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5 Calculation of gain in parent's separate financial statements

5 Calculation of gain in parent's separate financial statements

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(b)



Subsidiary to trade investment/IEI

(i)



Statement of profit or loss and other comprehensive income

(1)

(2)

(3)



(ii)



Treat the undertaking as a subsidiary up to the date of disposal, ie consolidate.

Show profit or loss on disposal.

Show dividend income only thereafter.



Statement of financial position

(i)



The investment remaining is at its fair value at the date of disposal (to calculate the

gain).



(2)



Thereafter, treat as an investment in equity instruments under IFRS 9.



A part disposal where a subsidiary becomes an investment in equity instruments is illustrated in

requirement (d) of the Question ‘Disposal’, later in this chapter.



3.7 Disposals where control is retained

Control is retained where the disposal is from subsidiary to subsidiary. The accounting treatment is as

follows.



3.7.1 Statement of profit or loss and other comprehensive income

(a)



The subsidiary is consolidated in full for the whole period.



(b)



The non-controlling interest in the statement of profit or loss will be based on percentage before

and after disposal, ie time apportion.



(c)



There is no profit or loss on disposal.



3.7.2 Statement of financial position

(a)



The non-controlling interest in the statement of financial position is based on the year end

percentage.



(b)



The change (increase) in non-controlling interests is shown as an adjustment to the parent's

equity.



(c)



Goodwill on acquisition is unchanged in the consolidated statement of financial position.



3.7.3 Adjustment to the parent's equity

This reflects the fact that the non-controlling share has increased (as the parent's share has reduced).

A subsidiary to subsidiary disposal is, in effect, a transaction between owners. Specifically, it is a

reallocation of ownership between parent and non-controlling equity holders. The goodwill is unchanged,

because it is a historical figure, unaffected by the reallocation. The adjustment to the parent's equity is

calculated as follows.

$

Fair value of consideration received

X

Increase in NCI in net assets at disposal

(X)

Increase in NCI in goodwill at disposal *

(X)

Adjustment to parent's equity

X

*Note. This line is only required where non-controlling interests are measured at fair value at the date of

acquisition (ie where there is an increase in the non-controlling interest share of goodwill already

recognised).

If you are wondering why the decrease in shareholding is treated as a transaction between owners, look

back to Chapter 12, where we explained that the revised IFRS 3 views the group as an economic entity,

and views all providers of equity, including non-controlling interests, as owners of the group.

Non-controlling shareholders are not outsiders, they are owners of the group just like the parent.



432



14: Changes in group structures  Part C Group financial statements



You can practise the adjustment to parent’s equity in the example and in requirement (b) of the Question

'Disposal' below.



3.7.4 Gain in the parent's separate financial statements

This is calculated as for disposals where control is lost: see Paragraph 3.5 above.



3.8 Example: Partial disposals

Chalk Co bought 100% of the voting share capital of Cheese Co on its incorporation on 1 January 20X2 for

$160,000. Cheese Co earned and retained $240,000 from that date until 31 December 20X7. At that date

the statements of financial position of the company and the group were as follows.



Investment in Cheese

Other assets

Share capital

Retained earnings

Current liabilities



Chalk Co

$'000

160

1,000

1,160



Cheese Co

$'000



500

500



400

560

200

1,160



160

240

100

500



Consolidated

$'000



1,500

1,500

400

800

300

1,500



It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of

the subsidiary's identifiable net assets.

On 1 January 20X8 Chalk Co sold 40% of its shareholding in Cheese Co for $280,000. The profit on

disposal (ignoring tax) in the financial statements of the parent company is calculated as follows.

Chalk

$'000

Fair value of consideration received

280

64

Carrying value of investment (40%  160)

Profit on sale

216

We now move on to calculate the adjustment to equity for the group financial statements.

Because only 40% of the 100% subsidiary has been sold, leaving a 60% subsidiary, control is retained.

This means that there is no group profit on disposal in profit or loss for the year. Instead, there is an

adjustment to the parent's equity, which affects group retained earnings.



Point to note



Remember that, when control is retained, the disposal is just a transaction between owners. The noncontrolling shareholders are owners of the group, just like the parent.

The adjustment to parent's equity is calculated as follows.

Fair value of consideration received

Increase in non-controlling interest in net

assets at the date of disposal (40%  400)

Adjustment to parent's equity



$'000

280

160

120



This increases group retained earnings and does not go through group profit or loss for the year. (Note

that there is no goodwill in this example, or non-controlling interest in goodwill, as the subsidiary was

acquired on incorporation.)



Part C Group financial statements  14: Changes in group structures



433



Solution: Subsidiary status

The statements of financial position immediately after the sale will appear as follows.



Investment in Cheese (160-64)

Other assets

Share capital

Retained earnings*

Current liabilities

Non-controlling interest



Chalk Co

$'000

96

1,280

1,376

400

776

200

1,376



Cheese Co

$'000



5500

500

160

240

100

500



Consolidated

$'000



1,780

1,780

400

920

300

1,620

160

1,780



*Chalk's retained earnings are $560,000 + $216,000 profit on disposal. Group retained earnings are

increased by the adjustment above: $800,000 + $120,000 = $920,000.



Solution: Associate status

Using the above example, assume that Chalk Co sold 60% of its holding in Cheese Co for $440,000.

The fair value of the 40% holding retained was $200,000. The gain or loss on disposal in the books of the

parent company would be calculated as follows.

Parent company

$'000

Fair value of consideration received

440

(96)

Carrying value of investment (60%  160)

Profit on sale

344

This time control is lost, so there will be a gain in group profit or loss, calculated as follows.

$'000

440

200



Fair value of consideration received

Fair value of investment retained

Less Chalk's share of consolidated carrying

value at date control lost 100%  400

Group profit on sale



(400)

240



Note that there was no goodwill arising on the acquisition of Cheese, otherwise this too would be

deducted in the calculation.

The statements of financial position would now appear as follows.



Investment in Cheese (Note 1)

Other assets

Share capital

Retained earnings (Note 2)

Current liabilities



Chalk Co

$'000

64

1,440

1,504

400

904

200

1,504



Cheese Co

$'000



500

500

160

240

100

500



Consolidated

$'000

200

1,440

1,640

400

1,040

200

1,640



Notes



434



1



The investment in Cheese is at fair value in the group SOFP. In fact it is equity accounted at fair

value at date control lost plus share of post-'acquisition' retained earnings. But there are no

retained earnings yet because control has only just been lost.



2



Group retained earnings are $800,000 (per question) plus group profit on the sale of $240,000,

ie $1,040,000.



14: Changes in group structures  Part C Group financial statements



The following comprehensive question should help you get to grips with disposal problems. Try to

complete the whole question without looking at the solution, and then check your answer very carefully.

Give yourself at least two hours. This is a very difficult question.



Exam focus

point



Questions may involve part-disposals leaving investments with both subsidiary and associate status.

Disposals could well come up at P2, since you have not covered them before.



Question



Disposal



Smith Co bought 80% of the share capital of Jones Co for $324,000 on 1 October 20X5. At that date

Jones Co's retained earnings balance stood at $180,000. The statements of financial position at

30 September 20X8 and the summarised statements of profit or loss to that date are given below. (There

is no other comprehensive income.)

Smith Co

Jones Co

$'000

$'000

Non-current assets

360

270

Investment in Jones Co

324



Current assets

370

370

1,054

640

Equity

$1 ordinary shares

540

180

Retained earnings

414

360

Current liabilities

100

100

1,054

640

Profit before tax

Tax

Profit for the year



153

(45)

108



126

(36)

90



No entries have been made in the accounts for any of the following transactions.

Assume that profits accrue evenly throughout the year.

It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of

the subsidiary's identifiable net assets.

Ignore taxation.

Required

Prepare the consolidated statement of financial position and statement of profit or loss at 30 September

20X8 in each of the following circumstances. (Assume no impairment of goodwill.)

(a)



Smith Co sells its entire holding in Jones Co for $650,000 on 30 September 20X8.



(b)



Smith Co sells one quarter of its holding in Jones Co for $160,000 on 30 June 20X8.



(c)



Smith Co sells one half of its holding in Jones Co for $340,000 on 30 June 20X8, and the

remaining holding (fair value $250,000) is to be dealt with as an associate.



(d)



Smith Co sells one half of its holding in Jones Co for $340,000 on 30 June 20X8, and the

remaining holding (fair value $250,000) is to be dealt with as an investment in equity instruments.



Part C Group financial statements  14: Changes in group structures



435



Answer

(a)



Complete disposal at year end (80% to 0%)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

Non-current assets

Current assets (370 + 650)



$'000

360

1,020

1,380

$'000



Equity

$1 ordinary shares

Retained earnings (W3)

Current liabilities



540

740

100

1,380



CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8

$'000

279

182

(81)

380



Profit before tax (153 + 126)

Profit on disposal (W2)

Tax (45 + 36)

Profit attributable to:

Owners of the parent

Non-controlling interest (20%  90)



362

18

380



Workings

1



Timeline



1.10.X7



30.9.X8



P/L



Subsidiary – all year

Group gain on disposal

not sub at y/e



2



Profit on disposal of Jones Co

Fair value of consideration received

Less share of consolidated carrying value when control lost:

net assets

goodwill

non-controlling interest: 20%  540



$'000



$'000

650



540

36

(108)

(468)

182



Note: goodwill

$'000

Consideration transferred

NCI (20%  360)

Acquired: (180 + 180)



436



14: Changes in group structures  Part C Group financial statements



324

72

(360)

36



3



Retained earnings carried forward



Smith



Jones



$'000

Per question/date of disposal

Add group gain on disposal (W2)

Reserves at acquisition



414

182





Share of post-acq'n reserves up to the disposal (80%  180)



144



$'000

360



(180)

180



740

(b)



Partial disposal: subsidiary to subsidiary (80% to 60%)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

$'000

Non-current assets (360 + 270)

Goodwill (part (a))

Current assets (370 + 160 + 370)



630

36

900

1,566



Equity

$1 ordinary shares

Retained earnings (W2)



540

610

1,150

216

200

1,566



Non-controlling interest (W4)

Current liabilities (100 + 100)



CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8

$'000

Profit before tax (153 +126)

Tax (45 + 36)

Profit for the period

Profit attributable to:

Owners of the parent

Non-controlling interest

20%  90  9/12

40%  90  3/12



$'000

279

(81)

198

175.5



13.5

9.0

22.5

198.0

19



Workings

1



Timeline

1.10.X7



P/L



30.6.X8



30.9.X8



Subsidiary – all year

20% NCI  9/12



Retained control (60%) –

so adjust parent's equity



40% NCI  3/12



Sells 20%



Consol – 40% NCI



Part C Group financial statements  14: Changes in group structures



437



2



Adjustment to parent’s equity on disposal of 20% of Jones

$'000

Fair value of consideration received

Less increase in NCI in net assets at disposal

20%  (540 – (3/12  90))



3



Group retained earnings



160.0

(103.5)

56.5

Smith

$'000



Per question/at date of disposal

(360 – (90  3/12))

Adjustment to parent's equity on disposal (W2)

Retained earnings at acquisition

Jones: share of post acq'n. earnings

(157.5  80%)

Jones: share of post acq'n. earnings

(22.5  60%)

4



414.0

56.5



Jones

80%

$'000



Jones

60% retained

$'000



337.5



360.0



(180.0)

157.5



(337.5)

22.5



126.0

13.5

610.0



Non-controlling interests (SOFP)

NCI at acquisition (part (a) – goodwill)

NCI share of post acq'n reserves (W3) (157.5  20%)

(22.5  40%)



$'000

72.0

31.5

103.5

9.0



Increase in NCI (W3)

(c)



$'000



$'000



112.5

103.5

216.0



Partial disposal: subsidiary to associate (80% to 40%)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

$'000

Non-current assets

Investment in associate (W4)

Current assets (370 + 340)

Equity

$1 ordinary shares

Retained earnings (W3)

Current liabilities



438



14: Changes in group structures  Part C Group financial statements



360

259

710

1,329

540

689

100

1,329



CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8

$'000

247.5

140.0

9.09

(72.0)

324.5



Profit before tax (153 + 9/12  126)

Profit on disposal (W2)

Share of profit of associate (90  3/12  40%)

Tax 45 + (9/12  36)

Profit for the period

Profit attributable to:

Owners of the parent

Non-controlling interest (20%  90  9/12)



311.0

13.5

324.5



Workings

1



Timeline



1.10.X7



P/L



30.6.X8



Subsidiary (80% – 9/12)



30.9.X8



Associate – 3/12



Sells =

40% of Jones



Equity account

in SOFP



Group gain

on disposal



2



Profit on disposal in Smith Co



$'000



Fair value of consideration received

Fair value of 40% investment retained

Less share of consolidated carrying value when control lost

540 – (90  3/12)

Goodwill (part (a))

Less NCI 20%  ((540 – (90  3/12))



$'000

340

250



517.5

36.0

(103.5)

(450)

140



3



Group retained earnings



Per question/at date of disposal

(360 – (90  3/12))

Group profit on disposal (W2)

Retained earnings at acquisition/date control lost

Jones: share of post acqn. earnings

(157.5  80%)

Jones: share of post acqn. earnings

(22.5  40%)



Smith



Jones

80%(sub)



$'000



$'000



414

140



337.5

(180)

157.5



Jones

40% retained

(assoc.)

$'000

360

(337.5)

22.5



126

9

689



Part C Group financial statements  14: Changes in group structures



439



4



Investment in associate

$'000

Fair value at date control lost (new ‘cost’)

Share of post ‘acq'n’ retained reserves (90  3/12  40%) (or from W3)



(d)



4250

9

259



Partial disposal: subsidiary to investment in equity instruments (80% to 40%)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

Non-current assets

Investment

Current assets (370 + 340)



$'000

360

250

710

1,320



Equity

$1 ordinary shares

Retained earnings (W2)

Current liabilities



540

680

100

1,320



CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8

$'000

247.5

140.0

(72.0)

315.5



Profit before tax (153 + (9/12  126)

Profit on disposal (See (c) above)

Tax (45 + (9/12  36))

Profit for the period

Profit attributable to:

Owners of the parent

Non-controlling interest



302.0

13.5

315.5



Workings

1



Timeline



1.10.X7



P/L



30.6.X8



Subsidiary (80% – 9/12)



30.9.X8



IEI – 3/12



Sells =

40% of Jones



IEI in SOFP



Group gain

on disposal



2



440



Retained earnings



Smith

$'000



Per question/at date of disposal (360 – (90  3/12))

Group profit on disposal (see (c) above)

Retained earnings at acquisition



414

140



Jones: share of post acq'n. earnings (157.5  80%)



126

680



14: Changes in group structures  Part C Group financial statements



Jones

$'000

337.5

(180.0)

157.5



3.9 Section summary

Disposals occur frequently in Paper P2 consolidation questions.





The effective date of disposal is when control passes







Treatment of goodwill is according to IFRS 3







Disposals may be full or partial, to subsidiary, associate or investment status











if control is lost, the interest retained is fair valued and becomes part of the calculation of

the gain on disposal

if control is retained, the change in non-controlling interests is shown as an adjustment to

parent's equity



Gain or loss on disposal is calculated for the parent company and the group



4 Changes in direct ownership

FAST FORWARD



12/11



Changes in direct ownership (ie internal group reorganisations) can take many forms. Apart from

divisionalisation, all other internal reorganisations will not affect the consolidated financial statements,

but they will affect the accounts of individual companies within the group.

Groups will reorganise on occasions for a variety of reasons.

(a)



A group may want to float a business to reduce the gearing of the group. The holding company

will initially transfer the business into a separate company.



(b)



Companies may be transferred to another business during a divisionalisation process.



(c)



The group may 'reverse' into another company to obtain a stock exchange quotation.



(d)



Internal reorganisations may create efficiencies of group structure for tax purposes.



Such reorganisations involve a restructuring of the relationships within a group. Companies may be

transferred to another business during a divisionalisation process. There is generally no effect on the

consolidated financial statements, provided that no non-controlling interests are affected, because such

reorganisations are only internal. The impact on the individual companies within the group, however, can

be substantial. A variety of different transactions are described here, only involving 100% subsidiaries.



4.1 New top parent company

A new top holding company might be needed as a vehicle for flotation or to improve the co-ordination of a

diverse business. The new company, P, will issue its own shares to the holders of the shares in S.



P



Part C Group financial statements  14: Changes in group structures



441



4.2 Subsidiary moved up

This transaction is shown in the diagram below. It might be carried out to allow S1 to be sold while S2 is

retained, or to split diverse businesses.

P



P



P



S1 could transfer its investment in S2 to P as a dividend in specie or by P paying cash. A share for share

exchange is not possible because an allotment by P to S1 is void. A dividend in specie is simply a

dividend paid other than in cash.

S1 must have sufficient distributable profits for a dividend in specie. If the investment in S2 has been

revalued then that can be treated as a realised profit for the purposes of determining the legality of the

distribution. For example, suppose the statement of financial position of S1 is as follows.

$m

Investment in S2 (cost $100m)

900

Other net assets

100

1,000

Share capital

Revaluation surplus

Retained earnings



100

800

100

1,000



It appears that S1 cannot make a distribution of more than $100m. If, however, S1 makes a distribution in

kind of its investment in S2, then the revaluation surplus can be treated as realised.

It is not clear how P should account for the transaction. The carrying value to S2 might be used, but there

may be no legal rule. P will need to write down its investment in S1 at the same time. A transfer for cash is

probably easiest, but there are still legal pitfalls as to what is distributable, depending on how the transfer

is recorded.

There will be no effect on the group financial statements as the group has stayed the same: it has made no

acquisitions or disposals.



4.3 Subsidiary moved along

This is a transaction which is treated in a very similar manner to that described above.

P



P



The problem of an effective distribution does not arise here because the holding company did not buy the

subsidiary. There may be problems with financial assistance if S2 pays less than the fair value to

purchase S3 as a prelude to S1 leaving the group.



442



14: Changes in group structures  Part C Group financial statements



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