In: Accounting
The Williams Company, a U.S.-based company, owns 100% of a European Subsidiary (ES). The investment in ES totals $10 million (euros 13.5 million) as of the end of Year 1. This represents an initial investment of $6 million and retained earnings of $4 million. The Currency Translation Adjustment (CTA) account included in Other Comprehensive Income (OCI) totals $1 million (loss) at the end of Year 1.
During Year 2, Williams decided to sell 25% of ES to the Tremont Company, an unrelated U.S.-based Company for $15 million in cash. The closing date of the transaction is June 30 of Year 2. Earnings of ES for the six months of Year 2 are $1 million and there was an additional increase of $200,000 in the CTA during the first six months of Year 2. No dividends have been paid by ES to Williams.
Instructions:
ANSWER TO QUESTION NO. 1
As per ASC 810 of US GAAP decrease in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions i.e., investments by owners and distributions to owners acting in their capacity as owners.
No gain or loss shall be recognized in consolidated net income or comprehensive income.
The carrying amount of the non controlling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the non controlling interest is adjusted shall be recognized in equity attributable to the parent.
Under IFRS , where there is reduction in the ownership without losing control, the carrying amounts of the carrying and NCI (non controlling Interest) are adjusted to reflect the change in their relative ownership interests in the subsidiary. Any difference between such amount and fair value of consideration adjusted directl to equity.
But under US GAAP difference adjusted in parent profit and loss.
Calculation under both are same basically.
Calculate the gain or the loss on the partial disposal by Williams of ES as of June 30, Year 2. | ||
Under US GAAP /IFRS | ||
Cash received on the sale of European Subsidiary (ES) | $15 million | |
Gross value of investment sold | ($10 million x 25%) | $2.5 million |
$7.5 million | ||
Share of equity transferred to NCI | ($10 million x 25%) | $2.5 million |
Gross value of investment sold | ($10 million x 25%) | $2.5 million |
- | ||
Net Gain on sale of 25% stake | $7.5 million |