Example: IFRS 10 Disposal of Subsidiary
Some time ago I published an article with an example of very simple method of consolidating a parent and a subsidiary.
This article still applies and you can learn the basic steps and methodology of consolidation with a nice video in it.
Many of my readers then asked me for a different situation:
How to actually stop consolidation, or deconsolidate, when a parent sells its share in a subsidiary?
In this article, I described various scenarios of how the group can change, so please check that out, it will give you more insights on how to assess the situation and decide what to do.
What happens when a parent sells the share in a subsidiary?
We should all look to the standard IFRS 10 Consolidated Financial Statements for guidance.
First of all, you need to assess whether the parent retains control or not.
If the parent retains control and sells the share, then well, you have a special purpose entity here and you still need to consolidate.
But of course, in this case, the non-controlling interest and other calculations will look differently and you can learn more about consolidating special purpose entity here.
If the parent loses control with selling shares, then you need to stop the full consolidation and dispose of the subsidiary.
Here I would like to show you how. Let me illustrate it all on a very simple example.
What’s the situation?
Here’s the question:
Mommy Corp acquired 80% share in Baby Plc. 3 years ago when Baby’s retained earnings were CU 12 000.
On 31 December 20X6 Mommy sold full 80%-share for CU 180 000.
Mommy accounted for non-controlling interest by the proportionate share method and no impairment of goodwill was charged. Mommy accounted for its investment in Baby at cost in its individual financial statements under IAS 27. Ignore the taxation and prepare consolidated financial statements of Mommy Group at 31 December 20X6.
Below there are statements of financial positions of both Mommy and Baby at 31 December 20X6.
And, below are the statements of profit or loss of both Mommy and Baby for the year ended 31 December 20X6:
Prepare consolidated statement of financial position, consolidated statement of profit or loss and consolidated statement of changes in equity of Mommy Group as at 31 December 20X6. Measure NCI at its proportionate share of Baby’s net assets.
Please note here that in the above financial statements of financial position, all assets are with “+” and all liabilities are with “-“, similarly all revenues are with “+” and all expenses with “-“.
You can use whatever method you want, but please, think about it and be consistent!
Believe me, people make most mistakes by messing up with pluses and minuses – simple as that.
What deconsolidation procedures should a parent perform?
When you lose control of your subsidiary by the full sale of shares, IFRS 10 requires you to:
- Derecognize all assets and liabilities of the subsidiary at the date when control is lost;
- Derecognize any non-controlling interest in the lost subsidiary;
- Recognize fair value of consideration received from the transaction,
- Recognize any resulting gain or loss in profit or loss attributable to the parent.
If you are involved in more complex transaction, like selling just a part of your shares, new distribution of shares by your subsidiary and similar, then there are more steps to complete.
However, let’s keep it simple here and focus on the full sale of shares with loss of control.
Consolidated statement of financial position after disposal of the subsidiary
First, you need to remove any assets and liabilities of a subsidiary.
This is very easy to perform because you will simply not make any aggregation of assets and liabilities of a parent and of a subsidiary.
Instead, the consolidated statement of financial position will contain only assets and liabilities of a parent.
And no, there won’t be neither goodwill nor investment in a subsidiary.
There is one more thing to do though:
You need to calculate parent’s gain or loss on the disposal of shares and recognize it in profit or loss, which will have effect on retained earnings:
- Fair value of consideration received: CU 180 000
- Less carrying amount of investment in Baby in Mommy’s financial statements: – CU 100 000
- Mommy’s profit: CU 80 000
The journal entry is (“-“ is credit, “+” is debit):
|Remove Mommy’s investment in Baby||-100 000||FP – Investment in Baby|
|Recognize FV of consideration received||+180 000||FP – Receivables or bank account|
|Recognize Mommy’s gain on sale of shares||-80 000||FP – Retained earnings (profit or loss)|
After we transfer these entries to Mommy’s individual statement of financial position, here we go: we have a consolidated statement of financial position of Mommy group at 31 December 20X6:
Note – the numbers in the last column were calculated as a sum of previous columns.
Consolidated statement of profit or loss after disposal of the subsidiary
Consolidated profit or loss statement is not that easy as consolidated statement of financial position, because this statement is NOT a picture at the certain date, but the REPORT about events during certain period.
Mommy held a subsidiary during the full year of 20X6 and therefore yes, you DO NEED to aggregate all parent’s and subsidiary’s revenues and expenses and eliminate intragroup transactions.
On top of it, you also need to calculate group’s gain or loss on disposal of subsidiary in the consolidated financial statements.
Hang on a minute – isn’t it the same as we calculated above?
No, it is not.
Above, you calculated the parent’s gain in the separate statement of financial position – which happens to be the same as consolidated statement of financial position of the Group.
Here, you calculate group’s gain in the consolidated financial statements after you take non-controlling interest and goodwill into account.
So first, let’s calculate goodwill at acquisition (which happens to be the same as the goodwill on disposal, since no impairment has been charged so far):
- Fair value of consideration paid for the investment in Baby at acquisition: CU 100 000 (see Mommy’s individual balance sheet)
- Add non-controlling interest at acquisition, calculated as:
- Baby’s share capital at acquisition: CU 80 000
- Add Baby’s retained earnings at acquisition (per question): CU 12 000
- Total of Baby’s net assets at acquisition: CU 92 000
- NCI’s share of 20% (Mommy acquired 80%, remember): CU 18 400
- Less Baby’s net assets at acquisition (calculated in the above point): – CU 92 000
- Goodwill: CU 26 400 (100 000+18 400-92 000)
Now, we can calculate Group’s gain in the consolidated financial statements:
- Fair value of consideration received: CU 180 000
- Less Group’s share on Baby’s net assets at disposal, calculated as:
- Baby’s share capital at disposal: CU 80 000
- Add Baby’s retained earnings at disposal (per question): CU 36 700
- Total of Baby’s net assets at disposal: CU 116 700
- Group’s share of 80%: – CU 93 360
- Less goodwill (calculated above): – CU 26 400
- Total gain on disposal: CU 60 240 (180 000-93 360-26 400)
Once you have all these calculations, then you should prepare the consolidated statement of profit or loss in three steps:
- Aggregate or combinethe amounts of revenues and expenses of a parent with the similar line items of revenues and expenses of a subsidiary,
- Eliminate intragroup transactions (here we have none due to simplicity),
- Recognize the Group’s gain on disposal of a subsidiary.
Our consolidated statement of profit or loss is here:
Notes: Numbers in „Combine“ column were calculated as sum of „Mommy Corp“ column and „Baby Ltd“ column. Numbers in the last column were calculated as sum of „Combine“ column and „Group profit on disposal“ column.
In this particular example, we aggregated the amounts of Mommy and Baby in full, because the subsidiary was disposed of at the end of the reporting period and therefore all revenues and expenses during the full year belong to the Group.
If a subsidiary is disposed of during the year, you need to include only the amounts of revenue and expenses from the beginning of the period until the date of disposal.
How do we know this was all correct?
OK, let’s prepare the consolidated statement of changes in equity and it will all click like a puzzle!
Consolidated statement in changes in equity
Before we actually prepare this statement, we need to make two more calculations:
- Group’s retained earnings brought forward at 1 January 20X6; and
- Group’s non-controlling interest brought forward at 1 January 20X6.
Let’s start with Group’s retained earnings at the beginning of the reporting period (1 January 20X6).
Since all we have are the statements as of 31 December 20X6, we will perform so-called “roll-back”.
In other words, we will start with the numbers as of 31 December 20X6 and go back to 1 January 20X6:
- Mommy’s retained earnings at 1 January 20X6: CU 49 000, were calculated as:
- Mommy’s retained earnings at 31 December 20X6 (per question): CU 62 000
- Less Mommy’s profit for the year 20X6: -CU 13 000
- Add Group’s share on Baby’s retained earnings at 31 December 20X6: CU 13 864, calculated as:
- Baby’s retained earnings at 31 December 20X6 (per question): CU 36 700,
- Less Baby’s pre-acquisition retained earnings (per question): – CU 12 000,
- Less Baby’s profit for the year 20X6 (per question): -CU 7 370,
- It gives us Baby’s retained earnings at 1 January 20X6 (36 700-12 000-7 370): CU 17 330
- Thereof Group’s share of 80%: 80%*17 330 = 13 864
- Total consolidated retained earnings at 1 January 20X6: CU 62 864 (CU 49 000+CU 13 864)
We also need to calculate non-controlling interest at 1 January 20X6:
- NCI at acquisition (see goodwill calculation above): CU 18 400
- Add NCI’s share on post-acquisition retained earnings of Baby: CU 3 466, calculated as:
- Baby’s retained earnings at 1 January 20X6: CU 17 330 (calculated above at consolidated retained earnings at 1 January 20X6)
- Apply NCI’s share of 20%: 20%*17 330 = 3 466
- Total NCI brought forward at 1 January 20X6: CU 21 866
Now, we can prepare consolidated statement in changes in equity and see whether the movement and numbers in make sense. I’ve done it here:
- Numbers in the last row are sum of the numbers in previous rows. The same applies for columns.
- The numbers for total comprehensive income for the year, CU 79 136 for retained earnings attributable to Group and CU 1 474 of non-controlling interest, come from the consolidated statement of profit or loss above (look last column at the bottom, you have a split there).
- The balaces of equity accounts at the year-end are only those of Mommy, because Baby is gone.
- DO NOT FORGET to remove any non-controlling interest related to Baby when disposing all of your investment – here it’s in the row „Elimination of NCI at disposal of Baby“.
We are done.
All adds up and clicks.
If you want all these schemes in Excel file, it is available in the IFRS Kit.
Can a parent lose control and keep all the shares?
It really can happen that a parent loses control without selling one piece of shares.
For example – a subsidiary might issue new shares to the third party and parent’s voting rights will be diluted.
Or, some contractual agreement giving control to the parent has just expired and a parent lost control.
If any of these happens and a parent loses control, then you need to deal with the disposal of a subsidiary in a similar manner as described above.
Because remember – CONTROL IS KING!!!
Any questions or comments?
Please let me know below. Thank you!
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