A step acquisition (or staged acquisition) occurs when control is obtained in multiple tranches over time. IFRS 3 requires a unique treatment: at the control date, remeasure all previously-held equity interests to fair value. The resulting gain/loss hits P&L immediately. This guide covers the mechanics, worked examples, and audit challenges.
What is a Step Acquisition?
Acquiring control of an entity in stages:
Common Scenarios
- Minority to control: Own 20% at cost, then acquire additional 31% to gain control (51% total)
- Associate to subsidiary: Own 25% under equity method, then acquire 26% more for control
- JV to subsidiary: Own 50% jointly with one partner, then buy out partner for control
IFRS 3 Treatment: The Control Date Remeasurement
Key Principle
At the acquisition (control) date, remeasure all previously-held equity interests to fair value. Recognize any gain/loss immediately in P&L.
Why This Rule?
Under IFRS 3, the acquisition method requires fair value measurement of all consideration transferred, including the existing equity interest. Moving from associate/JV to full subsidiary is treated as if you disposed of the old interest and bought a new one at fair value.
Step Acquisition Accounting Mechanics
Before Control Date (e.g., 20% ownership)
- If joint control or significant influence: Account under equity method (IFRS 11 JV or IAS 28 associate)
- If no control/influence: Account under IFRS 9 (FVOCI or FVPL)
- Carrying amount: cost + share of post-acquisition reserves (under equity method) or fair value (under IFRS 9)
Control Date (Acquisition Moment)
- Step 1: Remeasure previously-held equity interest to fair value
- Step 2: Recognize gain/loss: Fair value −’ Carrying amount to P&L
- Step 3: Consolidate with all assets/liabilities at fair value (acquisition method)
Calculation of Goodwill
Worked Example: Staged Acquisition of Manufacturing Company
Deal Timeline
1 January 2024: Acquire 30% of MfgCo (cost: £20m)
1 July 2025: Acquire additional 21% (cost: £18m) →’ Control reached (51%)
Fair value of MfgCo at control date: £100m (implies 1% = £1m)
Phase 1: 30% Ownership (Equity Accounted)
- Initial cost: £20m
- Share of profits 2024— 2025: +£8m
- Share of dividends paid: −’£2m
- Carrying amount (before remeasurement): £20m + £8m −’ £2m = £26m
Phase 2: Control Date Remeasurement (1 July 2025)
Step 1: Remeasure 30% Interest
- Fair value of 30% at control date: 30% × £100m = £30m
- Carrying amount (before remeasurement): £26m
- Remeasurement gain: £30m −’ £26m = £4m
- P&L Entry: Dr Equity Interest (balance sheet) £4m / Cr Gain on Remeasurement of Equity Interest £4m
Step 2: Consolidate New 21% Interest
- Fair value of 21% interest acquired: 21% × £100m = £21m
- Cash paid: £18m
- P&L Entry (acquisition): Dr Equity Interest £21m / Cr Cash £18m, Cr Gain on Bargain Purchase £3m
Step 3: Calculate Consolidated Goodwill
- Fair value of 30% (after remeasurement): £30m
- Fair value of 21% (new acquisition): £21m
- Total consideration (fair value basis): £51m
- Fair value of MfgCo's identifiable net assets: £90m (assume)
- Goodwill: £51m −’ (90% × £90m) = £51m −’ £81m = negative goodwill (bargain purchase)
Consolidated Balance Sheet (1 July 2025)
- MfgCo assets (fair values): £100m
- MfgCo liabilities (fair values): £10m
- Non-controlling interest (19%): £17.1m (19% × £90m net assets)
- Goodwill: £0 (bargain purchase, with gain recognized in OCI or P&L per IFRS 3)
- Consolidated equity: Buyer's equity + £4m remeasurement gain
Loss of Control Scenario
When Seller Loses Control
If you go from 51% to 30% ownership:
- Deconsolidate on loss of control date
- Remeasure retained 30% to fair value
- Recognize gain/loss in P&L
- Going forward, account as equity method (associate) or IFRS 9 (FVOCI)
Worked Example: Loss of Control
Scenario: You own 51% of TargetCo (consolidated), accounting goodwill £10m. You sell 21% stake (retaining 30%) for £25m cash.
- Fair value of retained 30%: £30m (= £100m × 30%)
- Carrying amount of retained 30%: (51% × £90m net assets + allocated goodwill) × 30/51 ≈ £27m
- Gain on sale of 21%: £25m −’ (21/51 × consolidated equity) = TBD based on actual equity
- Gain on remeasurement of retained 30%: £30m −’ £27m = £3m
- Total gain in P&L: Gain on sale + Gain on remeasurement
Audit Red Flags: Step Acquisitions
Red Flag 1: Remeasurement Not Recognized
Finding: Step acquisition closes; 20% interest previously carried at cost £10m remeasured to £15m fair value, but gain not recorded.
Auditor action: Require recognition of £5m remeasurement gain in P&L. Material misstatement.
Red Flag 2: Wrong Acquisition Date
Finding: Control obtained on 1 July, but acquisition date treated as 1 January (wrong fair value measurement dates).
Auditor action: Adjust acquisition date to control date; remeasure all identifiable assets/liabilities to correct date.
Red Flag 3: Goodwill Calculation Omits Prior Interest
Finding: Goodwill calculated only on new 21% acquisition, ignoring fair value of the 30% previously held.
Auditor action: Recalculate goodwill including both tranches at fair value; likely significant adjustment.
Red Flag 4: No Separate Disclosure of Remeasurement Gain
Finding: Remeasurement gain buried in consolidated P&L without separate line item or note.
Auditor action: Require clear identification so readers understand source of gain.
Real-Life Case Study: From Associate to Subsidiary
Scenario. A group already owns 30% of a company (equity-accounted associate, carrying amount £6m) and buys a further 40% for £10m, gaining control.
Treatment. This is a business combination achieved in stages. The previously held 30% is remeasured to fair value at the acquisition date, say £7.5m, and the £1.5m uplift goes to profit or loss. Goodwill is then computed using the fair value of the whole 70%-plus stake.
Takeaway. Gaining control is an accounting event even for the shares you already held: you crystallise a gain (or loss) on the old stake. Many preparers wrongly just add the new 40% cost to the old carrying amount.
Illustrative composite scenario for educational purposes. Figures are indicative and do not represent any specific company.
→ IFRS 3 Business Combinations Hub
• IFRS 3 PPA: Step-by-Step Purchase Price Allocation with Worked Example
• IFRS 3 Fair Value Measurement: Valuing Intangible Assets
• IFRS 3 Contingent Consideration: Earnouts, Remeasurement & Accounting
• IFRS 3 Reverse Acquisitions: Accounting for Control Transfers