When an acquisition turns a simple investment in a business into a subsidiary – in other words, when control is acquired – the previously held interest is treated as if it was sold and then immediately reacquired at fair value. This will result in a gain that needs to be recorded in the income statement; the fair value of the previously held interest is added to any consideration transferred within the goodwill calculation.

In the absence of any other information, the fair value of the previously held interest may be calculated based on the consideration transferred for the new interest. For example, suppose the previously held stake was 15 per cent and a further 45 per cent has just been acquired for consideration with a fair value of $600m. At the date of the second acquisition, the fair value of 45 per cent must be the $600m transferred, so the value of the previously held 15 per cent must be $600m x 15/45 = $200m.


Under this method, goodwill is calculated with reference to assets acquired on the date at which control passes to the new owner. The value of those assets at the date of the previous acquisition is irrelevant. As such, the goodwill should be determined in one calculation. In the above example, the way to think of it is that 60 per cent has been acquired on the date of the second acquisition for a total consideration of $800m.
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