+ free IFRS mini-course. What about the profit on disposal of subsidiary in parent company books? Here I would like to show you how. Hi Silvia Question 2 – what will be the treatment. will the proportionate goodwill be de-recognized and charged to P&L? The entry would look something like: Hi Hi Yan, not much information here. If the parent retains control and sells the share, then well, you have a special purpose entity here and you still need to consolidate. If the parent retains control even after the sale, the sale has no gain or loss implications and any difference between the cash inflows and adjusted value of investment is recognized in equity. I can’t find much on branch reporting anywhere. Disposal of fixed assets is accounted for by removing cost of the asset and any related accumulated depreciation and accumulated impairment losses from balance sheet, recording receipt of cash and recognizing any resulting gain or loss in income statement.. A company may need to de-recognize a fixed asset either upon sale of the asset to another party or when the asset is no longer … There is an investment in sub recorded on the parents books, and the subsidiary has a nominal net asset value. However, what about eliminations? Additionally, A and B has the same owners, hence the transaction may be regarded as business combination under common control. if that is the case, what would be the appropriate accounting treatment in both books? Include profit/loss on disposal 2. NCI calculation with reference to year end shareholding and on pro rata basis. Hi Praveen, interesting question. Where can one find the source theory for this type of example? The submitter asks how Entity X de­ter­mines the cost of its in­vest­ment in the investee on the date it obtains control of Entity Y. Believe me, people make most mistakes by messing up with pluses and minuses – simple as that. S. Hi Silvia, And also how will 80,000 profit at Standalone level will get reversed in Consolidated Financials? I don’t think 100% write-off is necessary, especially if the recoverable amount of that subsidiary is not zero (but at least 300 K). By using above calculation method two types of gain; realized gain and holding gain are accounted for. Before we actually prepare this statement, we need to make two more calculations: Let’s start with Group’s retained earnings at the beginning of the reporting period (1 January 20X6). Other procedures are the same as Associate to Subsidiary. Should we write-off only the delta (i.e. First of all, you need to assess whether the parent retains control or not. Dividends paid must be deducted in calculating Net Assets. Check your inbox or spam folder now to confirm your subscription. Remove and bring to disposal calculation 1. IAS 2 Cost Formulas: Weighted average, FIFO or FOFO?! 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. Baby’s retained earnings at 31 December 20X6 (per question): CU 36 700. Debit Credit Investment in subsidiary xxx Cash xxx Spin-off of Subsidiary When a parent company spins off a subsidiary to its shareholders in which it held a majority ownership interest, it must remove the book value of the subsidiary… As soon as you lose control, you need to deconsolidate fully and account for your investment accordingly – e.g. HI Sylvia, CR Retained earnings (profit or loss) -80 000 The disposal of assets involves eliminating assets from the accounting records.This is needed to completely remove all traces of an asset from the balance sheet (known as derecognition).An asset disposal may require the recording of a gain or loss on the transaction in the reporting period when the disposal occurs. miss Silivia, this is helpful. What entries will be recorded, Any gain will go to P&L? Thanks. The consideration was £400,000. $200K) in the Parent. Thanks for your reply. Hi Jess, yes, that’s a deemed disposal and the loss of control. 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 journal entries should be adjusted accordingly: Asset Disposal on Financial … I thought that we need also to show and apply discontinued operation in income statement or in the notes. Hi Silvia, for the calculate group gain in the consolidated FS, I can find the same answer based on the difference between the disposal proceed and the group’s share of the post-acquisition profits (losses) of the subsidiary up to the date of disposal (180,000 – 100,000 – 19,760). Journal Entry for Investment in Subsidiary Suppose, Book Ltd acquires 60% shares in Paper Ltd in the month of April 20×1 against consideration of 5,000,000. In this circumstance, the parent company needs to report its subsidia… Given the emerging importance, this area may be tested in professional exams. Your entries leave the interco debtor unpaid, presumably for all eternity, which doesn't seem right. Let’s assume Baby booked $10 million in sales up to 30 September. Also my Parent till October’2019 owned 100% of Daughter (which previously was 100% subsidiary of GrandParent directly). Your explanation was exactly what I needed. Dividends paid must be deducted in calculating Net Assets. There was a question on this in ACCA Dip IFRS June 2018 exam for the first time.. the investment in the subsidiary. Please explain the difference between when the interest is diluted or gained. In October’2019, Daughter was sold to GrandParent. Investment in a subsidiary accounted for at cost: Partial disposal In a similar fact pattern, an entity prepares separate financial statements and elects to account for its investments in subsidiaries at cost as per IAS 27. Credit Baby’s net assets: 116 700 (to derecognize them fully; of course, you need to go item by item – Debit Baby’s liabilities, Credit Baby’s PPE… you get the point I hope) Proceeds       xxx NCI———————————————-$ 42,800 (as above), Cr. The following is a summary of the impact of the investment in Coffee on the various line items in the separate financial statements of Winter, depending on the accounting policy choice, for the year ended 31 December 20.17 (the impact was determined by adding all the journal entries above to the relevant line item): Consolidate Sub until date of disposal (i.e. That is very clear. Accounted for according to equity method subsequent disposal. The journal entry for the disposal should be: Scenario 3: Disposal by asset sale with a loss. But, your explanation enhanced conceptual clarity. Thanks. Year end and acquisition date 31 Dec. Profit for the year of disposal $ 36,000, retained earnings $304,000 and share capital was $100,000. NCI                  xxx Less: Goodwill Let’s assume a 31 December year end and Mommy Corp sold Baby on 30 September. In present economic scenario group disposals have been common for cost cutting purposes. Subsidiary S has bought back 10 shares at 15 each Calculate debit / credit adjustment required to equity? In par­tic­u­lar, the submitte… I know impairment loss get subtracted to arrive at goodwill at disposal date, what about when goodwill is valued upwards instead of impaired, what value is used for goodwill at disposal? The intercompany receivable from the subsidiary will be written off by the parent. What if company decides to convert its subsidiaries to branches? Hi Celia, Thank you Silvia! is it same figure? Instead, the consolidated statement of financial position will contain only assets and liabilities of a parent. Thanks in advance. I have a question.My Company ( “X”) has 55% in another company(“Y”) and holds 825,000 shares of the 1,500,000 shares of the Company. Below there are statements of financial positions of both Mommy and Baby at 31 December 20X6. If the disposal is mid of the year then NCI and Net Assets need to be calculated till the date of disposal. 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. As soon as there are no effects of subsidiary to be shown, you stop calling your financial statements “consolidated”. 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? Following treatments are applicable depending on type of disposal; Difference of net proceeds received to changes in Non Controlling Interest (NCI) is debited / credited to shareholder’s equity. But you had a great point . Really desperate for some help and would really appreciate it. 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. S. Hello silvia thanks for explanation. If you have an only subsidiary and you dispose off during the period. 10% of holding was disposed off on 31 August 2008 for $ 70,000. I have a scenario. However, I have a question regarding income tax: in your example, the income tax does not change even if the profit on disposal of a subsidiary is recognised pre-tax. Need help? Hi, would you please also show the journal entry in consolidation level to record the total gain on disposal CU 60 240? 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, Less goodwill (calculated above): – CU 26 400, Group’s retained earnings brought forward at 1 January 20X6; and. I understand that if a subsidiary is liquidated with loss situation during the year, de consolidation is dealt with in a similar manner as described above because a parent loss control. Will your financial statements be called “Consolidated” as at 31 Dec 2019. When we prepared the consolidation financial statement, we book the Bank CU180,000 and recognize the consolidated gain on disposal CU60,240 again, it will be double count. Comparatives are not restated. Credit Goodwill: 26 400 (to derecognize it fully), Credit Baby’s net assets: 116 700 (to derecognize them fully; of course, you need to go item by item – Debit Baby’s liabilities, Credit Baby’s PPE… you get the point I hope), Debit Non-controlling interest on disposal: 23 340 (to derecognize it fully). Thank you! Consolidate subsidiary results as before disposal. I am confused about issue 3. In parents separate accounts – it depends which method the parent applies to report its investment, but it seems that at cost. So my statements would be called ; Investment in Subsidiary Journal Entry ABC Company purchase 30,000 shares in XYZ for $ 5 each shares. Some time ago I published an article with an example of very simple method of consolidating a parent and a subsidiary. include them in consolidation and eliminate intragroup transactions. Get subscribed! 2. The subsidiary has not been trading and has no assets except some cash (say around $300K). Hello Silvia, Less: ????? is pooling of interest method applicable? This has been treated as an investment in a subsidiary in the draft accounts at cost. A subsidiary is a company that is controlled by another company that owns 50% or more of its voting stock. Thank you for your great explanation, Less: Net asset value I can give you more details, as it is my case, as well Thanks for the ‘eye-opening’ presentation. Numbers in the last row are sum of the numbers in previous rows. In the final part of the question the asset is sold for 4,500. On top of it, you also need to calculate group’s gain or loss on disposal of subsidiary in the consolidated financial statements. 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, NCI at acquisition (see goodwill calculation above): CU 18 400. Hi Silvia, If a fully owned subsidiary is recorded at CU 100 and separate goodwill of CU 20; we sell 20% stake at a price of CU 30 (gain of CU 10). Subsidiary needs to remove its equity of the parent’s investment. Debit Non-controlling interest on disposal: 23 340 (to derecognize it fully) or it will be two different transaction in Joint venture “A” and “B”‘s books? But, if your starting point is consolidated balance sheet, then you must derecognize all Baby’s assets and liabilities (=net assets), all goodwill and all non-controlling interest left. where the investee is a subsidiary which is consolidated, the gain or loss depends on whether the parent uses the fair value method or equity method and whether it retains control after the sale. Similar to the example given by Jess above, may i know what would be the accounting treatment if parent (say, joint venture “A”) losses control of the subsidiary without selling one piece of shares (in which subsidiary issued new shares to another Joint Venture “B” and cause a dilution of A’s shareholding. Under IAS 21, this foreign exchange reserve may be transferred to the income statement on the disposal of the subsidiary as part of the gain ... Read moreDisposal of a … 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. S. Thanks, that is quite helpful. 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“. So you have R60 240 going through the P/L for group gain which ultimately goes to retained earnings on the consolidated financial position right? 10. 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. Hi Liew, Available-for-sale financial asset is remeasured to FV, with gain/loss recognised in P&L. Hi Silvia, can you explain how to record the transactions, when a subsidiary is sold among the same group, that is subsidiary shareholding is changing from one entity to another entity, but with in the same group. Acquisitions and disposals of subsidiaries Page | 7 Disposal of subsidiaries Where control is lost This scenario arises where either a parent disposes of all of its shares in its subsidiary, or a parent disposes of some of its shares such that it no longer has a controlling holding (for example from 80% down to 40%). What should be the accounting treatment in the parent and subsidiary books of accounts. Dear Silvia, I have a question. Then that subsidiary keeps that P&L in its Retained Earnings opening balance when it starts reporting as a branch? Parent prepares individual accounts for each entity as well as the Group Consolidated Accounts. Also, what else should be booked/thought about? Miss silvia, I wonder what would have happened in case of a joint venture or associate disposal. As for it is about separate financial statements , it is correct to record gain of CU 10…. Mommy Corp acquired 80% share in Baby Plc. Thanks for the detailed explanation .Kindly clarify , how the gain on sale of investment in subsidiary will be reversed if we do a line by line consolidation. So, treat cash flows before disposal date as intercompany cash flows; i.e. report “Top 7 IFRS Mistakes” This type of parent-subsidiary relationship typically comes about as the result of acquisitions or heavy investment by a large corporation in another company. – Statement of financial position [this will not be referred as consolidated since as at 31 Dec 2019 you do not own any subsidiary?] Hang on a minute – isn’t it the same as we calculated above? In this case, more than 50% stake has been acquired by Book Ltd in the entity Paper Ltd. Hi Malik, I heard if you own 100% and sell it off then you don’t recognize daughter company’s P&L. I got the answer from your above comments. So that’s important that you do that exercise as well. = Consolidated gain / loss. So there is a profit or loss on the disposal, but no dividend income and no debtor left over. Let’s consider the same situation as in scenario 2, but the selling price was only $500. Asset impairment accounting affects asset reduction in the balance sheet and impairment loss recognition in the income statement.Please note that goodwill and some tangible assets are required to make an annual impairment test. 1. Goodwill recognized prior disposal is original goodwill less any impairment to date. under licence during the term and subject to the conditions contained therein. Hai Silver? Changes in NCI share needs to be calculated and accounted for, therefore; Profit on disposal——————————$ 24,000 (36,000*8/12), NCI before disposal——————————–428,000*10%= 42,800, NCI after disposal———————————-428,000*20%=85,600, Dr. What I’ve understood after consultations with my colleagues, as we use “predecessor valuation method”, we simply do the same, – write-off all assets, liabilities and equity of Daughter, without any P&L effect. Regarding 1/1/20×6 (opening) retained earnings 62,864, does it automatically tie to prior year 12/31/20×5 closing retained earnings ? If the parent loses control, it must adjust the carrying value of investment in its individual finan… Proceeds X great question. Question 1 – In separate financial statement for recognising profit Cost of the shares sold should be calculated using average cost of holding or Taking FIFO method. As for consolidated accounts – the parent consolidates until it loses control over subsidiary (thus I guess until subsidiary is fully liquidated). The investment is an investment in an equity – consolidated statement of cash flows. they are negative. Here is another question that am struggling to solve. At acquisition goodwill: 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. Consolidated worksheet adjusting entries Eliminating parent’s investment against equity acquired in subsidiary • Dr Subsidiary’s total equity balance at acquisition date • Cr Parent’s investment in subsidiary o E.g. First, you need to remove any assets and liabilities of a subsidiary. report "Top 7 IFRS Mistakes" + free IFRS mini-course. Basically, A needs to dispose of subsidiary (that would be “deemed” disposal and I cover similar topic of deemed disposal of an associate here) and then you need to assess the substance of the transaction and yes, perhaps pooling of interest method would work, but anyway, I recommend checking up a status of IASB project on this topic. The journal entry is: Debit Profit or loss – loss on partial disposal of shares: CU 2 720. Maybe I should mention it up there. ADVERTISEMENTS: Read this article to learn about the transactions relating to investment account with its treatment. 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