Step Acquisitions and Changes in Ownership

Introduction

Berkshire Hathaway bought 38.6% of Pilot Travel Centers in 2017 and accounted for it under the equity method. On January 31, 2023, it bought another 41.4%, took control and began consolidating the truck-stop operator. Applying acquisition accounting, it remeasured its original 38.6% stake to fair value and recognized a pre-tax gain of about $3.0 billion, roughly $2.4 billion after tax, on shares it had not sold. A year later, on January 16, 2024, after settling litigation with the founding Haslam family over the value of their stake, Berkshire bought the remaining 20%, as FreightWaves reported. That purchase produced no gain or loss at all.

The two transactions illustrate the main rule for changes in ownership. Crossing the line into or out of control is treated as a significant economic event, so stakes are remeasured to fair value and the effects run through earnings. Changes on either side of the line are not.

When an investor obtains control of a business in which it already holds an interest, the deal is a business combination achieved in stages, or step acquisition. Accounting Standards Codification (ASC) 805 requires the investor to remeasure its previously held interest to fair value at the acquisition date and recognize the resulting gain or loss in earnings. Amounts it had recorded in other comprehensive income through the old stake, such as its share of the investee's currency translation adjustments, are reclassified into the same gain or loss, as Deloitte's guide to business combinations achieved in stages explains.

Step acquisition

A business combination in which the acquirer held an equity interest in the acquiree before obtaining control. The previously held interest is remeasured to its acquisition-date fair value, with any gain or loss in earnings, and goodwill is measured using the consideration transferred, the fair value of the previously held interest and the fair value of any noncontrolling interest.

Suppose an investor carries a 40% equity method stake at $300 and buys another 40% for $500 in cash, giving it control. The fair value of its original 40% is also $500, the business's identifiable net assets have a fair value of $1,000, and the remaining 20% minority stake is worth $240:

The investor recognizes a $200 gain on its old stake and consolidates the business. Goodwill is $240: the $500 paid, plus the $500 fair value of the old stake, plus the $240 fair value of the noncontrolling interest, less the $1,000 of identifiable net assets. The calculation and the purchase price allocation behind it are covered in the acquisition method.

Why a Gain Without a Sale

The logic is that gaining control changes the nature of the investment. Before, the investor held a financial stake in someone else's business; after, it owns and consolidates the whole business, with a new basis at fair value. The accounting treats the old stake as if it had been sold at fair value and reinvested in the controlled business. The gain is real in the sense that the stake was worth more than its carrying amount, but it involves no cash and does not recur, so bankers exclude it from adjusted earnings, along with the other items in one-time items: restructuring, impairments and gains. A loss is possible too, when the old stake is worth less than its carrying amount.

Pilot's Path to Full Ownership

Berkshire's investment in Pilot passed through all three stages in six years. From 2017 to early 2023, the 38.6% stake was an equity method investment, carried at cost plus Berkshire's share of Pilot's earnings, less distributions received. On gaining control in 2023, Berkshire remeasured that stake, recorded the $3.0 billion pre-tax gain and consolidated Pilot, showing the Haslams' 20%, which they could require Berkshire to buy, as redeemable noncontrolling interest outside shareholders' equity. The final purchase in 2024, for $2.6 billion, removed that noncontrolling interest with no gain or loss.

The price of the final 20% was set by a formula agreed in 2017: a multiple of Pilot's earnings for the preceding year, adjusted for net debt, as Berkshire's 2023 Form 10-K describes. The Haslams had sued over accounting decisions they argued would lower it, before the parties settled. Put and call options priced off reported earnings are common in staged acquisitions, and they make the accounting policies of the business a direct input into the price the minority receives, a point worth negotiating carefully at the outset.

Once a parent controls a subsidiary, buying more of its shares from minority holders, or selling some to them, is a transaction between owners of the same consolidated group, which ASC 810 treats as an equity transaction. No gain or loss is recognized and nothing is remeasured. The noncontrolling interest is adjusted to its new share of the subsidiary's carrying amount, and the difference between that adjustment and the price paid or received goes to additional paid-in capital. Berkshire's purchase of the last 20% of Pilot in 2024 was accounted for this way, as were Las Vegas Sands' purchases of Sands China shares described in noncontrolling interest. The cash paid or received is a financing cash flow, not an investing one, because it is a transaction with the group's own equity holders.

When a parent loses control of a subsidiary, through a sale, a share issue by the subsidiary to others, a contractual change or bankruptcy, it deconsolidates it under ASC 810. The deconsolidation gain or loss, recognized in earnings, is the fair value of any consideration received, plus the fair value of any interest the parent keeps, plus the carrying amount of the noncontrolling interest, less the carrying amount of the subsidiary's net assets. Any related amounts in accumulated other comprehensive income, such as translation adjustments, are reclassified into the gain or loss.

The Retained Interest

The retained interest is remeasured to fair value as part of the calculation and becomes the starting point for its new accounting, usually the equity method or fair value. A parent that sells 60% of a wholly owned subsidiary with $1,000 of net assets for $900, keeping 40% worth $600, records a gain of $500: $300 on the shares sold and $200 on the shares it still holds. The rules that then apply to the retained stake are described in fair value, equity method or consolidation.

Moving between the other methods follows simpler rules. An investor whose passive stake grows enough to give significant influence starts applying the equity method from that date, without restating prior periods. Its cost is the old stake's carrying amount, which fair value accounting has already brought to fair value through earnings, plus the cost of any shares just bought. An investor that loses significant influence stops using the equity method and carries the remaining stake at fair value, with any difference from its carrying amount in earnings. The mechanics of the equity method are covered in the equity method of accounting explained. The full set of transitions compares as follows:

For bankers, the practical consequences are about comparability. A company that crosses into control of a partly owned business suddenly reports its full revenue, earnings before interest, taxes, depreciation and amortization (EBITDA) and debt, along with a one-off gain; one that sells a controlling stake drops them and may book a large gain on the part it keeps. Pro forma figures that show the business on a consistent basis across periods, and adjusted earnings that strip out remeasurement gains, are the starting point for comparing such a company with its own history or its peers.