Question

A parent company may dispose all or part of its subsidiary’s shares during a financial year.
Give a detailed discussion on the appropriate accounting treatment for the disposal of
subsidiary’s shares.

In particular, you should analyse this one scenarios:
(1) the parent company remains control over the subsidiary after the disposal

Provide examples to show (with journal entries and calculations) how the disposal should be
presented in the parent’s separate financial statements and in the group’s consolidated
financial statements. Ignore tax effects.

Make up an example is alright.

Answer 1

1. Complete/partial disposal involving loss of control-

(a) In Consolidated financials-

The Parent shall sell all the shares of the subsidiary and hence, shall loose control of the subsidiary. As per IFRS 10, when a parent looses control over the subsidiary, it shall be accounted as loss of control. If a parent loses control of a subsidiary, the parent:

(a) derecognises the assets and liabilities of the former subsidiary from the consolidated balance sheet.

(b) recognises any investment retained in the former subsidiary at its fair value when control is lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance with relevant Ind ASs. That fair value shall be regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9 or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture.

(c) recognises the gain or loss associated with the loss of control attributable to the former controlling interest.

(b) In seperate financials-

The Parent shall reduce its investment and recognise gain/loss on disposal of shares in profit and loss.

2. Disposal of shares but not loose control-

In consolidated financial statement-

The Parent shall re-compute the non-controlling interest in its consolidated financial statement. Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (ie transactions with owners in their capacity as owners.

When the proportion of the equity held by NCI changes, an entity shall adjust the carrying amounts of the controlling and NCI to reflect the changes in their relative interests in the subsidiary. The entity shall recognise directly in equity any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received, and attribute it to the owners of the parent.

Journal entry-

Retained earnings of subsidiary---- Dr.

Share Capital of subsidiary---- Dr.

To NCI A/c

(Being changes in NCI recognised)

In Seperate financial statement-

In its seperate financial statement, the Parent shall record gain/loss on disposal of its investment in the subsidiary.

Bank/cash---- Dr

Gain on sale of investments--- Dr.

To Investments A/c

(Being gain on sale of investment in subsidiary recognised)

Following example could explain in further-

Subsidiary's financials-
Retained earnings	200
Share capital	100
Total shareholder's fund	300
Parent holds 100% in the subsidiary. And hence Non Controlling Interest is Nil.
The Company sells 25% stake in the subsidiary. Following adjustments shall be recorded-
Computation of NCI-
Total shareholder's fund	300
Non controlling interest	25%
NCI amount	75
In Consolidated financial statement-
Share capital	25
Retained earnings	50
To NCI		75
(Being NCI recorded)
In Separate financial statement-
Bank/Cash ---Dr
Gain on sale of investment--- Dr.
To Investment in subsidiary A/c