1. Connolly – International Financial Accounting and Reporting – 4 th Edition CHAPTER 32 DISPOSAL OF SUBSIDIARIES

2. Connolly – International Financial Accounting and Reporting – 4 th 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.

3. Connolly – International Financial Accounting and Reporting – 4 th 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

4. Connolly – International Financial Accounting and Reporting – 4 th 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).

5. Connolly – International Financial Accounting and Reporting – 4 th 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.

6. Connolly – International Financial Accounting and Reporting – 4 th 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

7. Connolly – International Financial Accounting and Reporting – 4 th 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.

8. Connolly – International Financial Accounting and Reporting – 4 th 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.

9. Connolly – International Financial Accounting and Reporting – 4 th 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 proceeds18,900,000 Cost(11,300,000) 7,600,000 Tax(1,300,000) Profit on disposal6,300,000 This would be recorded as follows: DRBank€18,900,000 CRTax liability€1,300,000 CRCost of investment€11,300,000 CRSPLOCI – P/L€6,300,000

10. Connolly – International Financial Accounting and Reporting – 4 th Edition 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.

11. Connolly – International Financial Accounting and Reporting – 4 th 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 tax60,00040,000 Income tax expense(24,000)(16,000) Profit after tax36,00024,000 Retained profit b/f104,00016,000 140,00040,000 Statement of Financial Position P Limited S Limited Assets€ € Investment in S75,000– Sundry net assets265,000100,000 340,000100,000 Equity Ordinary €1 shares200,00060,000 Reserves140,00040,000 340,000100,000

12. Connolly – International Financial Accounting and Reporting – 4 th 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.

13. Connolly – International Financial Accounting and Reporting – 4 th 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 proceeds115,000 Cost of investment(75,000) 40,000 2. In consolidated accounts: Goodwill €75,000 – 75% (€60,000 + €10,000)22,500 Written off y/e 31 December 2011 (impairment)(4,500) Remaining18,000 Profit on disposal Sale proceeds115,000 Share of net assets at date of disposal (€100,000 x 75%)(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.

14. Connolly – International Financial Accounting and Reporting – 4 th 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

15. Connolly – International Financial Accounting and Reporting – 4 th 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 proceeds450,000 Less cost of investment in S Limited (€500,000 x 40%) (200,000) Gain on sale in P Limited’s accounts250,000

16. Connolly – International Financial Accounting and Reporting – 4 th Edition 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 proceeds450,000 Recognition of non-controlling interest (€900,000 x 40%)(360,000) Credit to equity90,000 DRBank€450,000 CRNCI€360,000 CREquity – 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).

17. Connolly – International Financial Accounting and Reporting – 4 th Edition Goodwill impaired? The impact of a partial disposal with reduced subsidiary interest will differ depending on whether goodwill was impaired

18. Connolly – International Financial Accounting and Reporting – 4 th 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 200,000 Less NCI in S Limited (€480,000 x 40%) (192,000) Credit to equity 8,000

19. Connolly – International Financial Accounting and Reporting – 4 th Edition 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 200,000 Less NCI in Limited (€460,000 x 40%) (184,000) Credit to equity 16,000

20. Connolly – International Financial Accounting and Reporting – 4 th Edition 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)

21. Connolly – International Financial Accounting and Reporting – 4 th 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 675,000 Less cost of investment in S Limited (€500,000 x 60%) (300,000) Gain on sale in P Limited’s accounts 375,000

22. Connolly – International Financial Accounting and Reporting – 4 th Edition 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.

23. Connolly – International Financial Accounting and Reporting – 4 th 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%)

24. Connolly – International Financial Accounting and Reporting – 4 th 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 855,000 Less cost of investment in S Limited (€500,000 x 90%) (450,000) Gain on sale in P Limited’s accounts 455,000

25. Connolly – International Financial Accounting and Reporting – 4 th Edition 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).