CH. 13: Changes in group structures: disposals and group reorganisations

Question 1

Name the 6 Scenarios of Group and investment Disposals?

Answer 1

• Full Disposal - Sub to complete sale
  
  • 51% - 100% to 0%
• Subsidiary to associate
  
  • 51% - 100% to 50% - 20%
• Subsidairy to Investment holding
  
  • 51% - 100% to 19% - 1%
• Associate to Investment Holding
  
  • 20% - 50% to 19% -1%
• Sub to smaller Sub

Disposal of Investment Holding falls under IFRS 9 Financial asset disposal.

Question 2

How is a Full Disposal Accounted For?

Answer 2

• *(a) Full disposal**
• SPLOCI*
• Consolidate Income and Expenses and profits attributable NCI to the date of disposal/ Loss of control
• Show a group profit or loss on disposal
  
  • ​Consideration Received
  • - Less: share of Group C.A of Net assets
    
    • ​Net assets at disposal
      Goodwill at disposal
      Less: NCi
      = Group Share of the C.A of Net Assets.
  • = Gain or Loss on Disposal.

SOFP

• No consolidation (No goodwill and NCI) as there is no subsidiary at the year-end

Question 3

How to account for a SUB to associate disposal?

Answer 3

(B) Subsidiary to associate

Accounting Treatment - follows a Substance over form approach, Where the Sub is Sold and repurchased as an associate at F.V

SPLOCI

-the sale of sub/demerger

• Treat as a subsidiary to the date of disposal; ie
  
  • consolidate income and expenses at pro-rota
  • NCI share of profits to date of disposal
• New Line Item - Show a group profit or loss on disposal

-The remaining investment/repurchase of associate

• Treat as an associate thereafter (ie equity account)
  
  • Share of associate profits Now included

SOFP

• No Consolidation of Assets or Liabilities
• Remeasure the investment retained to F.V at the date of disposal
• Equity account investment in associate accounted for
  (F.V at the date of control lost = cost of associate)
  + share of profits of associates

Question 4

How do you account for Subsidiary to investment disposal?

Answer 4

c) Subsidiary to investment

Accounting Treatment - follows a Substance over form approach, Where the Sub is Sold and repurchased as an Investment at F.V

SPLOCI

• Consolidate as a subsidiary to the date of disposal
• Show a group profit or loss on disposal

Treatment as an investment from date of loss of control

• Follow IFRS 9
  
  • Show F.V Remeasurements
  • (and any dividend income) thereafter

SFP

• Remeasure the investment retained to fair value at the date of disposal
• Investment in equity instruments (IFRS 9) thereafter

Question 5

How do you account for associate disposal to an investment?

Loss of significant influence

Answer 5

• *(D) Associate to investment**
• SPLOCI*
• Equity account as on associate to dote of disposal
• Show a group profit or loss on disposal
• Show fair value changes (and any dividend income) thereafter

SPF

• Remeasure the investment remaining to fair value at the date of disposal
• Investment in equity instruments (IFRS 9) thereafter

Question 6

How is a profit or loss in disposal accounted for in the parents own accounts?

Answer 6

Profit or loss on disposal in parent’s own individual accounts

• Income Tax is normally payable by reference to the gain in the parent’s separate financial statements.
• *This should only be accounted for in exams if specifically requested.**
• In the parent’s separate financial statements, investments in subsidiaries are held at:
  
  • Cost, or
  • at fair value
• Consequently, the profit or loss on disposal is different from the group profit or loss on disposal:
  Fair value of the consideration received
  Less carrying amount of investment disposed of Profit/loss)
  = Profit and Loss

Question 7

How is part disposal in a Shareholding in a SUB accounted for?

e.g 80% to 51%

Answer 7

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. Therefore, is recorded in equity as follows:

• (A) Increase non-controlling interests (NCI) in the consolidated SOFP
• (B) Recognise the difference between the consideration received and the increase in NCI as on adjustment to equity.
  (post to the parent’s column in the consolidated R.E workings)

SPLOCI - P/L

• Consolidate as a subsidiary in full for the whole period
• Time apportion profits attributable to NCI based on percentage before and after the acquisition

SOFP- B/S

• Consolidate as a subsidiary at the year-end like normal
• Step 6 - Calculate the increase in NCI
• Calculate the adjustment to equity (post to the parent’s column in the consolidated retained earnings working):

Question 8

What is a deemed disposal?

Answer 8

‘Deemed’ disposal: This occurs when a subsidiary issues new shares and the parent does not take up all of its rights such that its holding is reduced.

In substance, this is a disposal and is therefore accounted for as such.

• This means the gain or loss on disposal workings is measured by using a new consideration transferred as NIL

Question 9

What is a group reorganisation?

Answer 9

A group may restructure itself internally to achieve the desired effect. Companies move around within the group but typically:

• The ultimate shareholders remain the same.
• No cash leaves the group.
• There is no change in non-controlling interests.

In substance, the group has remained the same so there is no impact on the consolidated financial statements.

However, the accounts of the individual entities within the group will be affected.

Various examples of group reorganisation:

• - Sub-subsidiary moved up
• - Sub-subsidiary moved across
• - Sub-subsidiary moved down
• New Parent

The reasons for doing this are:

• - Attempting to sell off a SUB
• - Potential tax savings
• - Divisionalisation and performance reporting/management reporting
• - Create or move across tax groups

Question 10

How do you account for a group reorganisation?

Answer 10

• Such reorganisations (known as ‘entities under common control’) are excluded from the scope of IFRS 3 Business Combinations at the present time and there are therefore no specific accounting requirements. (IFRS 3: para. 2(c))
• The substance of the transaction from the shareholders’ point of view is that no sale has occurred as they own the same assets before and after the transaction (assuming ownership of each subsidiary is 100%).
• However, again or loss may be made in the separate financial statements of Sub
• This is unrealised from the group point of view and would need to be eliminated in the consolidated financial statements.

Question 11

How does a new parent in the group account for investment holdings?

Answer 11

A group may restructure itself by adding a new parent to the group: e.g a new holding company.

• if the new parent chooses to measure the investment in the original parent at cost (as per IAS 27 Separate Financial Statements)
  
  • Cost is measured at its share of the C.A of the original entity’s equity.
  • (shown in the separate/individaul financial statements of the original parent at the date of reorganisation),

Providing all of the following criteria are met:

• (a) New parent obtains control of the original entity by issuing equity instruments in exchange for existing equity instruments of the original entity. (share for share exchange)
• (b) The assets and liabilities of the new and original group are the same immediately before and after the reorganisation; and
• (c) The owners of the original entity before the reorganisation have the same absolute and relative interests in the net assets of the original and new group immediately before and after the reorganisation.