Not all business combinations take place in one go. Sometimes a parent can acquire an entity in stages, which we call a step acquisition. This takes place when an acquirer holds an existing equity interest in the acquiree before the date of control. Say, for example, a company may hold 25% of a company, and then buy out another shareholder taking their share to 55% of the acquiree.
Adjustment to Goodwill
When a step acquisition takes place, an adjustment is made in calculating the goodwill or any bargain purchase. The equity is remeasured at the acquisition date fair value.
Remeasure Previous Equity Interest
At the acquisition date, the acquirer must remeasure its previous equity interest in the acquiree at the fair value. If there’s any gain or loss this will be recognised in the profit or loss. The fair value of the acquiree at the acquisition date will be the combination of:
- The fair value of the previous equity instrument, plus
- The consideration transferred to get control, plus
- The amount of any non-controlling interest in the acquiree.
Once this is calculated, the goodwill or bargain purchase can be calculated. This adjustment is only required when the business combination takes place in stages.