Disposal – Control Lost

Vail purchased a 60% interest in Nest for $80 million on 1 January 20X4 when the fair value
of identifiable net assets was $100 million. Vail elected to measure the non-controlling
interest in Nest at the proportionate share of the fair value of identifiable net asset. An
impairment of $4 million arose on the goodwill in Nest in the year ended 3 December 20X5.
Vail sold a 50% stock in Nest for $75 million on 3 December 20X5. The fair value of the Vail’s
remaining investment in Nest was $15 million of the date of sale Vail had carried the
investment at cost. The Finance Director calculated that a gain of $10 million arose on the
sale of Nest in the group financial statements, being the sales proceeds of $75 million less
$65 million, being the percentage of identifiable net assets sold (50% x $130 million).

Required:
Explain to the directors of Vail, with suitable calculations, how he group profit on disposal of
the shareholding in Nest should have been accounted for.

Activity 2: Exam standard (part of a question worth 10 marks)

Explanation

The Finance Director has calculated the group profit on disposal incorrectly. Prior to the
disposal, Nest was a 60% subsidiary. After selling a 50% stock, Vail is left with a 10% simple
investment in Nest with no significant influence at control, in substance, Vail has ‘sold’ a 60%
subsidiary, so Nest should be deconsolidated and a group profit at loss on disposal
recognized. On the same date in substance, nest has ‘purchased’ a 10% investment, as this
remaining investment should be re-measured to its fair value at the date control was lost (31
December 20X3).

The Finance Director was correct to calculate a group profit on disposal but the made three
errors in his calculation.

Firstly, he has deconsolidated the portion of net assets sold (50% rather than 100% of net
assets and is 40% non-controlling interest. As Nest is no longer a subsidiary, it should have
been fully deconsolidated.

Secondly, he has forgotten to deconsolidate goodwill.

Thirdly, he did not re-measure the remaining 10% investment to fair value.

The corrected group loss on disposal calculation is shown below. The correction results in
the Finance Director’s profit of $10 million becoming a loss of $4 million.
Calculation

Group profit or loss on disposal:

$m $m
Fair value of consideration received (for 50% sold) 7.5
Fair value of 10% investment retained 1.5
Less: share of consolidated carrying amount when control
lost
Net assets 130
Goodwill ( W2) 16
Less non-controlling interests (W3) (52)
(94)
Group loss on disposal (4)

Workings
1. Group structure
Vail

1:1.X5 60% Subsidiary

31.12.X5 Sell (50%)
10% Investment

Nest
2. Goodwill $m
Consideration transferred 80
Non-controlling interests (100 x 40%) 40
Less fair value of identifiable net assets at acquisition (100)
20
Impairment (4)
16

3. Non-controlling interests [SOFP] at date of loss of control $m

NCI at acquisition (100 x 40%) 40

NCI share of post-acquisition reserves ((130-100)* x 40%) 12
52
* Post-acquisition reserves can be calculated as the difference between net assets at
disposal and net assets at acquisition. This is because net assets equal equity and provided
there has been no share issue since acquisition, the movement in equity and net assets is
solely due to the movement in reserves.
Subsidiary to subsidiary disposal

On December, 20X0 Trail acquired 80% of the Dial’s 600 million $1 share for a cash
consideration of $800 million. At acquisition, the fair value of the non-controlling interest in
Dial was $190 million. Trail wishes to measure the non-controlling interest at fair value of
the date of acquisition. On 1 December 20X0, the retained earnings of Dial were $300 million
and other components of equity were $20 million. The fair value of Dial’s net assets was
equivalent to their book value.

On 30 November 20X1, Trail sold a 5% shareholding in Dial for $60 million. At 30 November
20X1, Dial had retained earnings of $400 million and other components of equity of $30
million

Required
Calculate the following figures in relation to Dial for inclusion in the consolidated statement
of financial position of the Trail group as of 30 November 20X1.

(a) Non-controlling interest

(b) Adjustment to equity

This the case when Trial have sold the shares but the control still exit over subsidiary (dial).
IFRS 3 says, decrease in the parent's shareholding in an existing subsidiary through the sale of
shares is known as 'a decrease in a controlling interest'.
The treatment in the group accounts is driven by the concept of substance over form.
In substance, there has been no disposal because the entity is still a subsidiary so no profit on
disposal should be recognised.

Instead this is a transaction between group shareholders (eg the parent is selling 5% to the
non-controlling interests). Therefore, it is recorded in equity as follows:
Accounting
The accounting treatment of the above situation is as follows:
The NCI within equity is increased
The difference between the proceeds received and the increased in the non-controlling interest
is accounted within equity (normally, in ‘other component of equity’).
Disposal – No control lost

Workings
1. Group structure
Trail

1.12.X0 80%
30.11.X1 Sell (5%)
75%

Dial
(a) Non-controlling interest $m

NCI at acquisition 190

NCI share of post-acquisition retained earnings to disposal 30
(20% x [450 – 300])
NCI share of post-acquisition other components of equity to 4
disposal (20% x [30 – 10])
NCI at date of disposal 224
Increase in NCI on date of disposal (224 x 5% / 20%) 56
NCI at year end 280
(b) Adjustment to equity $m
Fair value of consideration received 60
Increase in NCI (56)
4
Step Acquisition: Investment to subsidiary acquisition

Alpha acquired a 15% investment in Beta in 1 January X0X6 for $360,000 when Beta’s
retained earnings were $100,000. At that date, Alpha had neither significant influence nor
control of Beta.
The fair value of the investment at 31 December 20X8 was $480,000 and at 1 July 20X9 was
$500,000.
On 1 July 20X9, Alpha acquired on additional 65% of the 2 million $1 equity shares in Beta
for $2,210,000. The retained earnings of Beta at that date were $1,100,000. Beta has no
other reserves. Alpha elected to measure non-controlling interest at fair value at the date of
acquisition. The non-controlling interest had a fair value of $680,000 at 1 July 20X9.
There has been no impairment in the goodwill of Beta to date.

Required:
(a) Explain how the investment in Beta would be accounted for in Alpha’s group
accounts for the year ended 31 December 20X9.
(b) Calculate the gain or loss on re-measurement of the 15% investment at 1 July 20X9
(on the assumption that the investment was still carried at its 31 December 20X8 fair
value at that date).
(c) Calculate the goodwill in Beta for inclusion in the consolidated statement of financial
position of the Alpha group as at 31 December 20X9.

Solution

(a) EXPLANATION

On acquisition of an additional 65% in Beta on 1 July 20X9, Alpha’s total shareholding

amounted to 80% (15% + 65%), giving Alpha control of Beta, in the consolidated
statement of profit or loss and other comprehensive income, Alpha should
consolidate Beta for the 6 months that Beta was a subsidiary, pro-rating Beta’s
income and expenses accordingly (assuming profits accrue evenly).

Consolidated statement of profit or loss and other comprehensive income.

Since, in substance, Alpha has sold a 15% investment, the investment should be re-
measured to fair value on 1 July 20X9 and a gain or loss should be recognized either
in profit or loss (if the investment had been measured at fair value through profit or
loss) or other comprehensive income (if the election had been made to hold the
investment at fair value through other comprehensive income).

Consolidated statement of financial position

In substance, on 1 July 20X9, Alpha purchased on 80% subsidiary. Therefore, goodwill

should be calculated on the full 80% shareholding, and in the consolidated statement
of financial position, Beta should be consolidated as a subsidiary.
 WORKING

(b) Gain or loss on re-measurement

$000
Fair value at date control achieved (01-07-X9) 500
Carrying amount of investment (fair value at previous year end: 31-12-X8) (480)
Gain on re-measurement 20
Record in profit or loss if no
irrevocable election or in OCI if
irrevocable election made.

(c) Goodwill

$000 $000
Consideration transferred (for 65% on 1 July 20X9) 2,210
Fair value at
date control is Fair value of previously held investment (15%) Relation to the 20% not 500
achieved (1 Non-controlling interests (at fair value) owned by the group on
July 20X9). 1 July 20X9
Fair value of identifiable net assets of acquisition:
Share capital 2,000
Retained earnings (1 July 20X9) At the date control 1,100 (3,100)
is achieved
290
Step Acquisition: Investment to subsidiary acquisition

On 1 June 20X6, Robe acquired 80% of the equity interests of Dock, Robe elected to measure
the non-controlling interests in Dock at fair value at acquisition.

On 31 May 20X9, Robe purchased on additional 5% interest in Dock for $10 million. The
carrying value of Dock’s identifiable net assets other than goodwill was $140 million at the
date of sale. On 31 May 20X9, prior to this acquisition, non-controlling interests in Dock
amounted to $32 million.

In the group financial statements for the year ended 31 May 20X9, the group accountant
recorded a decrease in non-controlling interests of $7 million, being the group share of net
assets purchased ($140 million x 5%). He then recognized the difference between the cash
consideration paid for the 5% interest and the decrease in non-controlling interests in profit
or loss.

Required
Explain to the directors of Robe, with suitable calculation, whether the group accountant’s
treatment of the purchase of an additional 5% in Dock is correct, showing the adjustment
which needs to be made to the consolidated financial statements to carried any errors by
the group accountant.

Activity 4: Exam standard (part of a question worth 10 marks)

Explanation

Prior to the acquisition of the additional 5% stock, Robe controlled Dock through its 80%
shareholding, making Dock a subsidiary of Robe, with a 20% non-controlling interest (NCI).

This should be treated as a transaction between group shareholders and recorded in equity.
The difference between the consideration paid for the additional 5% and the decrease in
non-controlling interests should be recorded in group equity and attributed to the parent.

On the purchase of the additional 5%, Robe’s controlling interest in its subsidiary increased
to 85% whilst NCI fell to 15%. As Dock remains a subsidiary, no ‘accounting boundary’ has
been crossed and, in substance, no acquisition has taken places. Therefore, the group
accountant was wrong to record the difference between the consideration paid and the
decrease in NCI in profit or loss. This means that this difference of $3 million ($10 million - $7
million) needs to be reversed from profit or loss.

The group accountant has correctly recorded a decrease in non-controlling interests but of
the wrong amount, as he has calculated he decrease as the percentage of net assets
purchased. This does not take into account the fact that the full goodwill method has been
selected for Dock, therefore, the NCI of disposal will also include on element of goodwill. The
decrease in NCI must be adjusted to take into account the goodwill attributable to the NCI.
This results in a further decrease in NCI of $1 million (being the $8 million decrease in NCI
that the group accountant should have recorded less the $7 million he actually recognized).

Since the decrease in equity was incorrect, the difference between the consideration paid
and decrease in NCI was also incorrect. An adjustment to equity of $2 million rather than a
loss of $3 million in profit or loss should have been recorded.

Calculations

Decrease in NCI

NCI at date of step acquisition x

= $32 million x

= $8 million

Adjustment to equity
$m
Fair value of consideration paid (10)
Decrease in NCI ($32m x 5%/20%) 8
Adjustment to equity (2)

Correcting entry

The correcting entry to record the further decrease in NCI, reverse the original entry in profit
or loss and record the correct adjustment to equity is as follows:

DEBIT Group retained earnings $2 million

DEBIT Non-controlling interests $1 million
CREDIT Profit or loss $3 million

Working Group structure

Robe

1-6-X6 80%
31-5-X9 5%
8.5%

Dock