Changes in interest resulting in a loss of control

Changes in interest resulting in a loss of control – The loss of control of a subsidiary that is a business, other than in a non-reciprocal transfer to owners, results in the recognition of a gain or loss on the sale of the interest sold and on the revaluation of any retained non-controlling investment. A loss of control is an economic event, similar to that of gaining control, and therefore is a remeasurement event. Changes in interest resulting in a loss of control

In accordance with IFRS 10 B37, events resulting in deconsolidation of a subsidiary that is a business include the following: Changes in interest resulting in a loss of control

  • A parent sells all or part of its ownership interest in its subsidiary, thereby losing its controlling financial interest in its subsidiary
  • A contractual agreement that gave control of the subsidiary to the parent expires Changes in interest resulting in a loss of control
  • The subsidiary issues shares, thereby reducing the parent’s ownership interest in the subsidiary so that the parent no longer has a controlling financial interest in the subsidiary
  • The subsidiary becomes subject to the control of a government, court, administrator, or regulator

When should a parent company, which is not in bankruptcy, deconsolidate a subsidiary that is a business that has filed for bankruptcy? Changes in interest resulting in a loss of control

A parent should deconsolidate a subsidiary that is a business as of the date the parent no longer has control of the subsidiary in accordance with IFRS 10 B37. Examples of events that result in deconsolidation of a subsidiary include when a subsidiary becomes subject to the control of a government, court, administrator, or regulator. Normally, once a subsidiary files for bankruptcy protection, a parent no longer has control over the subsidiary (as the bankruptcy court must approve all significant actions), and the subsidiary should be deconsolidated on that date.

Loss of control

The definition of a subsidiary under IFRS includes legal entities and those that are unincorporated (i.e., unincorporated division). Therefore, the loss of control provisions of IFRS 10 apply to a group of assets that constitute a business, as well as to the loss of control of a subsidiary. IFRS 10 is silent as to whether a subsidiary must also be a business.

It is common practice to assume that the owner experiencing the loss of control of a legal entity that is not a business may apply IFRS 10, if no other IFRS would be applicable to the underlying assets and liabilities. For example, financial assets and liabilities should follow the derecognition flowchart in IAS 39 AG36 and IFRS 9 B3.2.1 rather than IFRS 10.

Further, there are no exclusions from the scope of IFRS 10 related to sales of in substance real estate or conveyances of oil and gas mineral rights.

Accounting for changes in interest if control is lost

If a parent loses control of a subsidiary that is a business through means other than a non-reciprocal transfer to owners, it must:

  • Derecognize the assets (including an appropriate allocation of goodwill) and liabilities of the subsidiary at their carrying amounts at the date control is lost
  • Derecognize the carrying amount of any NCI at the date control is lost (including any components of accumulated other comprehensive income attributable to it)
  • Recognize the fair value of the proceeds from the transaction, event, or circumstances that resulted in the loss of control Changes in interest resulting in a loss of control
  • Recognize any non-controlling investment retained in the former subsidiary at its fair value at the date control is lost Changes in interest resulting in a loss of control
  • Reclassify to income [profit or loss], or transfers directly to retained earnings if required, in accordance with other IFRS, the amounts recognized in other comprehensive income in relation to that subsidiary
  • Recognize any resulting difference as a gain or loss in income [profit or loss] attributable to the parent Changes in interest resulting in a loss of control

The gain or loss is calculated as the difference between: Changes in interest resulting in a loss of control

  • The aggregate of: Changes in interest resulting in a loss of control
    • The fair value of the consideration transferred Changes in interest resulting in a loss of control
    • The fair value of any retained non-controlling investment in the former subsidiary on the date the subsidiary is deconsolidated Changes in interest resulting in a loss of control
    • The carrying amount of any non-controlling interest in the former subsidiary (including any accumulated other comprehensive income or loss attributable to the NCI) on the date the subsidiary is deconsolidated Changes in interest resulting in a loss of control
  • The carrying amount of the former subsidiary’s net assets Changes in interest resulting in a loss of control

The calculation outlined above results in an amount that includes the gain or loss for both the interest sold and the non-controlling investment retained. However, IFRS requires a parent to separately disclose the total gain or loss and the portion of the gain or loss related to the retained non-controlling investment in accordance with IFRS 12 19. To obtain the information necessary for disclosure, a second calculation of the portion related to the gain or loss on the retained non-controlling investment is necessary.

It is also important to identify any gains or losses deferred in accumulated other comprehensive income attributable to the subsidiary. The cumulative amount deferred in other comprehensive income related to that subsidiary is considered part of the carrying amount of the subsidiary and is included in determining the gain or loss on the interest sold and the retained non-controlling investment in accordance with IAS 21 48.

This includes the parent’s and the NCI’s share of gains or losses previously recognized in other comprehensive income on foreign exchange differences, cash flow hedges, and other individual assets and liabilities (e.g., available-for-sale financial assets). Changes in interest resulting in a loss of control

Amounts recognized in equity (outside of other comprehensive income) related to changes in ownership interests that did not result in a change in control should not be included in determining the gain or loss on the interest sold and the retained non-controlling investment. These amounts resulted from transactions among shareholders and are not directly attributable to the NCI.

Additionally, under IFRS, amounts recognized in equity for revaluation of assets should not be included in determining the gain or loss on the interest sold and the retained non-controlling investment. For example, IFRS companies may have recognized gains or losses on the revaluation of fixed and intangible assets. These amounts are reclassified from reserves directly to retained earnings and do not form part of the gain or loss recognized. Changes in interest resulting in a loss of control

The effect of applying the steps above when a subsidiary that is a business is partially owned prior to the loss of control is that the non-controlling interests held by third parties are not revalued to fair value. As part of the deconsolidation of the subsidiary, the carrying value of the NCI’s portion of the subsidiary’s net assets is derecognized against the carrying amount of the NCI, with no gain or loss. Changes in interest resulting in a loss of control

Typically, impairment tests for goodwill and long-lived assets (asset group) are needed when a parent expects that it will sell or lose control of a subsidiary. If the goodwill or long-lived asset group (cash generating unit) is impaired, the impairment loss should be recognized in earnings [profit or loss] in accordance with IAS 36 60. Changes in interest resulting in a loss of control

The following two examples demonstrate the accounting for a change in interest when control is lost, assuming the transactions do not involve nonreciprocal transfers to owners or sales of in substance real estate. Changes in interest resulting in a loss of control

EXAMPLE – Accounting for changes in interest of a wholly owned subsidiary that is a business if control is lost

Company A owns 100% of a subsidiary that is a business. Company A disposes of 60% of its interest in the subsidiary for CU360 million, and loses control of the subsidiary. At the disposal date, the fair value of the retained non-controlling investment is determined to be CU240 million. The carrying value of the identifiable net assets is CU440 million, excluding goodwill. There is CU60 million of goodwill recorded related to the previously acquired interests in the subsidiary.

Company A tested the goodwill and long-lived assets of the subsidiary prior to disposal and there was no impairment. (For illustrative purposes, the tax consequences on the gain have been ignored.) Changes in interest resulting in a loss of control

How should Company A account for the change in interest?

Analysis

Company A should record the following journal entry on the disposal date to record the 60% interest sold, the gain recognized on the 40% retained non-controlling investment, and the derecognition of the subsidiary (in millions): Changes in interest resulting in a loss of control

Cash

CU360¹

Equity-method investment

CU240²

Net assets

CU500³

Gain on investment

CU100º

Notes

1 Cash received for the 60% interest sold

2 Fair value of the 40% retained non-controlling investment is recognized

3 Deconsolidation of the subsidiary and removal of 100% of carrying value of the subsidiary’s net assets, including an appropriately allocated portion of previously recorded goodwill

o Gain or loss on the interest sold and the retained non-controlling investment is recognized in earnings [profit or loss], calculated as follows:

Fair value of consideration

CU360

Fair value of retained non-controlling investment

240

Carrying value of NCI

n/a

Subtotal

600

Less: carrying value of former subsidiary’s net assets (CU440 net assets excluding goodwill + CU60 goodwill)

(500)

Gain on interest sold and retained non-controlling investment

CU100

The CU100 million gain on the interest sold and the retained non-controlling investment would be recognized in earnings [profit or loss] and disclosed in the financial statements. Additionally, Company A would need to disclose the portion of the gain or loss related to the remeasurement of the retained non-controlling investment to fair value. This amount is calculated as follows (in millions):

Fair value of retained non-controlling investment

CU240

Percentage retained of carrying value of subsidiary

((CU440 + CU60) × 40%)

-200

Gain on retained non-controlling investment

CU40

EXAMPLE – Accounting for changes in interest in a business if control is lost—accounting for changes in interest of a partially owned subsidiary if control is lost

Company B owns 80% of a subsidiary that is a business. Company B disposes of 50% of the subsidiary for CU300 million, and loses control of the subsidiary. Company B will deconsolidate the subsidiary and account for the remaining 30% interest as an equity-method investment. At the disposal date, the fair value of the retained non-controlling investment is determined to be CU180 million. The carrying value of the identifiable net assets is CU440 million and there is no goodwill.

The carrying value of the 20% non-controlling interests held by third parties prior to the transaction is CU88 million. (For illustrative purposes, the tax consequences on the gain have been ignored.)

How should Company B reflect the change in interest?

Analysis

Company B would record the following journal entry on the disposal date to record the 50% interest sold, the gain recognized on the 30% retained non-controlling investment, and the derecognition of the subsidiary are as follows (in millions):

Cash

CU300¹

Equity-method investment

CU180²

NCI

CU88³

Net assets

CU440º

Gain on investment

CU128ºº

Notes

Cash received for the 50% interest sold

2 Fair value of the 30% retained non-controlling investment is recognized

3 Derecognition of the carrying value of the NCI

o Deconsolidation of the subsidiary and removal of the carrying value of the subsidiary’s net assets

oo Gain or loss on the interest sold and the retained non-controlling investment is recognized in the income statement, calculated as follows:

Fair value of consideration

CU300

Fair value of retained non-controlling investment

180

Carrying value of NCI

88

Subtotal

568

Less: carrying value of former subsidiary’s net assets

-440

Gain on interest sold and retained non-controlling investment

CU128

The CU128 million gain on the interest sold and the retained non-controlling investment would be recognized in earnings [profit or loss] and disclosed in the financial statements. Additionally, Company B would need to disclose the portion of the gain or loss related to the remeasurement of the retained non-controlling investment to fair value. This amount is calculated as follows (in millions):

Fair value of retained non-controlling investment

CU180

Percentage retained of carrying value of subsidiary (CU440 × 30%)

(132)

Gain on retained non-controlling investment

CU48

Changes in interest resulting in a loss of control

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