Changes in ownership interest

Ownership of subsidiaries changes over time. A parent may build up a stake in steps, buy out minority shareholders, sell part of its holding while keeping control, or sell enough to lose control. Groups also own subsidiaries indirectly, through other subsidiaries. This lesson explains how each change is accounted for. The guiding principle is that control is the significant economic event: crossing the control threshold, in either direction, remeasures interests to fair value through profit or loss; changes in ownership that leave control unchanged are transactions among the owners of the group and go through equity.

Step acquisitions: achieving control in stages

An acquirer sometimes holds an equity interest in an entity before it obtains control, for example an associate accounted for by the equity method. When it buys more shares and obtains control, a business combination occurs on that date. The acquirer remeasures its previously held equity interest to fair value at the acquisition date and recognizes any gain or loss in profit or loss. The fair value of the previously held interest is then included in the goodwill calculation along with the consideration for the new shares and the NCI.

Amounts the investor recognized in OCI for the previously held interest, such as its share of the associate's translation differences, are treated as if the interest had been disposed of: recycled to profit or loss if they would be recycled on disposal, or transferred within equity if not. If the previous holding was an equity investment designated at FVOCI under IFRS 9, its cumulative gains stay in equity and are not recycled.

The logic is that the investor has exchanged one asset, a significant-influence investment, for another, a controlling interest, and the exchange is measured at fair value. Critics note that the remeasurement gain arises from buying more shares, not from selling anything, and that it can be large when the earlier stake was bought years ago.

Changes in a parent's interest that do not affect control

Once a parent controls a subsidiary, buying more shares from the NCI or selling some shares to outsiders while keeping control does not change the group's assets and liabilities. No goodwill is recognized on further purchases, and no gain or loss is recognized on partial disposals. Instead, the transaction is accounted for within equity: the carrying amount of NCI is adjusted to reflect the change in relative interests, and any difference between that adjustment and the fair value of the consideration paid or received is recognized directly in equity attributable to the owners of the parent.

# Changes in Larkspur's ownership of Blue Heron and Cedar Point, 1 January 2028 (illustrative)
# 1. Step acquisition: from 30% (equity method) to 70% of Cedar Point
held_carrying, held_fv = 1_102_500, 1_350_000
paid, nci_fv, fv_net_assets = 1_800_000, 1_250_000, 3_600_000
remeasure_gain = held_fv - held_carrying
goodwill = paid + held_fv + nci_fv - fv_net_assets
print(f"Step acquisition: gain on remeasuring 30% stake {remeasure_gain:,.0f}; goodwill {goodwill:,.0f}")
# 2. Buying half of the NCI in Blue Heron (20% -> 10% NCI): an equity transaction
nci_carrying = 990_000 - 12_000 + 114_000 - 50_000 - 12_000 + 2_872   # lessons 5-7 roll-forward
price = 560_000
nci_transferred = nci_carrying * 10 / 20
print(f"NCI before {nci_carrying:,.0f}; transferred {nci_transferred:,.0f}; "
      f"charge to parent's equity {price - nci_transferred:,.0f}")
# 3. Indirect holding: effective interest through a chain
p_in_s, s_in_t = 0.80, 0.60
eff = p_in_s * s_in_t
print(f"Effective interest in a sub-subsidiary: {eff:.0%}; total NCI in it {1 - eff:.0%}")

Step acquisition: gain on remeasuring 30% stake 247,500; goodwill 800,000
NCI before 1,032,872; transferred 516,436; charge to parent's equity 43,564
Effective interest in a sub-subsidiary: 48%; total NCI in it 52%

The program also shows how ownership works through a chain. If a subsidiary owns 60 per cent of another company, and the parent owns 80 per cent of that subsidiary, the parent's effective interest in the sub-subsidiary is 48 per cent. The sub-subsidiary is still consolidated, because the parent controls it through its controlled subsidiary, but total NCI in its profit is 52 per cent: 40 per cent held directly by outsiders and 12 per cent indirectly through the outsiders who own 20 per cent of the intermediate subsidiary. Consolidating chains bottom-up, starting with the lowest-level subsidiary, keeps the attribution straight.

Loss of control

When a parent loses control of a subsidiary, whether by selling shares, by the subsidiary issuing shares to others, by contract or by the subsidiary coming under the control of a government or court, it derecognizes the subsidiary's assets (including goodwill) and liabilities at their carrying amounts and derecognizes the carrying amount of NCI. It recognizes the fair value of any consideration received and the fair value of any investment it retains. The difference is a gain or loss in profit or loss attributable to the parent, and amounts in OCI relating to the subsidiary are recycled or transferred as if the assets had been disposed of directly. The retained interest becomes an associate, a joint venture or a financial asset, measured initially at fair value.

# Loss of control: Larkspur sells 60% of Blue Heron, keeping 20% (alternative scenario)
proceeds = 3_400_000
fv_retained = 1_100_000          # fair value of the 20% kept, now an associate
net_assets_incl_gw = 5_400_000   # Blue Heron's net assets in the consolidated statements, with goodwill
nci = 1_032_872                  # NCI derecognized
oci_recycled = 0                 # no recyclable OCI in this example
gain = proceeds + fv_retained + nci - net_assets_incl_gw + oci_recycled
print(f"Derecognize net assets {net_assets_incl_gw:,.0f} and NCI {nci:,.0f}")
print(f"Gain on loss of control: {gain:,.0f}")
part_retained = fv_retained - 0.20 / 0.80 * (net_assets_incl_gw - nci)
print(f"  of which from remeasuring the retained 20% to fair value: about {part_retained:,.0f}")

Derecognize net assets 5,400,000 and NCI 1,032,872
Gain on loss of control: 132,872
  of which from remeasuring the retained 20% to fair value: about 8,218

Part of the gain comes from remeasuring the retained interest to fair value, which the standards treat as a deemed sale and repurchase. The second program estimates that portion at about $8,218: the parent's share of Blue Heron's net assets was $4,367,128, so the retained 20 per cent (a quarter of the parent's 80 per cent) carried about $1,091,782, which is remeasured to $1,100,000.

IFRS 10 requires this treatment. When a subsidiary that does not contain a business is transferred to an associate or joint venture, the accounting of gains and losses has been a long-standing point of conflict between IFRS 10 and IAS 28; the IASB's 2014 amendments to resolve it were deferred indefinitely, and its equity method project (lesson 2) is expected to settle the issue. Under ASPE, Section 1602 treats changes in a parent's ownership that do not result in loss of control as equity transactions, similar to IFRS.

Dilution through subsidiary share issues

A parent's percentage can also change when the subsidiary itself issues new shares. If outsiders buy them and the parent keeps control, the parent's interest is diluted. The transaction is an equity transaction: NCI increases by its new share of the subsidiary's net assets after the issue, and the difference between the proceeds and that increase adjusts the parent's equity. If the parent buys all the new shares, its percentage rises, and the same equity accounting applies in reverse.