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ACCA Strategic Professional · Strategic Business Reporting (International) · Associates and joint arrangements

Gamma plc owned 25% of Delta Ltd, an associate, with a carrying amount of $12m. On 1 July it bought a further 35% for $30m cash, gaining control. The fair value of the original 25% at that date was $11m. Under IFRS 3 and IAS 28, how should Gamma treat the original 25% interest?

Gamma remeasures the original 25% to its fair value of $11m and recognises the $1m loss in profit or loss. That fair value then enters the goodwill calculation, because gaining control from an associate is a step acquisition.

  1. ARemeasure it to $11m and recognise the $1m loss in profit or loss as part of the step acquisitionCorrect
  2. BKeep it at $12m carrying amount and add it to goodwill
  3. CRecognise the $1m loss in other comprehensive income
  4. DRemeasure it to $11m and recognise the $1m loss directly in retained earnings

Explanation

When an associate becomes a subsidiary, the previously held interest is treated as disposed of and reacquired at fair value. The difference of $12m minus $11m, a $1m loss, goes to profit or loss. The fair value of $11m is included in the goodwill calculation. Amounts in OCI relating to the associate are reclassified as if the associate were disposed of.

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