In a step acquisition, what happens to the pre-existing equity interest when you gain control?

Question

AcadiFi · Accepted Answer

Step acquisitions are one of the trickiest areas in business combinations. The key concept is that gaining control is a transformative event — the accounting resets completely.

**The Rule (IFRS 3 / ASC 805)**

When an acquirer achieves control through a step acquisition, the **previously held equity interest must be remeasured to fair value at the acquisition date**. Any difference between fair value and carrying amount is recognized as a **gain or loss in the income statement**.

**Cascadia–Rimrock Example**

| Item | Amount |
|---|---|
| Pre-existing 25% carrying amount (equity method) | $85M |
| Fair value of 25% at acquisition date | $100M |
| Cash paid for additional 40% | $160M |
| Rimrock identifiable net assets at fair value | $350M |

**Step 1: Remeasure the Pre-Existing Interest**

Gain = $100M - $85M = **$15M** (recognized in income statement)

**Step 2: Calculate Total Consideration**

Total consideration = Cash for new shares + FV of old shares
= $160M + $100M = **$260M**

**Step 3: Compute Goodwill**

Goodwill = Total consideration + NCI - Identifiable net assets at FV

Assuming full goodwill method and NCI fair value of $140M (35% x implied):

Goodwill = $260M + $140M - $350M = **$50M**

```mermaid
flowchart TD
    A["Pre-Existing 25%
Carrying: $85M"] -->|"Remeasure to FV"| B["Fair Value: $100M
Gain: $15M on I/S"]
    C["New 40% Acquired
Cash: $160M"] --> D["Total Consideration
$100M + $160M = $260M"]
    B --> D
    D --> E["+ NCI Fair Value: $140M"]
    E --> F["- Net Assets FV: $350M"]
    F --> G["Goodwill: $50M"]
```

**Why Remeasure?**

The logic is that when you gain control, you are effectively disposing of an investment and acquiring a subsidiary. The old equity method accounting ends, and fresh-start consolidation begins. The remeasurement ensures the entire subsidiary is reflected at acquisition-date fair values — including your original stake.

**OCI Recycling**

If the previous 25% had any amounts in OCI (e.g., from available-for-sale reclassification or foreign currency translation), those OCI balances are also reclassified to profit or loss on the acquisition date.

**Exam tip:** A step acquisition creates TWO income statement effects — (1) the gain/loss on remeasuring the old interest, and (2) any OCI recycling. Both boost or reduce reported income in the acquisition period.

For step acquisition practice problems, check our CFA Level II FRA course.

In a step acquisition, what happens to the pre-existing equity interest when you gain control?

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