Whenever there is a disposal into a subsidiary Investment, one has to look at whether it is a loss of control or it’s a disposal without losing the existing control by its Parent Company.
Control has been defined by Ind-As -110 which talks about that in order to establish a control over an investee, there must be existing power which can direct relevant activities of that investee where the investor is exposed towards its variable returns from the Investee.
On an overall perspective, whenever there is a loss in such control for which consolidation has been done in the past will then be de-consolidated at the date of Loss of such control as defined by Ind-As 110 –
Para -B98 – If a parent loses control of a subsidiary, it shall:
(i) the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost; and
(ii) the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost (including any components of other comprehensive income attributable to them).
(i) the fair value of the consideration received, if any, from the transaction, event or circumstances that resulted in the loss of control;
(ii) if the transaction, event or circumstances that resulted in the loss of control involves a distribution of shares of the subsidiary to owners in their capacity as owners, that distribution; and
(iii) any investment retained in the former subsidiary at its fair value at the date when control is lost.
(c) reclassify to profit or loss, or transfer directly to retained earnings if required by other Ind ASs, the amounts recognised in other comprehensive income in relation to the subsidiary on the basis described in paragraph B99.
(d) recognise any resulting difference as a gain or loss in profit or loss attributable to the parent.
After reading the approach of the instances where such loss in control happens, One can conclude that the value of such shares which are being disposed off and/ or some remaining shares (may or may not be) which are being retained by the Investor will be valued at its Fair value and the difference between such fair value and the consideration received will be treated as Gain/ Loss to the Income Statement of the at period when this transaction happens.
Interesting part of the article will start from here,
There could be a situation where an entity entered into a multiple agreements (or totally different agreement but which have been considered as One) to dispose its investment in subsidiary, however as per the para B-98 of Ind-As 110 all such disposals will required to be valued at its fair value ONLY when ultimately it is a loss of control. If there are some individual disposals which are not considered to be a loss in control upto certain stage (e.g. 10%, each time till it is gone below 50%) then these transactions will be accounted as an EQUITY TRASNACTION (transaction with shareholders and no fair valuation required) without affecting Income Statement of the entity. Refer Para 18 of Ind-As 112 also.
Ind-As 112 – Disclosures of Interests in Other Entities
Para-18– An entity shall present a schedule that shows the effects on the equity attributable to owners of the parent of any changes in its ownership interest in a subsidiary that do not result in a loss of control
If an entity which has multiple disposals agreements and such agreements falls together as ONE being satisfying the para 97 of Ind-As -110 then the individual transactions will be accounted as one transaction and each individual transaction will be considered for FAIR VALUE accounting-
Ind-As 110 – Consolidated Financial Statements
Para -B-97– A parent might lose control of a subsidiary in two or more arrangements (transactions). However, sometimes circumstances indicate that the multiple arrangements should be accounted for as a single transaction. In determining whether to account for the arrangements as a single transaction, a parent shall consider all the terms and conditions of the arrangements and their economic effects. One or more of the following indicate that the parent should account for the multiple arrangements as a single transaction:
(a) They are entered into at the same time or in contemplation of each other.
(b) They form a single transaction designed to achieve an overall commercial effect.
(c) The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.
(d) One arrangement considered on its own is not economically justified, but it is economically justified when considered together with other arrangements. An example is when a disposal of shares is priced below market and is compensated for by a subsequent disposal priced above market.
The effect of the para above will be to account all such individual transactions at its FAIR VALUE (even there is no loss in control) because it has been considered as ONE transaction even the such individual transaction is not in loss of control and normally should have been accounted as EQUITY TRANSCTION (transaction with shareholders and no fair valuation required).
The impact of the para could be used to avoid satisfying such conditions where an entity wants to delay any fair value accounting only at its point where loss in control actually happens. If the para B 97 conditions are not satisfied then individual transactions will be treated separately and could be account as EQUITY TRANSACTION (in case there is no loss in control) which is not possible when para B 97 conditions are satisfied and hence all individual transactions will be at FAIR VALUE (even there is no loss in conrol).
Company A is currently holding 80% of shares in Company B and it has not entered in such an agreements to dispose 10%, then 10%, and 8% and finally 15% totaling 45%.
Hence upto the First three disposal i.e 10% +10% +8% =28% there will not be any Loss in control (because still Company A is holding more than 50%, assuming this is relevant to satisfying control criteria) and after the last disposal i.e. 15% it will be a Loss in Control.
Situation -1 (When para B 97 not satisfies)
All the individual disposals will be treated separately and hence upto the loss of 28% there will be not loss in control , and these should be treated at EQUITY TRANSACTION (transaction with shareholders and no fair valuation required) and fair value accounting will be happening only at last stage when 15% shares are being disposed off.
Situation -2 (When para B 97 satisfies)
Since ultimately there will be a loss in control, then all individual disposals will be accounted at fair value each time.
Hence para B-97 should be dealt carefully from the Management & an Auditor’ s perspective because it could impact Income statement treatment over the two different periods in case these conditions are satisfied or otherwise.
Readers will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
(Author of this article is an experienced chartered accountant who has specialization on various GAAP conversions assignments covering different industries around different part of the world including acting as an Independent IFRS Advisor & Corporate Trainer. He can be reached via email at email@example.com or Whatsapp +91-9634706933)