 Hello, and welcome to this session in which we would look at the step acquisition going from non-controlling to a controlling interest when we purchase a subsidiary. What does that mean? Well, we have to know that we have, if we own up to 20%, we say we use the cost method between 20 to 50%. If we own 20 to 50, we use the equity method. It means we have significant influence, and anything above 50%, now we have control of the company. So often time what happens is we don't purchase, for example, we don't purchase in one shot 70% of the company. Maybe we start at 30%, then at some point in time we buy the additional 40%. So this is called the step acquisition. It means we purchased, we had no control at 30%, then went from 30% to 70%, now we have control. So this is what we're going to be discussing today. What do we have to do when that occur? Well, this topic is covered in an advanced accounting course. It's covered on the CPA exam. It's covered on the ACCA exam. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. I am a supplemental additional resources to your CPA review course. I explain the material differently. I provide alternative resources, lectures, multiple choice, CPA questions. Your risk is one month of subscription. Your potential gain is passing the exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. This is a list of all my accounting courses, including advanced accounting. If you are taking advanced accounting, where I have additional resources. My supplemental CPA review courses are aligned with your CPA review course, whether it's Roger, Wiley, Gleam, or Becker, of course. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with other, connect with me on Instagram, Facebook, Twitter and Reddit. Let's take a look at step acquisition. Step acquisition occur when control is achieved in a series of acquisition rather than a single transaction. So we will go from a non-controlling position to a controlling interest. For example, initially we purchased 25% of the company. We have non-controlling. Then this is 50% because we are below 50%. We have no control. Then we made another purchase and we purchased an additional 55% and now we are at 80%. We crossed the 50% controlling interest. What do we have to do under those circumstances? We have to revalue our 25% interest to market. So this 25% is adjusted to market. And once it's adjusted to market, we have to recognize any gain or loss that goes into retained earning. Basically, there's a gain or there's a loss. Now, what happened if we are controlling more than 50%? We went from 60% to 80%. We would look at the scenario in the next recording. So the best way to illustrate this is to work an example. Basically, on the CPA exam, in my opinion, that's all what you have to know on the CPA exam in a sense that you have to know that you have to revalue your old position to fair market value and book again or a loss. But the best way to illustrate this concept is to actually work an example. We have Adam Company and Ryan Company. And we're going to assume that Adam purchased 30% of Ryan. Adam purchased 30% of Ryan's company and paid 164,000. Now, we need to know what is the book value and what's the fair value for Ryan's company? The book value for Ryan's company is 400,000. The fair value is 546. What does that mean? It means we paid 164,000 and we purchased 30% of the book value, which is 120,000, 400,000 times 30%. We paid an additional 44,000. And we're going to assume this 44,000 has to do with a customer contract and it's going to be amortized over 22 years. Therefore, we're going to amortize $2,000 per year. So we made this assumption about the customer contract. And here's the income and dividend for Ryan's company, year 22 and 23, because we purchased it January 1st, 2022. Now, here's what we're going to do. We're going to take a look at the investment of Ryan Company as of January 1st, 2024, because in January 1st, 2024, we paid 350,000 and we purchased an additional 50% of Ryan's company. So simply put, here's what happened. First, we own 30%. Then, two years later, we purchased an additional 50%. We are up to 80%. 80% means it's above 50%. We are in control now. So first, what we have to do is we have to bring our investment account up to date. And you're going to see why, because we're going to value it at fair market value. So we started by paying 164,000. This is 30% of Ryan's company. Then, from net income in 2022, 60,000, we're going to allocate 30%, which is 18,000, increase the investment. Then, the company paid 20,000 in dividend. We're going to get 6,000 of that. We're going to reduce our investment by 6,000. And we're going to reduce our investment by the amortization of the extra asset, of the extra intangible asset that we picked up. So simply put, if you ask, what's the investment value at the end of 2022? That's 164 minus, oh, at 6, 8, plus 10. So this will be 174 as of 2022. Then, in 2023, again, the company made a profit of income of 80,000. We increase our investment by 24. Dividend paid is 20,000. We reduce our investment income by 6,000, 30%. Then, we have to chip away 2,000 of the amortization. Now, we are ready to compute our investment in Ryan's company as of 1231, 2024 was 190,000. We started at 164, and we went up all the way to 190. Then, the following day, January 1st, 2024, we purchased an additional 350,000. And now we have to value, remember I told you, we have to value our investment at fair market value. How do we value our investment? Well, what does that mean? We paid 350,000, and we paid, we purchased 50% of the company. It means the fair value of the company is 900,000, 700,000. And look here, the fair value is 500,000. The book value was 500,000. Well, if we own 30%, remember that the fair value is 500,000. Remember that original 30% at 700,000 fair value of the company, it means the fair value of our investment is, guess how much, 210,000. Therefore, 50% is what we paid for now. 30% is the reevaluation of the old equity. It means we have to write up the equity. Guess what? We have to write up the equity by 2,000. And as a result, how do we write it up? We book again. We're going to debit investment in Ryan, and we're going to book again. This should be a credit indented. Therefore, we booked again. We booked again, and we increase our investment to 210,000. Then obviously 50 plus 30, what's remaining 20% of the non-controlling interest, which is 140,000. So remember, we have to, so basically the fair value at the acquisition plus the fair value of the old asset plus the fair value of the non-controlling interest should equal to the fair value of the company, 700,000, 700,000. So the 700,000 have to be split between those three figures. Now let's take a look at the access fair value over book allocation and amortization January 1st. The fair value is 700,000. The book value is 500,000 right here given. The difference is 200,000. And we're going to allocate the whole difference to the customer contract. We're not going to deal with book value. And we're going to allocate this over 20 years. Therefore, we're going to amortize 10,000 every year. You remember now, the amortization 8,000 is for the controlling and 2,000 is for the non-controlling. Because remember the NCI, we have to keep track of the NCI. So this is 2,000 goes to the NCI and 8,000 goes to the controlling interest. So take a look at these figures, make sure to see what we did. So all we did is we find out what is the value of the investment. Then when we made the new purchase, we valued the old investment which was at the books for 190. We valued it at 210 based on what we paid. We had a gain of 2,000. Then we kept going. Now let's take a look at what happened by the end of year 2024. So the investment account after the valuation was 210, we purchased the new company. We purchased 50%, which is 350,000. Then the company made income of 100,000 hours is 80, which is 80%, which is 80,000. Then we have to reduce our investment by the excess amortization 10,000 times 80%. Then we have to reduce our investment by the dividend, 80% of 20,000. Therefore, our investment in Ryan company after all said and done as of December 31st, 2024, 616,000. And I hope you were able to follow this example, how we went from purchasing the company waiting two years later, buying additional shares, which will give us control because we obtained control. We had to revalue our old investment to fair value. Then book again. We happened to book again and kept going as usual. Keep in track of the investment account, adding the income, deducting the excess amortization, and deduction the dividend. In the next recording, maybe you would look at an example where we have control and went from control to more control. At the end of this recording, I'm going to remind you whether you are an accounting student or a CPA candidate to take a look at my website, farhatlectures.com. Again, if you're studying for your CPA investment, for your CPA exam, this is a long-term investment in your life and your career. Make sure to change yourself. Give me a try. I might be able to add a few points to your CPA exam score. Once you pass, you're done. Invest in yourself. Good luck. Study hard. The CPA is worth it, and stay safe.