A parent company acquires 80 percent of the voting shares of another company in a transaction that qualifies as a business combination, with the remaining 20 percent continuing to be held by outside shareholders as a non-controlling interest. Under ASC 805, and separately under IFRS 3, what measurement options does the acquirer have for that non-controlling interest at the acquisition date, and how does the choice affect the goodwill recognized?
- Both frameworks require the acquirer to measure the non-controlling interest at its proportionate share of identifiable net assets, producing partial goodwill in every acquisition
- Under IFRS 3, the non-controlling interest must always be measured at fair value; ASC 805 instead offers a policy choice between fair value and proportionate share
- Under ASC 805, the non-controlling interest must be measured at fair value, which produces full goodwill for the acquisition; under IFRS 3, the acquirer may elect, transaction by transaction, to measure the non-controlling interest either at fair value, producing full goodwill, or at its proportionate share of the acquiree's identifiable net assets, producing partial goodwill
- Neither framework permits any measurement of non-controlling interest at fair value, since goodwill can only ever be recognized in relation to the controlling interest actually acquired
Why C? And why not the others?
Correct answer: C. Under ASC 805, the non-controlling interest must be measured at fair value, which produces full goodwill for the acquisition; under IFRS 3, the acquirer may elect, transaction by transaction, to measure the non-controlling interest either at fair value, producing full goodwill, or at its proportionate share of the acquiree's identifiable net assets, producing partial goodwill
ASC 805 gives the acquirer no choice: the non-controlling interest must be measured at its acquisition-date fair value, which, combined with the fair value of the consideration transferred for the controlling interest, results in goodwill being recognized on the non-controlling interest's share of the business as well as the controlling interest's share, commonly called the full goodwill method. IFRS 3 instead gives the acquirer an accounting policy choice, made separately for each business combination, to measure the non-controlling interest either at fair value, which produces the same full goodwill outcome as ASC 805, or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets, which produces a smaller amount of goodwill recognized only in respect of the controlling interest, commonly called the partial goodwill method. The option requiring proportionate-share measurement under both frameworks is wrong because ASC 805 does not offer that option at all. The option attributing the policy choice to ASC 805 and a fixed fair-value rule to IFRS 3 is wrong because it reverses which framework is mandatory and which is elective. The option denying that either framework permits fair value measurement of the non-controlling interest is wrong because fair value measurement is not only permitted but required under ASC 805, and is one of the two available elections under IFRS 3.
Source: FASB Accounting Standards Codification ASC 805-20-30 (non-controlling interest measured at fair value); IFRS Foundation, IFRS 3 Business Combinations, paragraph 19 (accounting policy choice, on a transaction-by-transaction basis, between fair value and proportionate share of identifiable net assets)