Author’s Note: I wrote this article based on a practical issue encountered during audit of a listed entity involving sale of a wholly owned subsidiary, requiring evaluation of applicability of Ind AS 27, Ind AS 105 and Ind AS 109. Now the situation was my real estate client say Aman Ltd which is a listed company sold its 100% subsidiary let’s say STS Ltd, now what will be the treatment of the same in balance sheet? The analysis made by me with help of management of Aman Ltd was amazing hence I decided to write an article on this topic.
Introduction
The accounting treatment which is to be done at the time of sale of a subsidiary, specially when it is most probable that subsidiary will be sold after balance sheet date, under Indian Accounting Standards is the area which often leads to interpretational challenges, particularly in distinguishing between the applicability of Ind AS 27, Ind AS 105, and Ind AS 109.
What the above Ind AS which I used, actually states:
Ind AS 27 deals with accounting of investments in subsidiaries, associates and JVs in standalone financial statements. Such investments are usually measured either at cost or as per Ind AS 109, without any requirement for “held for sale” reclassification.
Ind AS 105 applies to non-current assets or disposal groups held for sale, requiring separate presentation and measurement at lower of carrying value and FVLCTS. However, it excludes financial assets covered under Ind AS 109 (Para 5).
Ind AS 109 governs classification, measurement and recognition of financial instruments, including equity shares. Investments are measured at FVTPL or FVOCI, and this standard overrides Ind AS 105 for financial assets.
My concern was, Aman Limited (Holding) and STS Limited (Subsidiary) both are doing real estate business, then how STS Limited is treated as held for sale in balance sheet date? Its not a different disposal group.
Management argued that its 100% subsidiary and “Shares held for sale” (if they represent a non-current asset or a disposal group/subsidiary) are presented in financial statements under Ind AS 105 (Non-current Assets Held for Sale and Discontinued Operations). The core principle is to present them separately to distinguish them from assets used in ongoing operations.
In Balance Sheet (Statement of Financial Position) it was shown as a separate line item, under Assets held for sale. They are classified as Current Assets, even if they were previously classified as non-current, but only the measurement in Balance Sheet is to be done as per Ind AS 109.
But Aman Ltd was holding shares in STS Ltd and both were the separate entities, so I admit in group level or consolidated level STS Ltd could be shown as held for sale, but how come at Standalone level?
Hence in this article I am trying to provide a detailed analysis of this issue which I came across professionally, I hope you will learn something valuable from the same.
Nature of investment in subsidiary
I believe that before we try to determining the applicable standard or law, it is more important to understand the nature of the asset being dealt with, talking about the standalone financial statements, investment in a subsidiary is a financial asset and is represented by the equity shares, while in consolidated financial statements, the subsidiary cannot be said to be just an “investment” rather there is a line-by-line consolidation of assets and liabilities
This difference was the root cause of the argument that took place during an audit of Aman Ltd, also it will form the foundation of the entire accounting treatment.
Applicability in standalone financial statements of Aman Ltd
In this case, Ind AS 27 provides that “investments in subsidiaries shall be accounted for either at cost or in accordance with Ind AS 109”.
Thus, in SFS the investment remains classified as “Investment in Subsidiary”, though it can be measured at Cost model (most commonly used), or Fair value under Ind AS 109 as per the choice of management.
Applicability of Ind AS 105 in standalone
This is the main issue of the case, now talking about bare language of Ind AS 105, its para 5 clearly states:
“The measurement provisions of this Standard do not apply to financial assets within the scope of Ind AS 109”
Now, analysing it we get to know that the shares are the financial instrument and Equity investments qualify as financial instruments within the scope of Ind AS 109. Therefore, it should be excluded from the measurement as per Ind AS 105.
This is done even if the management has approved sale, the asset is available for immediate sale and the sale is highly probable within 12 months, still an investment will remain a financial asset and Ind AS 105 cannot override Ind AS 109. Also, unlike non-current assets there is no requirement in Ind AS 27 to reclassify investments as “held for sale” with no concept of separate presentation or lower of carrying value and fair value less cost to sell.
Conceptually I tried to justify it to management that the point is financial instruments are already measured at fair value (or cost where permitted), the exit value is inherently reflected. Hence, separate “held for sale” classification is redundant
Now, after my justification and further expert analysis
Management argued that they have done only the presentation change, and measurement was as per Ind AS 109 which was acceptable by me as the investment continued at the fair value (i.e. as per Ind AS 109) and was only shown separately as “Assets held for sale”. Such classification may be justified from a presentation perspective, subject to appropriate disclosure, considering the substance of an imminent sale.
This was because Ind AS 105 does not prohibit presentation, and Para 5 only restricts measurement, and explicitly does not restricts presentation.
Also, a combined reading of Para 5A and 5B indicates that even where financial assets form part of a disposal group, their measurement continues in accordance with their respective standards. Ind AS 105 applies only at the level of the disposal group for impairment testing and does not override asset-specific measurement principles.
Talking about substance over form (given by treatment as per Ind AS 1)
Asset is treated as per Ind AS 105 if the sale is highly probable (I took the documents regarding sale deed and valuation reports and they justified the same), Board approved (I got the possession of board approval of Aman Ltd as well as STS Ltd) also had a detailed active plan for sale. Hence this separate presentation improves true and fair view.
Accordingly, the treatment adopted by management was accepted by me, considering that only presentation was modified while measurement continued in accordance with applicable standards, This was a good learning for me regarding the manner of interpretation of Ind AS.
Would not have been acceptable this “Held for sale” presentation if the measurement would have changed to lower of carrying value & Fair value less costs to sell, or if the impairment would have applied under 105 or if logic of depreciation happened to be wrongly altered. In that case it could have become a clear non-compliance
In conclusion I accepted the approach as the Company has classified investment in subsidiary as held for sale based on management’s intent to dispose. However, measurement had continued to apply Ind AS 27 / Ind AS 109, as financial assets are excluded from measurement provisions of Ind AS 105.”
Applicability in consolidated financial statements
The treatment changes significantly in consolidated financials.
When a parent decides to dispose of a subsidiary then in that case the transaction cannot be viewed as sale of shares, rather it should be seen as disposal of a business unit and hence be treated as Ind AS 105.
Conditions for classification as held for sale
Under Ind AS 105, asset can be classified as “held for sale when” asset available for immediate sale and sale is highly probable and there is an active plan to sell and sale expected within 12 months and active marketing is taking place at a reasonable price.
Concept of disposal group
In CFS of Aman Ltd, the entire subsidiary can be treated as a disposal group that includes the assets as well as liabilities of STS Ltd.
Once classified, the assets can be shown separately as “Assets classified as held for sale” and the liabilities can be shown separately with no offsetting allowed which shall be measured at the lower of carrying amount and fair value less costs to sell (FVLCTS).
Depreciation and Impairment
I being auditor, focussed that the depreciation on the assets of STS Ltd should be ceased, along with that the impairment loss should have been recognized in P&L, for which the reversal is allowed but should be limited to previous impairment.
Discontinued Operations
As per the law in case, the subsidiary represents a separate major line of business or geography then in that case it would qualify as a discontinued operation
As I discussed above, in the case of my client, since the subsidiary and holding company are engaged in the same line of business and operate within the same economic environment, the disposal does not represent a separate major line of business or geographical area, hence this concept is not applicable.
Conclusion
The accounting treatment for sale of a subsidiary works on a fundamental distinction, in standalone financial statements, the entity holds shares, which are financial assets governed by Ind AS 27 and Ind AS 109. Accordingly, while Ind AS 105 governs classification and measurement of disposal groups in consolidated financial statements, its measurement provisions do not extend to investments in subsidiaries in standalone financial statements due to explicit scope exclusion. However, limited application for presentation purposes may be acceptable, provided measurement continues in accordance with Ind AS 27 read with Ind AS 109.
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The author can be contacted at aman.rajput@mail.ca.in
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