CHAPTER 32
DISPOSAL OF SUBSIDIARIES
Connolly – International Financial Accounting and Reporting – 4th Edition
Key terms
Associate
An entity in which the investor has significant influence and which is neither a subsidiary nor a joint
venture of the investor.
Equity method
A method of accounting whereby the investment is initially recorded at cost and adjusted thereafter to
reflect the investor’s share of the post-acquisition net profit or loss of the investee/associate. The SPLOCI
reflects the investor’s share of the results of operations of the investee.
Non-controlling interest
This is an ownership interest in an entity where the held position gives the investor no influence on how
the company is run. In simple terms, any position that holds less than 50% of the outstanding voting
shares is deemed to be a NCI.
Significant Influence
The power to participate in the financial and operating policy decisions of the investee but not control
those policies. If an investor holds, directly or indirectly, 20% or more of the voting power of the investee,
it is presumed that it has significant influence, unless it can be clearly demonstrated that this is not
the case. Conversely, if less than 20%, the presumption is that the investor does not have significant
influence.
Subsidiary
An entity in which the investor has dominant influence and therefore controls. Control is presumed to
exist when the parent owns over 50% of the voting power of an enterprise unless, in exceptional
circumstances, it can be clearly demonstrated that such ownership does not constitute control.
Connolly – International Financial Accounting and Reporting – 4th Edition
32.1 INTRODUCTION
•
•
•
IFRS 10 deals with the disposal of subsidiaries
When an undertaking ceases to be a subsidiary
undertaking the consolidated financial statements for the
period should include the results of the subsidiary up to
the date that it ceases to be a subsidiary
The calculation of the profit/loss on disposal in the
consolidated financial statements is different to that in the
holding company’s own accounts
Connolly – International Financial Accounting and Reporting – 4th Edition
32.1 INTRODUCTION
•
The calculation of the profit/loss on the disposal of a
subsidiary can be considered under the following
circumstances:
 disposal of an entire holding in a subsidiary (See Section
32.3);
 partial disposal of an interest in a subsidiary leading to
reduced subsidiary interest (See Section 32.4);
 disposal of an interest in a subsidiary leading to an
investment in an associate (See Section 32.5); and
 disposal of an interest in a subsidiary leading to an
investment interest (See Section 32.6).
Connolly – International Financial Accounting and Reporting – 4th Edition
32.2 DISPOSAL OF SUBSIDIARIES
•
In broad terms, there are two possible scenarios:

A change in a parent’s ownership interest in a
subsidiary that does not result in the loss of control;
and

A change in a parent’s ownership interest in a
subsidiary that does result in the loss of control.
Connolly – International Financial Accounting and Reporting – 4th Edition
No Loss of Control
•
•
•
Changes in a parent’s ownership interest in a subsidiary that
do not result in a loss of control are accounted for as equity
transactions (i.e. transactions with owners in their capacity
as owners)
In such circumstances the carrying amounts of the
controlling and NCI should be adjusted to reflect the
changes in their relative interests in the subsidiary.
Any difference between the amount by which the NCI are
adjusted and the fair value of the consideration paid or
received should be recognised directly in equity and
attributed to the owners of the parent
Connolly – International Financial Accounting and Reporting – 4th Edition
Loss of Control
•
If a parent loses control of a subsidiary, it should:
(a) derecognise the A&L (incl. GW) of the subsidiary at their
carrying amounts at the date when control is lost;
(b) derecognise the carrying amount of any NCI at the date when
control is lost;
(c) recognise:
(i) the FV of the consideration received; and
(ii) any distribution of shares of the subsidiary to owners in
their capacity as owners;
(d) recognise any investment retained at its FV at the date when
control is lost;
(e) reclassify to profit or loss, or transfers directly to retained
earnings if required in accordance with other IFRSs, amounts
previously recognised in equity; and
(f) recognise any resulting difference as a gain or loss in profit or
loss attributable to the parent.
Connolly – International Financial Accounting and Reporting – 4th Edition
32.3 DISPOSAL OF AN ENTIRE HOLDING IN A SUBSIDIARY
•
Parent company’s accounts
 The cash received on disposal of the investment, and
the profit/loss on that disposal, will be recorded in the
parent company’s own accounts.
 The profit/loss for a complete disposal is simply the
difference between the sale proceeds and the carrying
value of the investment.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 32.1: Disposal of entire holding in parent’s
accounts
During the year ended 31 December 2012, Company A sold all of its shares
in Subsidiary B for €18,900,000. Prior to the sale, Company A owned 75%
of Subsidiary B, which it had acquired for €11,300,000. The sale gave rise
to a tax liability of €1,300,000.
€
Sale proceeds
18,900,000
Cost
(11,300,000)
7,600,000
Tax
(1,300,000)
Profit on disposal
6,300,000
This would be recorded as follows:
DR
Bank
CR
Tax liability
CR
Cost of investment
CR
SPLOCI – P/L
€18,900,000
Connolly – International Financial Accounting and Reporting – 4th Edition
€1,300,000
€11,300,000
€6,300,000
32.3 DISPOSAL OF AN ENTIRE HOLDING IN A SUBSIDIARY
•
Consolidated Accounts


In the consolidated accounts, the sale proceeds should
be deducted from the share of the net assets of the
subsidiary disposed of.
The net assets comprise any goodwill arising on the
acquisition of the subsidiary that has not been impaired.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 32.2: Disposal of entire holding in consolidated
accounts
The following are the draft financial statements of P Limited and S Limited for the
year ended 31 December 2012.
SPLOCI
P Limited
S Limited
€
€
Profit before tax
60,000
40,000
Income tax expense
(24,000)
(16,000)
Profit after tax
36,000
24,000
Retained profit b/f
104,000
16,000
140,000
40,000
Statement of Financial Position
P Limited
S Limited
Assets
€
€
Investment in S
75,000
–
Sundry net assets
265,000
100,000
340,000
100,000
Equity
Ordinary €1 shares
200,000
60,000
Reserves
140,000
40,000
340,000
100,000
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 32.2: Disposal of entire holding in consolidated
accounts
P Limited acquired 75% of the ordinary shares of S Limited on
1 January 2011 when the reserves of S Limited were €10,000.
The investment is sold for €115,000 on 31 December 2012.
Goodwill, which is accounted for in accordance with IFRS 3,
suffered impairment of €4,500 during the year ended 31
December 2011.
Requirement
Calculate the profit on disposal of the shares to be included in
P Limited’s own and consolidated financial statements.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 32.2: Disposal of entire holding in consolidated
accounts
Solution
Profit on disposal of shares
1. In P Limited’s own accounts:
Sale proceeds
Cost of investment
2. In consolidated accounts:
Goodwill
€75,000 – 75% (€60,000 + €10,000)
Written off y/e 31 December 2011 (impairment)
Remaining
Profit on disposal
Sale proceeds
Share of net assets at date of disposal (€100,000 x 75%)
€
115,000
(75,000)
40,000
22,500
(4,500)
18,000
115,000
(75,000)
40,000
Less attributable goodwill
(18,000)
22,000
Note: S Limited is a subsidiary until 31 December 2012; therefore its results for the
full year must be consolidated.
SEE FULL SOLUTION, CHAPTER 32, PAGES 732-734.
Connolly – International Financial Accounting and Reporting – 4th Edition
32.4 PARTIAL DISPOSAL OF AN INTEREST IN A SUBSIDIARY
LEADING TO REDUCED SUBSIDIARY INTEREST
•
•
•
Changes in a parent’s interest in a subsidiary that do not
result in the loss of control are accounted for in equity
Any difference between the amount transferred to NCI
(percentage held outside the group) and the proceeds
received is recorded in the parent’s equity
The amounts recognised in equity for the change in
ownership that do not result in a change of control are NOT
reclassified to profit or loss upon loss of control
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 32.3: Partial disposal with subsidiary interest
retained
P Limited purchased a 100% interest in S Limited for €500,000
at the end of 2010 when the fair value of S Limited’s net assets
was €400,000. P Limited sold 40% of its investment in S
Limited on 31 December 2012 for €450,000, retaining a 60%
controlling interest in S Limited. The carrying value of S
Limited’s net assets at 31 December 2012 is €900,000
(including goodwill of €100,000).
Parent Company’s Accounts:
Sale proceeds
Less cost of investment in S Limited (€500,000 x
40%)
Gain on sale in P Limited’s accounts
Connolly – International Financial Accounting and Reporting – 4th Edition
€
450,000
(200,000)
250,000
Example 32.3: Partial disposal with subsidiary interest
retained
Consolidated Accounts:
A change in ownership that does not result in loss of control is considered an equity
transaction. The identifiable net assets (including goodwill) remain unchanged and any
difference between the amount by which the NCI is recorded (including NCI share of goodwill)
and the FV of the consideration received is recognised directly in equity and attributed to the
controlling interests. The change in NCI is recorded at its proportionate interest of the carrying
value of the subsidiary. Therefore the gain on sale would not be recorded in the consolidated
SPLOCI. The difference between the fair value of the consideration received and the amount by
which the NCI is recorded is recognised directly in equity.
€
Sale proceeds
450,000
Recognition of non-controlling interest (€900,000 x 40%)
(360,000)
Credit to equity
90,000
DR
Bank
€450,000
CR NCI
€360,000
CR Equity – other components
€90,000
The difference between the gain in the parent’s SPLOCI and the gain reported in the
consolidated SPLOCI is €160,000. This difference represents the share of the post-acquisition
profits retained in the subsidiary of €160,000 ((€900,000 - €500,000) x 40%) that have been
reported in the group SPLOCI up to the date of sale. The NCI immediately after the disposal
will be 40% of the net carrying value of S Limited’s net assets including any goodwill in the
consolidated statements of financial position of €900,000 (i.e. €360,000).
Connolly – International Financial Accounting and Reporting – 4th Edition
Goodwill impaired?
•
The impact of a partial disposal with reduced subsidiary
interest will differ depending on whether goodwill was
impaired
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 32.4: Goodwill not impaired
P Limited purchased a 100% interest in S Limited on 31
December 2010, with goodwill of €80,000 arising on the
acquisition. On 31 December 2012, the net assets of S
Limited, excluding goodwill were €400,000 and P Limited
disposed of 40% of its interest for €200,000 on this date. The
goodwill arising on the acquisition of S Limited had not been
impaired since 31 December 2010.
Sale proceeds
Less NCI in S Limited (€480,000 x 40%)
Credit to equity
Connolly – International Financial Accounting and Reporting – 4th Edition
€
200,000
(192,000)
8,000
Example 32.4: Goodwill impaired
P Limited purchased a 100% interest in S Limited on 31
December 2010, with goodwill of €80,000 arising on the
acquisition. On 31 December 2012, the net assets of S
Limited, excluding goodwill were €400,000 and P Limited
disposed of 40% of its interest for €200,000 on this date. The
goodwill arising on the acquisition of S Limited had been
impaired by €20,000 at 31 December 2012.
Sale proceeds
Less NCI in Limited (€460,000 x 40%)
Credit to equity
Connolly – International Financial Accounting and Reporting – 4th Edition
€
200,000
(184,000)
16,000
32.5 DISPOSAL OF AN INTEREST IN A SUBSIDIARY
LEADING TO AN INVESTMENT IN AN ASSOCIATE
•
From >50% interest (presumed dominant influence) to
20%-49% (presumed significant influence)
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 32.6: Associate status
P Limited purchased a 100% interest in S Limited for €500,000
at the end of 2010 when the fair value of S Limited’s net assets
was €400,000. Therefore goodwill is €100,000. P Limited sold
60% of its investment in S Limited on 31 December 2012 for
€675,000, retaining a 40% non-controlling interest in S Limited.
The carrying value of S Limited’s net assets at 31 December
2012 is €900,000 (including goodwill of €100,000).
Parent Company’s Accounts:
Sale proceeds
Less cost of investment in S Limited (€500,000 x
60%)
Gain on sale in P Limited’s accounts
Connolly – International Financial Accounting and Reporting – 4th Edition
€
675,000
(300,000)
375,000
Example 32.6: Associate status
Consolidated Accounts:
Note: For simplicity, it is assumed that the FV of the investment in S Limited
retained is proportionate to the FV of the 60% sold (i.e. €450,000). In the
consolidated accounts, the carrying value of net assets (including goodwill)
should be derecognised when control is lost. This is compared to the
proceeds received and the FV of the investment retained.
€
Sale proceeds
675,000
Fair value of 40% interest retained
450,000
1,125,000
Less net assets disposed (including goodwill)
(900,000)
Gain on sale
225,000
This gain on loss of control would be recorded in profit or loss. It includes
the gain of €135,000 (€675,000 – (€900,000 x 60%)) on the portion sold.
However, it also includes a gain on remeasurement of the 40% retained
interest of €90,000 (€360,000 to €450,000). This FV element of the gain
should be disclosed separately in a note to the SPLOCI.
Connolly – International Financial Accounting and Reporting – 4th Edition
32.5 DISPOSAL OF AN INTEREST IN A SUBSIDIARY
LEADING TO AN INVESTMENT INTEREST
•
Loss of both dominant influence and significant influence
(i.e. interest <20%)
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 32.7: Investment status
P Limited purchased a 100% interest in S Limited for €500,000
at the end of 2010 when the FV of S Limited’s net assets was
€400,000. Therefore goodwill is €100,000. P Limited sold 90%
of its investment in S Limited on 31 December 2012 for
€855,000, retaining a 10% interest in S Limited. The carrying
value of S Limited’s net assets at 31 December 2010 is
€900,000 (including goodwill of €100,000). The FV of the
remaining interest is €95,000 (assumed for simplicity to be pro
rata to the fair value of the 90% sold).
Parent Company’s Accounts:
Sale proceeds
Less cost of investment in S Limited (€500,000 x
90%)
Gain on sale in P Limited’s accounts
Connolly – International Financial Accounting and Reporting – 4th Edition
€
855,000
(450,000)
455,000
Example 32.7: Investment status
Consolidated Accounts:
Note: In the consolidated accounts, the carrying value of net
assets (including goodwill) should be derecognised when
control is lost. This is compared to the proceeds received and
the fair value of the investment retained.
€
Sale proceeds
855,000
FV of 10% interest retained
95,000
950,000
Less net assets disposed (including goodwill)
(900,000)
Gain on sale
50,000
This gain on loss of control would be recorded in profit or loss.
It includes the gain of €45,000 (€855,000 – (€900,000 x 90%))
on the 90% sold as well as €5,000 related to the gain on
remeasurement of the 10% retained (€90,000 to €95,000).
Connolly – International Financial Accounting and Reporting – 4th Edition