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When an entity loses control of a subsidiary it derecognizes the assets and liabilities and related equity components of the former subsidiary. Any gain or loss is
recognized in profit or loss. Any investment retained in the former subsidiary is measured at its fair value at the date when control is lost. IAS 27 sets out the six
adjustments to be made when a parent loses control of a subsidiary.
1. Derecognize the carrying amount of assets (including goodwill), liabilities, and noncontrolling interests.
2. Recognize the fair value of consideration received.
3. Recognize any distribution of shares to owners.
4. Reclassify to profit or loss any amounts (i.e., the entire amount, not a proportion) relating to the subsidiary’s assets and liabilities previously recognized in other
comprehensive income as if the assets and liabilities had been disposed of directly.
5. Recognize any resulting difference as a gain or loss in profit or loss attributable to the parent.
6. Recognize the fair value of any residual interest.
CASE STUDY 5
On January 1, 20X9, Race had acquired a 90% interest in Mine, a public limited company for a cash consideration of $80 million. Mine’s identifiable net
assets had a fair value of $74 million and the NCI had a fair value of $6 million. Race uses the full goodwill method. On December 31, 20X9, Race
disposed of 65% of the equity of Mine (no other investor obtained control as a result of the disposal) when its identifiable net assets were $83 million. Of
the increase in net assets $6 million had been reported in profit or loss and $3 million had been reported in comprehensive income. The sale proceeds were
$65 million and the remaining equity interest was fair valued at $25 million. After the disposal, Mine is classified as an associate under IAS 28, Investments
in Associates.
Required
Show the gain or loss on disposal of Mine.
Solution
The gain recognized in profit or loss would be as follows:
Fair value of consideration 65
Fair value of residual interest to be recognized as an associate 25
Gain reported in comprehensive income 3
Value of NCI (10% of 83)
Less: Net assets and goodwill derecognized
$m
8.3
101.3
Net assets (83)
Goodwill (80 + 6 – 74) (12)
Gain on disposal to profit or loss 6.3
After the sale of the interest, the holding in the associate will be fair valued at $25 million.
Separate Financial Statements
When an entity elects, or is required by local regulations, to present separate financial statements, investments in subsidiaries, jointly controlled entities, and
associates, must be accounted for at cost or in accordance with IAS 39, Financial Instruments: Recognition and Measurement. The parent/investor shall apply the
same accounting for each category of investments. Investments that are classified as held for sale in accordance with IFRS 5 shall be accounted for in accordance with
that IFRS (IAS 27.37). Investments carried at cost should be measured at the lower of their carrying amount and fair value less costs to sell. The measurement of
investments accounted for in accordance with IAS 39 is not changed in such circumstances (IAS 27.38). An entity shall recognize a dividend from a subsidiary, jointly
controlled entity, or associate in profit or loss in its separate financial statements when its right to receive the dividend in established (IAS 27.38A).