Disposals

Disposals: Business Combinations

Subsidiaries and associates are consolidated / equity accounted for until the date control, or significant influence is lost therefore profits need to be time-apportioned.

A gain on disposal must also be calculated, by reference to the fair value of any interest retained in the subsidiary or associate.

An entity may sell all or some of its shareholding in another entity.

In addition to full disposals of subsidiaries and associates, other situations which may arise include:

  • The sale of shares in a subsidiary such that control is retained
  • The sale of shares in a subsidiary such that the subsidiary becomes an associate
  • The sale of shares in a subsidiary such that the subsidiary becomes an investment
  • The sale of shares in an associate such that the associate becomes an investment

Disposal of a whole Subsidiary

Parent company’s accounts

In the parent’s individual financial statements the profit or loss on disposal of a subsidiary or associate holding will be calculated as:

DISPOSALS  
  (£)
Sales proceeds X
Less: Carrying amount (cost in P’s own statement of financial position) (X)
Profit (loss) on disposal X / (X)

Group accounts – disposal of subsidiary

In the group financial statements the profit or loss on disposal will be calculated as:

GROUP DISPOSALS  
  (£)
Proceeds X
Less: Amounts recognised prior to disposal:  
Net assets of subsidiary X
Goodwill X
Non-controlling interest (X)
  (X)
Profit (loss) on disposal X / (X)

Consolidated statement of financial position

  • The statement of financial position does not include the subsidiary disposed of as it is no longer controlled at the reporting date.

Consolidated statement of comprehensive income

  • The time-apportioned results of the subsidiary should be consolidated up to the date of disposal
  • The non-controlling interest must be time apportioned
  • The gain or loss on disposal forms part of the profit or loss for the year

IFRS 5 Discontinued operations

  • If the sale represents a discontinued activity per IFRS 5 the consolidated statement of comprehensive income will reflect, as one figure, ‘Profit for the period from discontinued operations’, being the ‘group profit on disposal’ plus the ‘subsidiary’s profit for the year to disposal’.

Disposal of a whole Associate

Group accounts – disposal of associate

In the consolidated financial statements the profit or loss on disposal should be calculated as:

GROUP DISPOSALS  
  (£)
Proceeds X
Less: Carrying value of Investment:  
Cost of Investment X
Share of post-acquisition profits retained by associate at disposal X
Impairment of investment to date (X)
  (X)
Profit (loss) on disposal X / (X)

The other effects of disposal are also similar to those of the disposal of a subsidiary:

Consolidated statement of financial position

  • There is no holding in the associate at the end of the reporting period, so there is no investment to recognise in the consolidated statement of financial position.

Consolidated statement of comprehensive income

  • The associate’s after tax earnings should be included in consolidated profit or loss up to the date of disposal.

Part disposal of a Subsidiary holding

Subsidiary to Subsidiary

Shares may be disposed of such that a subsidiary holding is still retained, eg a 90% holding is reduced to a 70% holding.

In this case there is no loss of control and therefore:

  • No gain or loss on disposal is calculated
  • No adjustment is made to the carrying value of goodwill
  • The difference between the proceeds received and the change in the non-controlling interest is accounted for in shareholders’ equity

Consolidated statement of financial position

  • Consolidate as normal with the NCI calculated by reference to the year end shareholding
  • Calculate goodwill as at the original acquisition date
  • Record the difference between NCI and proceeds in shareholders’ equity as above

Consolidated statement of comprehensive income

  • Consolidate the subsidiary’s results for the whole year
  • Calculate the NCI on a pro-rata basis

Subsidiary to Associate

Shares may be disposed of such that an associate holding is still retained, eg a 90% holding is reduced to a 30% holding.

In this case there is a loss of control, and so a gain or loss on disposal is calculated as:

GROUP DISPOSALS  
  (£)
Proceeds X
Fair value of interest retained X
Less: Net assets of subsidiary recognised prior to disposal:  
Net assets X
Goodwill X
Non-controlling interest (X)
  (X)
Profit (loss) on disposal X / (X)

Consolidated statement of financial position

  • Equity account by reference to the year end holding. The carrying value of the associate is based on the fair value of the interest as included within the gain calculation.

Consolidated statement of comprehensive income

  • Consolidate results up to the date of disposal based on the pre disposal holding
  • Equity account for results after the date of disposal based on the post disposal holding
  • Include gain or loss on disposal as calculated above

Adjustments on losing control

At the date of disposal, amounts recognised in other comprehensive income in relation to the subsidiary should be accounted for in the same way as if the parent company had directly disposed of the assets that they relate to, for example:

E.g.:

Equity held in subsidiary classified as an Available For Sale investment

  • If the subsidiary holds available-for-sale assets, then on disposal, the amounts of other comprehensive income recorded in the consolidated accounts in relation to these are reclassified to profit or loss (recycled).

Equity held in subsidiary as revalued assets

  • If the subsidiary holds revalued assets, the revaluation surplus previously recognised in consolidated other comprehensive income should be transferred to group retained earnings.

Part disposal of a Subsidiary holding - loss of control

Subsidiary to Investment

Shares may be disposed of such that an investment is still retained, eg a 90% holding is reduced to a 10% holding.

The gain or loss on disposal is calculated as described above (as for Subsidiary to Associate). Therefore at the point of disposal, the retained interest is measured at fair value.

Statement of financial position

  • The interest retained is initially recorded at fair value (as included within the gain calculation).

Statement of comprehensive income

  • Consolidate results up to the date of disposal based on the pre disposal holding
  • Include dividend income after the date of disposal
  • Include gain or loss on disposal as calculated above

Adjustments on losing control

Upon loss of control, other comprehensive income recorded in relation to the subsidiary should again be accounted for in the same way as if the parent company had directly disposed of the assets that it relates to.

Part disposal of an Associate holding

Shares may be disposed of such that an investment is still retained, eg a 40% holding is reduced to a 10% holding.

In this case there is a loss of significant influence, and a gain or loss on disposal is calculated as:

GROUP DISPOSALS  
  (£)
Proceeds X
Fair value of interest retained X
Less: Carrying value of Investment:  
Cost of Investment X
Share of post-acquisition profits retained by associate at disposal X
Impairment of investment to date (X)
  (X)
Profit (loss) on disposal X / (X)

Statement of financial position

  • The interest retained is initially recorded at fair value (as included within the gain calculation).

Statement of comprehensive income

  • Equity account for results up to the date of disposal based on the pre disposal holding
  • Include dividend income after the date of disposal
  • Include gain or loss on disposal as calculated above