of $20 million. Company A purchases an additional 50% interest in Company B for $250 million in cash. The fair value of Company A’s 40% previously held equity method investment is determined to be $200 million.1 The fair value of the NCI is determined to be $50 million.1The net aggregate value of the identifiable assets and liabilities is determined to be $440 million. (For illustrative purposes, the tax consequences on the gain have been ignored.)
How should Company A account for the partial acquisition of Company B?
Analysis
At the acquisition date, the acquirer would recognize (1) 100% of the identifiable net assets, (2) NCI at fair value, and (3) goodwill. Any gain or loss on the previously held equity method investment is recognized in the income statement.
The journal entry recorded on the acquisition date for the 50% controlling interest acquired would be as follows (in millions):
Dr. Identifiable net assets
$440
Dr. Goodwill
$60 2
Cr. Cash
$250
Cr. Equity method investment
$20 3
Cr. Gain on equity method investment1
$180 4
Cr. NCI 1
$ 50
View table
1As more fully described in BCG 5.3.4 and FV 7.3.5, the fair value of the NCI and the previously held equity method investment may not merely be an extrapolation of the consideration transferred for the controlling interest; therefore, the fair value of the NCI and the previously held equity method investment may have to be independently determined.
2 Goodwill is recorded (in millions):
Fair value of consideration transferred
$250
Fair value of the NCI
50
Fair value of previously held equity method investment
200
Subtotal
500
Recognized value of 100% of the identifiable net assets
(440)
Goodwill recognized
$60
3Elimination of the carrying value of the 40% previously held equity method investment
4The gain on the 40% previously held equity method investment is recognized in the income statement: fair value of the previously held equity method investment less the carrying value of the previously held equity method investment ($200 – $20)

5.3.4 Fair value considerations (partial and step acquisitions)

ASC 805-20-30-7 through ASC 805-20-30-8 provide the guidance for measuring a noncontrolling interest in an acquiree at fair value.

ASC 805-20-30-7

Paragraph 805-20-30-1 requires the acquirer to measure a noncontrolling interest in the acquiree at its fair value at the acquisition date. An acquirer sometimes will be able to measure the acquisition-date fair value of a noncontrolling interest on the basis of a quoted price in an active market for the equity shares (that is, those not held by the acquirer). In other situations, however, a quoted price in an active market for the equity shares will not be available. In those situations, the acquirer would measure the fair value of the noncontrolling interest using another valuation technique.

ASC 805-20-30-8

The fair values of the acquirer’s interest in the acquiree and the noncontrolling interest on a per-share basis might differ. The main difference is likely to be the inclusion of a control premium in the per-share fair value of the acquirer’s interest in the acquiree or, conversely, the inclusion of a discount for lack of control (also referred to as a noncontrolling interest discount) in the per-share fair value of the noncontrolling interest if market participants would take into account such a premium or discount when pricing the noncontrolling interest.

The fair value of a noncontrolling interest can be measured on the basis of market prices for the equity shares not held by the acquirer if the noncontrolling interest consists of publicly traded securities. The acquirer must measure the fair value of the noncontrolling interest using other valuation techniques if the securities are not publicly traded, as described in ASC 805-20-30-7. See FV 7.3.5.2 for additional information on valuation techniques for measuring the fair value of NCI. On a per-share basis, the fair value of the acquirer’s interest in the acquiree and the noncontrolling interest may differ. This difference may be due to the inclusion of a control premium in the per-share fair value of the acquirer’s interest in the acquiree or, conversely, the inclusion of a discount for lack of control in the per-share fair value of the noncontrolling interest, as described in ASC 805-20-30-8.
A control premium represents the amount paid by a new controlling shareholder for the benefits resulting from synergies and other potential benefits derived from controlling the acquired company. Control premiums and noncontrolling interest discounts should not be applied without considering whether the noncontrolling interest will benefit in ways similar to the acquirer. For example, certain operational synergies will often impact the cash flows of the acquiree as a whole, including the noncontrolling interest in the acquiree. In such a case, deducting those operational synergies (control premium) to value the noncontrolling interest may not be appropriate.
As discussed in BCG 5.3.2, in a step acquisition, the acquirer’s previously-held equity interest is remeasured to fair value at the date the controlling interest is acquired in accordance with ASC 805-10-25-10. However, ASC 805 does not address measuring the fair value of a previously-held equity interest. We believe the measurement guidance and foregoing considerations related to the fair value of NCI should similarly be considered for the measurement of a previously-held equity interest. See FV 7.3.5.3 for additional information on measuring the fair value of a previously-held equity interest.

5.3.5 Consideration of goodwill when NCI exists

In a partial acquisition, consideration needs to be given to the attribution of goodwill to controlling and noncontrolling interests in the event that goodwill is later impaired. When goodwill is impaired, ASC 350-20-35-57A requires that the impairment loss be attributed to the parent and the NCI on a rational basis. One rational approach would be to attribute the impairment loss to the controlling interest and the NCI using their relative interests in the carrying value of goodwill. See BCG 9 for further information on impairment testing of goodwill.

5.3.6 Bargain purchase in partial or step acquisition

Occasionally, an acquirer will make a bargain purchase; that is, a business combination in which (a) the acquisition-date amount of the identifiable net assets acquired and the liabilities assumed exceeds (b) the aggregate of (1) the consideration transferred, which generally requires acquisition-date fair value; (2) the fair value of any noncontrolling interest in the acquiree; and (3) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.
Similar to a bargain purchase in an acquisition of 100% of the equity interests, the acquirer shall reassess whether it has identified all of the assets acquired and liabilities assumed. The acquirer shall also review its valuation procedures used to measure the amounts recognized for the identifiable net assets, the NCI, the previously held equity interest, and the consideration transferred. If a bargain purchase is still indicated, the acquirer recognizes a gain in the income statement on the acquisition date in accordance with ASC 805-30-25-2 through ASC 805-30-25-4.
In a bargain purchase, the bargain element realized by the controlling interests in the transaction is not allocated to the NCI. Therefore, the NCI is recognized at its fair value in accordance with ASC 805-20-30-7.
Example BCG 5-4 demonstrates the accounting for a bargain purchase in a partial acquisition.
EXAMPLE BCG 5-4
Accounting for a bargain purchase in a partial acquisition of a business
Company A acquires Company B by purchasing 70% of its equity for $150 million in cash. The fair value of the NCI is determined to be $69 million. 1 The net aggregate value of the identifiable assets and liabilities is determined to be $220 million. (For illustrative purposes, the tax consequences on the gain have been ignored.)
How should Company A account for the bargain purchase gain?
Analysis
The bargain purchase gain is calculated as the excess of (a) the recognized amount of the identifiable net assets acquired over (b) the fair value of the consideration transferred plus the fair value of the NCI and, in a step acquisition, the fair value of the previously held equity interest.
Recognized value of 100% of the identifiable net assets (a)
$220
Fair value of consideration transferred
(150)
Fair value of the NCI 1
(69)
Fair value of previously held equity interest
n/a
Less: subtotal (b)
(219)
Bargain purchase gain (a – b)
$1
The recognized amount of the identifiable net assets is greater than the fair value of the consideration transferred plus the fair value of the NCI, and there was no previously held equity interest in Company B to value. Therefore, a bargain purchase gain of $1 million would be recognized in the income statement.
The journal entry recorded on the acquisition would be as follows (in millions):
Dr. Identifiable net assets
$220
Cr. Cash
$150
Cr. Gain on bargain purchase
$1 2
Cr. NCI 1
$69
1 As more fully described in BCG 5.3.4 and FV 7.3.5, the fair value of the NCI may not merely be an extrapolation of the consideration transferred for the controlling interest; therefore, the fair value of the NCI may have to be independently derived.
2 Gain recognized on bargain purchase: recognized amount of the identifiable net assets, less: fair value of consideration transferred, and the fair value of the NCI ($220 – ($150 + $69))
Because the NCI is required to be recorded at fair value, a bargain purchase gain is recognized only for $1 million. The NCI is recognized at fair value, which includes embedded goodwill of $3 million: Fair value of NCI – NCI’s share of identifiable assets ($69 – ($220 × 30%) = $3). Although the NCI value includes embedded $3 million of goodwill, the consolidated financial statements do not contain a separate goodwill line item. Consistent with the guidance on bargain purchases in BCG 2.6.2, when a bargain purchase gain is recognized in a business combination (regardless of whether or not there is NCI), no goodwill is recognized.

5.3.7 Multiple transactions that result in gaining control

Sometimes a company gains control of a business as a result of two or more transactions (e.g., purchase of 40% of a business and a second purchase of 20% of the business shortly thereafter). The same principles discussed in BCG 5.5.4 for a loss of control may be applied for gaining control of a business in multiple transactions. Companies may consider the factors included in BCG 5.5.4 to assess whether a series of transactions that results in gaining control should be considered as a single transaction.
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