IFRS 3 Step Acquisitions: Staged Purchases & Fair Value Remeasurement

A step acquisition (a business combination achieved in stages) is where an acquirer already holds a non-controlling equity interest in an entity and then buys more shares, crossing the line into control. Under IFRS 3.41–.42 the acquirer must remeasure that previously held interest to acquisition-date fair value and take the gain or loss to profit or loss, then build goodwill on the whole 100% fair value of the business. This is one of the most misunderstood corners of consolidation, and it is routinely confused with simply adding a few more percent to a stake you already control — a transaction that gets the opposite treatment. This guide sets out the mechanics, two contrasting worked examples, the auditor red flags, and a real, publicly filed case where a previously held stake crystallised a multi-billion-dollar gain.

What is a step acquisition under IFRS 3?

A step acquisition is a business combination in which the acquirer obtains control of a business in which it already held an equity interest immediately before the acquisition date. The defining feature is a change in status: the investment crosses into control for the first time. IFRS 3.41 describes this precisely as an acquirer “obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date,” and calls it a business combination achieved in stages, or a step acquisition (IFRS 3.41). The old interest could have been a passive financial asset under IFRS 9, an associate under IAS 28, or a joint venture — what matters is that none of those gave the investor control, and the new tranche does.

The previously held interest can sit in one of several accounting homes before the control date, and where it sat determines what the remeasurement disturbs. If the stake was a passive holding it was carried at fair value through profit or loss or fair value through OCI under IFRS 9; if it conferred significant influence it was equity-accounted as an associate under IAS 28; if it was jointly controlled it was equity-accounted as a joint venture. Each of these is derecognised at the control date because the equity method (or IFRS 9 measurement) ceases the moment control is obtained and consolidation under IFRS 10 begins (IAS 28.22 requires that an entity discontinue the equity method from the date its investment ceases to be an associate).

Common step-acquisition scenarios

• Passive stake to control: hold 15% as an IFRS 9 financial asset, then buy a further 40% and consolidate a 55% subsidiary.
• Associate to subsidiary: hold 25% as an IAS 28 associate, then buy a further 30% for control (the classic case, and the one in our worked example).
• Joint venture to subsidiary: hold 50% jointly, then buy out the co-venturer and control the whole entity.

The core rule: remeasure to fair value

IFRS 3.42: In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss (or in OCI, if appropriate).

The economic logic behind IFRS 3.42 is that obtaining control is a significant change in the nature of the investment and an economic remeasurement event. The standard treats it as if the acquirer disposed of its old interest at fair value and simultaneously re-acquired it as part of gaining control, so the old stake is marked to fair value one final time before it disappears into the consolidated numbers (IFRS 3.42). There is a specific recycling rule sitting alongside this: where the acquirer had recognised changes in the value of its old interest in OCI — for example an FVOCI equity investment, or its share of an associate's OCI — that amount is reclassified on the same basis that would apply had the acquirer disposed of the interest directly (IFRS 3.42, final sentence). In practice that means an FVOCI equity election is not recycled to profit or loss (it moves within equity), whereas the acquirer's share of an associate's OCI generally is reclassified to profit or loss, exactly as the case study below illustrates.

How do you account for a step acquisition at the control date?

At the control date you do three things in sequence: remeasure the old interest to fair value and book the gain or loss, then measure the total consideration for goodwill as the sum of the fair value of the old interest plus the fair value of what you transferred for the new tranche, then recognise the acquiree's identifiable assets and liabilities at fair value and any non-controlling interest. Goodwill falls out as the residual (IFRS 3.32). The point people miss is that goodwill is built on the whole controlling investment — the fair value of the previously held interest is one of the ingredients of consideration, not something bolted on afterwards.

The three-step mechanics

IFRS 3.32 sets out goodwill as the excess of (a) the aggregate of the consideration transferred, any non-controlling interest, and — critically for step deals — the acquisition-date fair value of the acquirer's previously held equity interest, over (b) the net of the acquisition-date fair values of the identifiable assets acquired and liabilities assumed. IFRS 3.33 then requires goodwill to be recognised regardless of the tranches that got you there. This is why a step acquisition is a full step-up to 100% fair value goodwill, not a partial or blended goodwill number.

Worked example: 25% associate becomes a subsidiary

The journal at the control date to deal with the old interest is:

Now goodwill is computed on the whole controlling investment under IFRS 3.32, using the fair value of the old interest — not its carrying amount — as an ingredient of consideration:

Note the internal consistency check: the fair value of the whole entity implied by the 40% tranche is roughly £130m (£52m / 0.40), so 25% is worth about £32.5m — close to the £32m independent fair value, which is exactly the kind of cross-check an auditor performs. The £5m credit to profit or loss is a one-off, non-cash item and should be presented so a reader can see it is not operating performance.

Why is buying out the remaining NCI not a step acquisition?

Buying more shares in an entity you already control is not a step acquisition and triggers no remeasurement — it is a transaction between owners and is accounted for entirely within equity under IFRS 10. IFRS 10.23 is explicit: changes in a parent's ownership interest in a subsidiary that do not result in the parent losing control are equity transactions (i.e. transactions with owners in their capacity as owners). Because there is no change in control status, there is no acquisition, no fresh goodwill, and nothing goes to profit or loss (IFRS 10.23). This is the mirror image of a step acquisition, and mixing the two up is the single most common error in this area.

The mechanics are set by IFRS 10.B96: when the proportion of equity held by non-controlling interests changes, the carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interests, any difference between the amount by which the NCI is adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent, and no gain or loss is recognised (IFRS 10.B96). So if a parent already holding 80% buys the remaining 20% NCI, it adjusts down the NCI balance, and the gap between that balance and the cash paid hits equity — there is no P&L gain, no remeasurement of the 80% it already held, and no new goodwill.

Worked example: an NCI buyout is an equity transaction

Contrast this directly with the earlier example: there, control was obtained for the first time and £5m went through profit or loss; here, control already existed and £10m went straight to equity with nothing in profit or loss and no change to goodwill. Same direction of cash, opposite accounting, because the trigger — a change in control — is present in one and absent in the other (IFRS 3.42 versus IFRS 10.23/B96).

The one-question decision test

The whole classification turns on a single question: did control change hands at this transaction? If the entity moves from not-controlled to controlled, it is a step acquisition — remeasure the old interest to fair value, gain or loss to profit or loss, goodwill on 100% (IFRS 3.41–.42). If the entity was already controlled and stays controlled, it is an equity transaction — adjust NCI, difference to equity, no remeasurement, no new goodwill (IFRS 10.23/B96). The percentages are a distraction; the control boundary is everything.

What are the auditor red flags in a step acquisition?

Step acquisitions concentrate several higher-risk elements — a fair value estimate of an unlisted stake, a one-off gain that flatters earnings, and a genuine classification judgement — so they attract focused audit attention under the ISAs. The three red flags below are the ones that most often turn into audit adjustments.

Red flag 1: remeasurement gain not recognised (ISA 315)

Finding. Management closes a step acquisition but simply adds the cost of the new tranche to the carrying amount of the old associate, never remeasuring the previously held interest to fair value, so the gain or loss required by IFRS 3.42 never reaches profit or loss and goodwill is understated. This is a risk of material misstatement arising from an unusual, non-routine transaction, precisely the kind ISA 315 (Revised 2019) directs the auditor to identify and assess as a significant risk requiring specific responses. The auditor should walk the deal timeline, confirm the control date, and recompute the remeasurement independently rather than accepting the netted figure.

Red flag 2: fair value of the old interest is unsupported (ISA 540)

Finding. The fair value assigned to the previously held interest — often an unlisted associate with no quoted price — is management's own estimate, and the gain flowing to profit or loss is directly sensitive to it. ISA 540 (Revised) governs auditing accounting estimates, including fair value, and requires the auditor to evaluate the method, assumptions and data, and to challenge management's point estimate for indicators of bias. A useful corroboration is the price paid for the new controlling tranche: if 40% cost £52m, an implied value for the 25% that is wildly higher than a pro-rata £32.5m needs a control-premium or synergy explanation, not just an assertion (ISA 540; the auditor also gathers sufficient appropriate evidence under ISA 500).

Red flag 3: misclassifying an NCI buyout as a step acquisition, or vice versa (ISA 500)

Finding. Management records a purchase of further shares in an already-controlled subsidiary as if it were a step acquisition, booking a fictitious remeasurement gain and fresh goodwill, when IFRS 10.23/B96 required an equity transaction with no profit-or-loss effect — or the reverse, treating a genuine loss-then-regain of control as a simple equity move. Under ISA 500 the auditor must obtain sufficient appropriate evidence over the assertion that underpins the classification, namely whether control actually changed at the transaction date. That means inspecting shareholders' agreements, board composition, and voting arrangements to pin down the control boundary rather than relying on the ownership percentage alone, which links back to the ISA 315 risk assessment for non-routine transactions.

Real case study: AB InBev / Grupo Modelo

Frequently asked questions

Does the remeasurement gain on a step acquisition always go to profit or loss?

Usually yes. IFRS 3.42 recognises the gain or loss from remeasuring the previously held interest in profit or loss. The exception is the recycling of amounts previously held in OCI, which are reclassified on the same basis that would apply had the interest been disposed of directly — so an FVOCI equity election moves within equity rather than to profit or loss, while an associate's share of OCI is generally reclassified to profit or loss.

Is buying the last 20% of a subsidiary I already control a step acquisition?

No. Because you already have control, buying out the remaining non-controlling interest is an equity transaction under IFRS 10.23. You adjust the NCI balance, put any difference versus the consideration into equity attributable to the parent, and recognise no gain, no loss, and no new goodwill (IFRS 10.B96).

Do I calculate goodwill on just the new tranche or on the whole stake?

On the whole stake. IFRS 3.32 measures goodwill using the aggregate of the consideration transferred, any NCI, and the acquisition-date fair value of your previously held interest, less the fair value of identifiable net assets. The fair value of the old interest is an ingredient of consideration, so goodwill is a full step-up, not a figure computed only on the incremental shares.

What fair value do I use — the price I paid for the new shares, or an independent valuation?

You use the acquisition-date fair value of the previously held interest, which is a separate measurement from the consideration for the new tranche. The price paid for the controlling tranche is strong corroborating evidence but is not automatically the answer, because a controlling stake can carry a control premium the minority stake does not. Auditors test this under ISA 540 and expect a reconciliation between the two.

How is a step acquisition different from loss of control followed by a retained interest?

They sit at opposite ends of the control boundary. A step acquisition is gaining control (remeasure the old interest up to fair value, IFRS 3.42). Losing control is the reverse under IFRS 10.25–.26: you deconsolidate, remeasure any retained interest to fair value, and recognise the gain or loss on disposal. Both involve a fair value remeasurement, but one is entering consolidation and the other is leaving it.

Where should the remeasurement gain be presented in the income statement?

IFRS does not mandate a specific line, but because the gain is a one-off, non-cash item driven by obtaining control, good practice is to present it separately (or disclose it clearly in the notes) so users can distinguish it from operating performance. AB InBev, for example, disclosed its Grupo Modelo gain as an exceptional, non-recurring item.

About the author

Usman Qureshi is a Chartered Certified Accountant (ACCA) working in audit and advisory. He writes the IFRS, FRS 102 and US GAAP guides published on this site. Membership is listed on the ACCA public register.