Full explanation
Overview
Two companies buy the exact same business, at the exact same price. One books fifty thousand more goodwill than the other — and both are completely correct.
IFRS three, IFRS ten and IAS twenty-seven are the three standards that turn a group of separate companies into one set of financial statements. Three standards, one real acquisition running through all of them.
Who does what
IFRS three is the acquisition itself, recognising what you bought and the goodwill left over. IFRS ten decides whether you consolidate at all, and how. IAS twenty-seven covers the parent's own financial statements, prepared on their own, alongside the group.
What makes it a subsidiary?
IFRS ten's test for control has three parts, and all three must be true: power over the investee's relevant activities, exposure or rights to variable returns from it, and the ability to use that power to affect those returns. More than fifty percent of the voting rights is a strong starting signal — but it is only a rebuttable presumption, never the final word.
Below 50%, still in control
Control can exist well below fifty percent. Potential voting rights — options or convertibles exercisable right now — count. So does de facto control, where a large minority stake plus a widely scattered remaining shareholding gives you the practical ability to direct the company, proven by how votes have actually gone at past meetings. And decision-making power is NOT control when you are an agent — a fund manager making decisions for investors' benefit does not control the fund. In a group with a subsidiary owning its own subsidiary, control is tested at every tier: the parent consolidates the bottom company because it controls the company that controls it.
Uniform policies, aligned dates
Before you can even add the numbers together, IFRS ten requires the whole group to use uniform accounting policies for like transactions. If a subsidiary runs different policies locally, its figures are adjusted before consolidation, never left as reported. Reporting dates must line up too: if a subsidiary's year end differs from the parent's by more than three months, it must prepare additional financial information as of the parent's date.
Four steps, every time
Every business combination uses the acquisition method: identify the acquirer, determine the acquisition date, recognise the identifiable assets acquired and liabilities assumed at fair value, and measure any non-controlling interest. Acquisition-related costs — legal fees, due diligence — are expensed as incurred. They are never added to the deal.
Up to 12 months to finalise
The acquirer gets a measurement period, up to twelve months from the acquisition date, to finalise provisional amounts as new information about facts and circumstances at that date comes to light. Occasionally, the net identifiable assets acquired exceed the consideration paid plus any NCI. That is a bargain purchase — reassess your work first, because it is genuinely rare, and if it holds up, the gain is recognised immediately in profit or loss, not spread over time.
Now the number everyone actually wants: what does the leftover look like on the balance sheet? Let's run it through a real acquisition.
Method A — NCI at fair value
Meridian Limited buys eighty percent of Sub Co for two million euros cash. Sub Co's identifiable net assets are worth two million euros at fair value. Method A values the remaining twenty percent, the non-controlling interest, at its own fair value: four hundred and fifty thousand euros. Consideration two million, plus NCI four hundred and fifty thousand, less net identifiable assets two million: goodwill of four hundred and fifty thousand euros.
Method B — NCI at proportionate share
Method B values that same twenty percent at its proportionate share of the net identifiable assets instead: twenty percent of two million is four hundred thousand euros. Same deal, same price — but goodwill comes out at four hundred thousand, fifty thousand less. That fifty-thousand-euro gap is exactly the premium built into the non-controlling interest's fair value. IFRS three lets you choose either method, transaction by transaction.
An exit price, ranked in 3 levels
Every fair value in this episode — the NCI, the identifiable assets and liabilities — follows one definition, from IFRS thirteen: the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. IFRS thirteen also ranks how you get there. Level one: quoted prices in an active market. Level two: other observable inputs. Level three: unobservable inputs, used only when nothing better exists.
Eliminate, then what's left
On consolidation, Meridian's investment in Sub Co is eliminated against Sub Co's pre-acquisition equity. What's left on the group balance sheet is the goodwill you just calculated, and the non-controlling interest, sitting inside equity, not as a liability.
The acquisition is one moment in time. What happens to that twenty percent stake every year afterward?
100% consolidated, then split
In year one, Sub Co earns three hundred thousand euros of profit. The consolidated income statement includes all of it, one hundred percent, because Meridian controls Sub Co completely, even though it owns only eighty percent. That single profit figure is then split: two hundred and forty thousand euros attributable to Meridian's own shareholders, sixty thousand attributable to the non-controlling interest. The NCI's balance in equity grows from four hundred and fifty thousand at acquisition to five hundred and ten thousand by year end.
What has to be disclosed
IFRS three requires extensive disclosure. The acquiree's name and nature, the acquisition date, the percentage of voting equity acquired, and the primary reasons for the deal. A qualitative description of the goodwill recognised — what it actually represents, like expected synergies or an acquired workforce. Consideration transferred by class: cash, equity, or contingent. The fair value of assets acquired and liabilities assumed by major class. The non-controlling interest's amount and how it was measured. A full reconciliation of goodwill from opening to closing balance. And the terms of any contingent consideration arrangement.
Never amortised, never reversed
One more thing about that goodwill number: it's never amortised. IAS thirty-six requires it to be tested for impairment at least annually, and immediately whenever there's an indicator — regardless of whether anything looks wrong. And if it IS impaired, that loss can never be reversed in a later period, the one asset on the balance sheet where that's permanently true.
Mechanics, not disclosure
IFRS ten itself doesn't carry a long disclosure list — its job is mechanics, not disclosure. The detailed disclosures about control, joint control, and significant influence, including every judgement call behind them, actually live in IFRS twelve. That's the companion standard covered properly in the next video, alongside associates and joint arrangements.
A different document entirely
IAS twenty-seven governs a different document entirely: Meridian's own SEPARATE financial statements, prepared alongside, never instead of, the consolidated ones. Here, the investment in Sub Co is not consolidated at all. It sits at cost, two million euros, or under IFRS nine at fair value, or using the equity method. IAS twenty-seven requires disclosure of every significant investment: its name, country, and the ownership and voting percentages held. And where separate financial statements are the ONLY financial statements an entity prepares, extra disclosure is required: the fact of, and reason for, that exemption from consolidating, plus the name of the parent that does publish consolidated financial statements available for public use.
Put numbers on the other two
Put numbers on those other two options. If Meridian used the fair value option instead of cost, that same investment would be restated to its year end fair value — say, two million one hundred and fifty thousand euros, with the hundred and fifty thousand euro increase straight to profit or loss. If Meridian applied the equity method in its OWN separate financial statements instead, the investment would build up like an associate's: cost two million, plus eighty percent of Sub Co's three hundred thousand euro profit, two hundred and forty thousand — two million two hundred and forty thousand euros. Same investment, three completely different numbers, depending on the accounting policy chosen.
Two more things worth knowing — one is a drafted fix still waiting on its effective date, one is still being written.
Full gain, or only partial?
There's a genuine, unresolved conflict between IFRS ten and IAS twenty-eight: what happens when a parent loses control of a subsidiary by selling or contributing it into an associate or joint venture instead? Back in two thousand fourteen, the IASB drafted the fix — if the subsidiary is itself a business under IFRS three, the parent recognises the FULL gain or loss; if it is not a business, the gain or loss is recognised only to the extent of the OTHER, unrelated investors' interest. But the IASB deferred that amendment's effective date indefinitely the very next year, and it still is not mandatory today — treat it as the direction of travel, not settled law, until the IASB finishes its equity-method project.
Proposed, not law
IFRS three itself is under live review. An exposure draft from March twenty twenty-four proposes new disclosures, including whether a strategic acquisition actually delivered the synergies management promised. The IASB has been redeliberating since February twenty twenty-five and expects to decide the project's direction in the second half of twenty twenty-six. Nothing here is law yet.
One more question: where does any of this land under the new presentation standard?
Where it lands
Under IFRS eighteen, acquisition-related costs sit in the OPERATING category for a normal trading business — they are simply a cost of doing that deal. Any later remeasurement of contingent consideration is classified the same way, by its nature. And the split between the parent's shareholders and the non-controlling interest happens BELOW the categorised profit-or-loss figure — IFRS eighteen's new categories do not touch that allocation at all. That is different from what you will see in the next video: equity-accounted associates and joint ventures get their OWN classification question under IFRS eighteen, integral or non-integral, because they are never fully consolidated line by line the way Sub Co is here.
Four industries, real judgement
Where this actually bites, industry by industry. Private equity roll-ups live and die by the NCI measurement choice — full goodwill can flatter a leverage ratio a lender is watching closely. Tech-sector deals lean hard on contingent consideration; an earn-out tied to future revenue creates real remeasurement volatility for years after the deal closes. Banks and asset managers face the agent-versus-principal test constantly, deciding whether a fund they manage should be consolidated at all. And family businesses bringing in outside investors run straight into de facto control, when a founder's forty percent stake plus scattered smaller shareholders may still mean control in substance.
The consolidated statements
Here is Meridian Group's actual position at the end of year one. Consolidated statement of financial position: goodwill four hundred and fifty thousand euros, other net assets five million and fifty thousand, total assets five million five hundred thousand. Equity: three million seven hundred and fifty thousand attributable to Meridian's owners, five hundred and ten thousand non-controlling interest, total equity four million two hundred and sixty thousand, plus liabilities of one million two hundred and forty thousand. And the consolidated statement of profit or loss: one million two hundred and sixty thousand euros of profit, split one million two hundred thousand to the owners of the parent, sixty thousand to the non-controlling interest.