IFRS 3: the Acquisition Method, Goodwill and Non-controlling Interest

Buying a controlling share of another company is a purchase of its net assets plus something more: the reputation, workforce, customer relationships and expected synergies that the buyer was willing to pay for. That something more is goodwill, and it is measured in the consolidated statements by comparing what was paid, and what outsiders still own, with the fair value of what was acquired.

This topic covers the acquisition method in International Financial Reporting Standard (IFRS) 3 Business Combinations, how to identify the acquirer and the acquisition date, how consideration is measured (including shares, deferred and contingent amounts), acquisition costs, the two ways of measuring non-controlling interest, the goodwill calculation, a bargain purchase, and impairment. The next topic builds the consolidated statement of financial position.

The goodwill and non-controlling interest calculations are tested in almost every group question. In May Diet, 2023, Question 3(b) asked for goodwill on acquisition and non-controlling interest (4 marks), where the shares were bought through a share exchange and the non-controlling interest was at fair value. May Diet, 2025, Question 3 asked for non-controlling interest, goodwill and consolidated reserves (20 marks), with an impairment of goodwill. Read groups, control and the exemption from consolidating first.

The acquisition method

The objective of IFRS 3 is to improve the relevance, reliability and comparability of information about business combinations. Every business combination is accounted for by the acquisition method:

1. Identify the acquirer. Usually the entity that obtains control. Where it is unclear, indicators are the larger entity, the one that transfers cash or incurs liabilities or issues equity, the one whose owners hold most of the voting rights or can appoint the governing body, the one whose management dominates, and the one that pays a premium over pre-combination fair values.
2. Determine the acquisition date: the date the acquirer obtains control, normally the closing date when consideration is transferred.
3. Recognise and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest. They are recognised separately from goodwill if they meet the definitions of assets and liabilities in the Conceptual Framework at the acquisition date, which may include items the acquiree had not recognised. They are measured at their acquisition-date fair values, with specified exceptions.
4. Recognise and measure goodwill or a gain from a bargain purchase.

Consideration transferred

The consideration transferred is measured at fair value, the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities it incurs to the former owners and the equity interests it issues.

• Cash paid at the acquisition date is included at face value.
• Shares issued are at their fair value (market price) at the acquisition date, not nominal value.
• Deferred consideration is discounted to present value, and the unwinding of the discount is a finance cost.
• Contingent consideration (payable if future events occur) is measured at its fair value at the acquisition date and classified as a liability or equity. Later changes in a liability are in profit or loss.
• Assets of the acquirer given up are revalued to fair value first, with the gain or loss in profit or loss.

Acquisition-related costs, such as legal and valuation fees, are expensed when incurred. Costs of issuing shares or debt are not acquisition costs; they reduce equity or the liability.

Measuring non-controlling interest

When less than 100% is acquired, the non-controlling interest (NCI) is recognised in equity at the acquisition date by one of two methods, chosen for each combination.

• Proportionate share of net assets: the NCI percentage multiplied by the fair value of the subsidiary’s identifiable net assets. It is the simpler method and the more common in practice. Goodwill then relates only to the parent’s share.
• Fair value: the fair value of the NCI at the acquisition date, often the market price of the shares they hold. Goodwill then includes the NCI’s share and is called “full” goodwill.

After acquisition, the NCI is the amount at acquisition plus its share of post-acquisition profits and reserves.

Calculating goodwill

Goodwill = consideration transferred + non-controlling interest at the acquisition date − the net identifiable assets of the subsidiary at fair value at the acquisition date. The net assets are share capital and reserves at the date, adjusted for fair value differences on identifiable assets and liabilities.

For example, P buys 80% of S for ₦500 million. S’s identifiable net assets at fair value are ₦560 million. If the NCI is measured as a proportionate share, it is 20% × ₦560m = ₦112m, and goodwill is ₦500m + ₦112m − ₦560m = ₦52 million. If the NCI is measured at a fair value of ₦130m, goodwill is ₦500m + ₦130m − ₦560m = ₦70 million. The ₦18m difference is the NCI’s share of goodwill (₦130m − ₦112m).

Consideration with several parts

P pays cash of ₦300m, issues 20 million shares with a fair value of ₦3.00 each (₦60m), and promises ₦121m in two years, discounted at 10% to ₦121m ÷ 1.21 = ₦100m. Consideration is ₦300m + ₦60m + ₦100m = ₦460m. With NCI at 20% of ₦560m (₦112m), goodwill is ₦460m + ₦112m − ₦560m = ₦12m. Legal fees of ₦8m are expensed. In year 1 the deferred amount unwinds by 10% × ₦100m = ₦10m, a finance cost.

A bargain purchase

If the total is below the net assets, the acquirer first reassesses that it has identified and measured all assets and liabilities correctly. If a negative figure remains, it is a gain on a bargain purchase, recognised in profit or loss at the acquisition date. With consideration of ₦420m and NCI of ₦112m against net assets of ₦560m, the result is ₦420m + ₦112m − ₦560m = −₦28m, a gain of ₦28m.

After the acquisition

• Goodwill is carried at cost less accumulated impairment, is not amortised, and is tested for impairment at least annually (see the topic on cash-generating units). Under the proportionate method, goodwill belongs to the parent only, so an impairment is charged wholly to the parent. Under the fair value method, goodwill includes the NCI’s share, and the impairment is shared in proportion to ownership. An impairment of ₦14m on goodwill of ₦70m is ₦11.2m to the parent and ₦2.8m to the NCI.
• Measurement period. The initial accounting may be provisional and is finalised within the measurement period, at most one year from the acquisition date. Adjustments for facts that existed at the acquisition date change goodwill.
• Contingent consideration that is a liability is remeasured to fair value, with changes in profit or loss.

The ideas in more depth

Why goodwill is a residual

Goodwill is the part of the price that cannot be assigned to any identifiable asset. Measuring the identifiable assets at fair value first, and letting goodwill be the balance, means that nothing identifiable is hidden in goodwill.

Why the NCI method matters

The proportionate method records only the goodwill the parent paid for. The fair value method records all of it, including the part attributable to outsiders. This is why the two methods give different goodwill and different non-controlling interest, with the same group net assets.

Sources and references

• IFRS 3 Business Combinations: the acquisition method, consideration, acquisition costs, non-controlling interest, goodwill, bargain purchases and the measurement period.
• International Accounting Standard (IAS) 36 Impairment of Assets, for goodwill; IFRS 10 for non-controlling interest.

These points are stated as at 5 November 2026.

Worked examples

1. Proportionate.
   NCI ₦112m; goodwill ₦500m + ₦112m − ₦560m = ₦52m.
2. Fair value.
   Goodwill ₦500m + ₦130m − ₦560m = ₦70m.

1. Consideration.
   ₦300m + ₦60m + ₦100m = ₦460m.
2. Goodwill.
   ₦460m + ₦112m − ₦560m = ₦12m.

1. Calculation.
   ₦420m + ₦112m − ₦560m = −₦28m.
2. Treatment. After reassessment, a gain of ₦28m in profit or loss.

How to answer in the exam

• Write the goodwill working in full: consideration, NCI, less net assets, with sub-workings for each.
• Use fair values at the acquisition date for shares and net assets; discount deferred amounts.
• Expense acquisition costs.
• State the NCI method that the question uses, because it changes both goodwill and the NCI.

Common mistakes in the exam

• Using nominal value for shares issued as consideration.
• Capitalising acquisition costs in goodwill.
• Using the subsidiary’s carrying amount of net assets and not the fair value.
• Ignoring the NCI in the goodwill working.
• Amortising goodwill.
• Not discounting deferred consideration.

Quick revision

• Goodwill = consideration (fair value) + NCI − net identifiable assets at fair value.
• NCI: proportionate share of net assets, or fair value.
• Costs of acquisition expensed; deferred amounts discounted; contingent consideration at fair value.
• Bargain purchase gain in profit or loss after reassessment. Goodwill tested annually for impairment.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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