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Chapter 4: Interaction between different Standards
Interaction between IFRS 5 and IAS 28 – Disposals of associates and joint ventures
Associates and joint ventures classified as held for sale
An entity applies IFRS 5 to an investment or portion of an investment in an associate or joint venture that meets the criteria to be classified as held for sale. Where an entity maintains either significant influence or joint control over the investee, any retained portion of the investment that has not been classified as held for sale continues to be accounted for, using the equity method of accounting, until the disposal of the portion that is classified as held for sale takes place. In cases where significant influence or joint control is lost, the retained interest is accounted for in accordance with IFRS 9.
Joint venture or associate interest acquired exclusively with a view to resale
An associate or joint venture that has been acquired exclusively with a view to resale will be a disposal group in accordance with IFRS 5, and the same rules apply as for other associates and joint ventures that are held for sale. However, an associate or joint venture acquired with a view to resale might not be a discontinued operation. The definition in IFRS 5 allows only subsidiaries held for sale to be discontinued. However, a major associate, if it is classified as held for sale, could meet the definition of a major line of business or geographical area and, therefore, might qualify to be a discontinued operation.
The associate or joint venture, or portion thereof to be sold, must meet the conditions to be classified as held for sale. It is first measured in accordance with applicable standards (For example, IAS 28), and so the share of profits and remeasurement of carrying amounts should be done in accordance with normal associate and joint venture rules, up to the point of classification as held for sale. The associate or joint venture, or portion thereof to be sold, must then be measured in accordance with IFRS 5. It will be measured at the lower of carrying amount and fair value less costs to sell.
How should an associate or joint venture held for sale be accounted for where it contains an asset held for sale itself?
Where an associate or a joint venture that is equity accounted has a noncurrent asset or a disposal group that is classified as held for sale, our view is that the non-current asset or disposal group should remain within the overall carrying amount of the associate or joint venture. In other words, the asset should not be reclassified from the investment in the associate to the investing entity’s ‘assets held for sale’ line. Such assets or disposal groups are measured in accordance with IFRS 5, once they qualify to be classified as held for sale, within the amounts that are included in the investor’s or venturer’s financial statements.
An investment in an associate or a joint arrangement that no longer meets the criteria to be classified as held for sale should be accounted for, using the equity method (or as a joint operation, as appropriate), as from the date of its classification as held for sale. Any financial statements for the periods since classification as held for sale, when the investment in the associate or in the joint arrangement would have been accounted for in accordance with IFRS 5 rather than IAS 28, should be amended accordingly, as if the investment had never been accounted for in accordance with IFRS 5.
Associates and joint ventures classified as discontinued operations
If the associate or joint venture is a discontinued operation, any amounts recognised in respect of the associate or joint venture in the income statement should be presented as part of the single line item for discontinued operations below the tax expense line. This contrasts with the treatment of an associate or joint venture that is a disposal group, but not a discontinued operation. The prior period’s income statement should also be restated in the same way. The post-tax profit or loss of the discontinued associate or joint venture should be analysed between revenue, expenses, pre-tax profit or loss and the related income tax expense, even though such an analysis is not required for associates and joint ventures that are part of continuing operations.
Classification of an associate or joint venture as a discontinued operation
The disposal of an interest in an associate or joint venture will rarely meet the definition of a discontinued operation, because the associate or joint venture is unlikely to represent a separate major line of business or geographical area of operation. An associate or joint venture might, however, be part of a single plan to dispose of a major line of business or geographical operation, or it might be a particularly significant associate or joint venture. In both cases, the associate or joint venture is accounted for under IFRS 5 where the conditions to be classified as held for sale are met.
Sale of associate that is classified as a discontinued operation
A multi-national oil company has four geographical segments (Europe, South America, Africa and Asia). It has one major investment in Africa that it accounts for as an associate under IAS 28. This investment is classified as held for sale. The African associate meets the definition of a discontinued operation, since it is being presented as a geographical segment and, as such, it is a major geographical area of operations.
Interaction between IFRS 5 and IAS 36 – Impairment implications of disposals
An entity must assess, at each reporting date, whether there is an indication that an asset might be impaired and, if any such indication exists, estimate the asset’s recoverable amount. The decision to sell an asset or a disposal group is a change in the planned manner of recovery and an indicator that the asset or disposal group might be impaired. An impairment review is required, even where a disposal is outside the measurement scope of IFRS 5, because the asset or business is to be terminated or abandoned rather than sold.
A full impairment review is also required when, at a later date, the asset or disposal group meets the IFRS 5 criteria to be classified as held for sale. When IFRS 5 requires the non-current asset or the assets and liabilities forming a disposal group to be measured in accordance with relevant standards, this includes IAS 36. An entity should determine whether the previous impairment review needs to be updated immediately prior to classification as held for sale.
A disposal group should include goodwill if the group is a cash-generating unit to which goodwill has been allocated in accordance with IAS 36, or if it is an operation within such a cash-generating unit. If an operation within a CGU is disposed of, the goodwill associated with the operation disposed of should be measured based on the relative values of the operation disposed of and the portion of the CGU retained, unless a different method better reflects the goodwill associated with the operation disposed of. This allocation is typically made at the disposal date. An initial allocation of goodwill would be required on classification of a disposal group as held for sale. This allocation would then typically be finalised at the disposal date.
Any impairment loss recognised prior to disposal, or on classification as held for sale, will be included within the income statement line item for discontinued operations if the disposal group meets the criteria to be a discontinued operation.
Allocation of impairment losses or subsequent gains
Any impairment losses recognised, on initial measurement, as held for sale, or any impairment loss or gain recognised on subsequent measurement, should be allocated to the carrying amounts of the non-current assets in the group within the scope of IFRS 5’s measurement requirements.
There might be circumstances where the amount of the impairment loss to be allocated exceeds the carrying amounts of the assets within the scope of IFRS 5’s measurement requirements. In this instance, it might be possible to recognise a liability for the excess impairment that could not be allocated.
Allocation of impairment loss: two approaches
Guidance in IFRS 5 on determining the amount of impairment loss is not clear. There are two different approaches that could be followed.
The first potential approach follows the guidance in IFRS 5. This states that an impairment loss on a disposal group is allocated to the non-current assets within IFRS 5’s scope and is limited to the carrying value of those assets. Other assets and liabilities are measured in accordance with applicable IFRSs in both initial and subsequent measurement of the disposal group. As a result, any impairment loss in excess of the carrying amount of the non-current assets will be recognised on disposal.
The second approach is to allocate the impairment loss to all of the assets within the disposal group, not just the non-current assets. This view is supported by IFRS 5, which states that an entity should measure a non-current asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell. In addition, the standard states that, if a non-current asset within the scope of the measurement requirements of IFRS 5 is part of a disposal group, those measurement requirements apply to the group as a whole, so that the group is measured at the lower of its carrying amount and fair value less costs to sell. Under this view, a separate liability would not be recorded for any impairment in excess of that which can be allocated across all of the assets of the disposal group, because the definition of a liability in IAS 37 has not been met.
The IASB acknowledged the conflict within IFRS 5, in that it requires the disposal group to be recognised at fair value less costs to sell, but it also requires losses to be allocated only to non-current assets. No consequent amendments have been made to date.
Example – Allocation of impairment loss: two approaches Entity A intends to dispose of a major line of business. The business meets the held for sale criteria. The line of business includes the following assets:
Carrying amount C Property, plant & equipment 60 Inventory 60 Total assets 120 Liabilities 20 Net assets 100 The business has been under-performing and requires restructuring. Entity A has decided to sell the line of business rather than perform the restructuring itself. Entity A anticipates receiving C20 in net proceeds for the business (net of all direct costs to sell). The fair value less costs to sell of the property, plant and equipment and the inventory, on an individual basis, is equal to their carrying amounts.
Under one view, the impairment loss on a disposal group is allocated to the non-current assets within IFRS 5’s scope. As such, in this example, the impairment loss would be limited to the carrying amount of property, plant and equipment (that is, C60). The remaining C20 cannot be recognised as a liability unless the criteria in IAS 37 are met.
Under the other view, the impairment loss would not be limited just to the non-current assets. As a result, an impairment loss of C80 would be recognised.
Two approaches to the reversal of impairment losses recognised under IFRS 5 are observed in practice; and both are acceptable. One approach is by reference to IAS 36, which prohibits the reversal of an impairment of goodwill; thus, any reversal is limited to the amount allocated to assets other than goodwill. The second approach looks at the IFRS 5 disposal group as a single unit of account, and permits reversal of any impairment losses recognised under IFRS 5, including those allocated to goodwill.
Reversal of impairment loss: two approaches
A conflict noted by the IFRS IC in May 2010 relates to reversals of impairment losses. IFRS 5 refers to the guidance in IAS 36 in determining the order of allocation of such reversals. Specifically, IAS 36 prohibits impaired goodwill from being reinstated. However, IFRS 5 would appear not to prohibit such a reversal, provided that it did not exceed any impairment loss previously recognised either under IFRS 5 or under IAS 36 prior to classification as held for sale. In our view, consistent with the guidance in IAS 36, the guidance in IFRS 5 prohibits the reversal of goodwill impairment losses. However, the IFRS IC agreed that this is a potential area of diversity, and it recommended to the IASB that this should be considered as part of the post-implementation review of IFRS 5. As such, both interpretations of the guidance might currently be acceptable, until such time as further guidance is issued.
Interaction between IFRS 5 and IAS 37 – Disposals including provisions, and restructuring
Provisions included in disposal groups
A disposal group, or a discontinued operation, might include liabilities, including restructuring provisions. These are accounted for under the rules of IAS 37. Amendments to IAS 37, on the publication of IFRS 5, added additional disclosures where a restructuring meets the definition of a discontinued operation. IFRS 5 adds disclosures only, and does not change the measurement of any provisions.
Any provisions should be measured in accordance with IAS 37, before a disposal group in which they are included is subject to the measurement requirements of IFRS 5.
Restructuring
A group might need to restructure its operations before a disposal can occur. The principles of IAS 37 are applied in recognising a restructuring provision
Interaction between IFRS 5 and IFRS 3 – Subsidiaries acquired with a view to resale and non-current assets held for sale acquired in business combinations
Subsidiaries acquired exclusively with a view to resale
All subsidiaries should, in principle, be consolidated. There is no exemption from consolidation for subsidiaries acquired exclusively with a view to resale, although IFRS 5 provides a short-cut method for such subsidiaries.
A subsidiary acquired exclusively with a view to resale should meet the conditions to be classified as held for sale; although it is unlikely that an acquirer would be able to meet all of the conditions for classification as held for sale on the date of acquisition. However, IFRS 5 gives some relief. The one-year condition must be met, and it should be highly probable that the entity will meet all of the other conditions to be classified as held for sale within a short period of the acquisition. The ‘short period’ is usually within three months.
Measurement and remeasurement of subsidiaries acquired exclusively with a view to resale
A subsidiary held exclusively with a view to resale is a disposal group, and it meets the definition of a discontinued operation in accordance with IFRS 5.
The acquirer has a choice of how to account for a subsidiary acquired exclusively with a view to resale. The choice applies at the acquisition date and to subsequent reporting. The acquirer can perform a full consolidation of the individual assets and liabilities, or it can apply the ‘shortcut method’ given in the IFRS 5 implementation guidance.
‘Full consolidation’ approach
A full fair value exercise is undertaken for the business acquired under the full consolidation approach. The acquirer then applies the general measurement principles in IFRS 5. Then the disposal group (being the subsidiary) is measured as a whole, at the lower of its carrying amount and fair value less costs to sell.
The remeasurement rules described in para 30.19 are then applied at each subsequent reporting date for the disposal group. Any loss on remeasurement is recognised in the income statement. Increases in value can also be recognised on the remeasurement of the assets and liabilities outside IFRS 5’s scope. The carrying value of non-current assets within the scope of IFRS 5 will be equal to the initial carrying value assigned on acquisition. Increases in value can only be recognised to the extent that they are reversing an impairment in a previous reporting period.
Short-cut method
The acquirer might choose to follow the short-cut method set out in IFRS 5. A subsidiary acquired exclusively with a view to resale is valued at fair value less costs to sell, at each reporting date, as a single unit of account. There is no requirement to fair value the entity’s individual assets and liabilities. The entity’s identifiable liabilities are measured at fair value, and this amount is added to the fair value less costs to sell amount, to ascertain the value of the assets to be disclosed.
Full consolidation versus short-cut method for subsidiaries acquired exclusively with a view to resale
When an entity acquires a subsidiary exclusively with a view to resale, it has a choice of accounting at the acquisition date and at subsequent balance sheet dates. An entity can choose to perform a full consolidation of the individual assets and liabilities, or it can perform a short-cut method given in the IFRS 5 implementation guidance.
Full consolidation approach
An entity that chooses to adopt the full consolidation approach is required to complete a full fair value exercise for the business acquired. It then applies the general measurement principles in IFRS 5. Certain non-current assets, and all current assets and liabilities and non-current liabilities, are valued in accordance with the applicable accounting standard. Once this has been performed, the disposal group (being the subsidiary) should be measured as a whole at the lower of its carrying amount and fair value less costs to sell.
At each subsequent reporting date for non-current assets outside IFRS 5’s scope, and for all current assets and liabilities and non-current liabilities, the carrying value is remeasured in accordance with the applicable accounting standard. Any loss on remeasurement is recognised in the income statement. Gains can also be recognised on the remeasurement of the assets and liabilities outside IFRS 5’s scope. For non-current assets within the scope of IFRS 5, the carrying value will be equal to the initial carrying value assigned on acquisition. Therefore, gains can only be recognised to the extent that they are reversing an impairment in a previous reporting period. The disposal group’s fair value would also need to be reassessed each reporting period in accordance with the measurement principles in IFRS 5.
Any profits generated post-acquisition are recognised when a disposal group continues its operations and the disposal group shows an increase in its net current assets.
Short-cut method
Alternatively, the implementation guidance to IFRS 5 includes a short-cut method of consolidation for a subsidiary held exclusively with a view to resale. The short-cut method is allowed because it avoids the burden of a full fair value exercise in accordance with the business combination guidance and, hence, allows the subsidiary to effectively be treated as a single investment asset.
The short-cut method requires the entity being disposed of to be valued at fair value less costs to sell at each reporting date. The consequence of applying the short-cut method is that there is no requirement to fair value all of the entity’s individual assets and liabilities acquired with a view to resale.
For balance sheet presentation purposes, the entity’s identifiable liabilities are measured at fair value, and this amount is added to the fair value less costs to sell figure to ascertain the value of the assets to be disclosed.
Example – Application of the short-cut method
Entity A acquires entity H, a holding company with two subsidiaries, A and B. Subsidiary B is acquired exclusively with a view to sale, and it meets the criteria to be classified as held for sale. In accordance with paragraph 32(c) of IFRS 5, subsidiary B is also a discontinued operation.
The estimated fair value less costs to sell of subsidiary B is C135. Entity A accounts for subsidiary B as follows:
· Initially, entity A measures the identifiable liabilities of subsidiary B at fair value, say at C40.
· Initially, entity A measures the acquired assets at C175, being the fair value less costs to sell of subsidiary B (C135) plus the fair value of the identifiable liabilities (C40).
· At the balance sheet date, entity A remeasures the disposal group at the lower of its cost and fair value less costs to sell, say at C130. This means that an impairment of C5 needs to be recorded. The liabilities are remeasured in accordance with applicable IFRSs, say at C35. The total assets are then C165 (C130 + C35).
· At the balance sheet date, entity A presents the assets (C165) and liabilities (C35) separately from other assets and liabilities in its consolidated financial statements.
· In the income statement, entity A presents the total of the post-tax profit or loss of subsidiary B and the post-tax gain or loss recognised on the subsequent remeasurement of subsidiary B of (C5), which equals the remeasurement of the disposal group from C135 to C130.
Further analysis of the assets and liabilities, or of the change in value of the disposal group, is not required if the short-cut method is applied.
In the notes to the financial statements, normally the major categories of assets and liabilities of disposal groups and discontinued operations need to be disclosed. For subsidiaries held with a view to resale, further analysis of the assets and liabilities (other than that required for balance sheet presentation) is not required.
This example demonstrates several points. The first is that consolidation of a subsidiary held exclusively with a view to resale under the short-cut method in IFRS 5 is not a traditional line-by-line consolidation. Initially, the subsidiary is measured at fair value less costs to sell and, at each subsequent reporting date, it is remeasured to the lower of the initial carrying amount and the fair value less costs to sell (in accordance with the general requirements for disposal groups). The net change in the subsidiary’s carrying value is the single figure result that is reported in discontinued operations in accordance with paragraph 33 of IFRS 5. However, it should be noted that often such a remeasurement will not be necessary in the subsequent period, because the entity held for sale should generally be sold in that period.
The short-cut example in the standard also shows that, despite the requirement for an entity to consolidate a subsidiary exclusively held for resale, it does not have to separately identify the acquired entity’s identifiable assets (including intangible assets) and liabilities and goodwill.
The short-cut method allows an entity to measure the overall fair value less costs to sell of the subsidiary, and then to measure the fair value of its liabilities, with the fair value less costs to sell of its assets (including goodwill) being the balancing figure. This is considerably less work than a full IFRS 3 fair value exercise.
The example above shows that the subsidiary as a whole is remeasured to the lower fair value less costs to sell of C130 (from an original carrying amount of C135). The decrease in carrying value of C5 represents the post-tax loss recognised on the subsequent remeasurement of subsidiary B.
The standard does not specifically deal with increases in value; but, since a subsidiary held for resale is a disposal group, it must always be measured at the lower of its carrying amount and fair value less costs to sell. An increase in fair value less costs to sell (above the amount at which the subsidiary was originally stated) cannot, therefore, be recognised, unless there is a reversal of a previous impairment.
Practical issues in applying the short-cut method: inter-company transactions
IFRS 5 does not contain any guidance on treatment of inter-company transactions where the short-cut method has been applied. It is difficult to apply normal consolidation procedures for the elimination of intercompany balances where a disposal group is a subsidiary held exclusively with a view to resale and the short-cut method has been applied. The general consolidation principle is that inter-company balances on the group balance sheet should be eliminated. Separate asset and liability balances, including inter-company balances, are not identified when the short-cut method has been applied. The question then arises how to treat inter-company balances between a disposal group measured using the short-cut method and the rest of the continuing group.
We believe that, even though they are not separately identified, it is appropriate to record the elimination entry against the carrying amount of the disposal group. Although this will lead to a change in the carrying amount of the disposal group (it could increase or decrease), the movement is caused by recording an inter-company elimination entry rather than recording a change in measurement. The IFRS 5 measurement rules are still applied correctly.
Treatment of inter-company transactions in the income statement is less straightforward. The guidance given in paragraph 30.86 is applicable when the full consolidation method has been applied. A balance sheet approach is taken to remeasurement when the short-cut method is applied, so that any amount relating to the disposal group in the income statement represents the net movement between the fair value less costs to sell and the carrying amount. Therefore, no individual trading income or expense items in the income statement are identified.
By applying the short-cut method, a subsidiary that is held exclusively with a view to resale will not show any individual income statement items. This can cause an issue where there have been inter-company dividends and interest paid or received by the subsidiary held for sale. The continuing group will have recorded the inter-company income or expense in its income statement. However, in the disposal group the income or expense item is not separately recorded, so there is no inter-company item to eliminate from the income statement. In these circumstances, we believe that the general principle to apply is that, to the extent that the interest or dividends are cash settled and there is no likelihood of repayment of the cash (that is, it is not a circular transaction), it would be appropriate to record the interest receivable or payable by the continuing group in the consolidated income statement. If the interest or dividend payment is settled via inter-company transaction, we do not believe that it is appropriate to record the income/expense in the consolidated income statement. The amount recorded in the continuing group income statement should be reversed and held on the balance sheet. The amount on the balance sheet will be released and recognised as part of the subsequent gain or loss on disposal.
Elimination of interest receivable from subsidiary held exclusively with a view to resale
The disposal group pays interest due on its loan from entity P in cash. In the disposal group’s individual books, it would record an interest expense and reduce cash by the amount paid.
Entity P would record the interest income in its individual books, and it would increase cash by the amount received.
In the consolidated financial statements, the increased cash needs to be reflected in the continuing group. Because the cash has been received, the interest income would remain in the income statement. The disposal group would record no entry for this transaction for consolidation purposes. However, the carrying amount of the disposal group would be compared to fair value less costs to sell, in order to check that there was no impairment as a result of taking cash out of the disposal group.
If cash was not received because the interest was paid via inter-company account, it would not be appropriate to record the interest income to the consolidated income statement. In these circumstances, we consider that the most appropriate approach is to record the interest as deferred income and to release this balance when the disposal group is sold, as part of the gain or loss on disposal. Interaction between IFRS 5 and IFRS 10 – Loss of control, disposals of subsidiaries, transactions with noncontrolling interest and inter-company transactions Loss of control and disposals of subsidiaries
Non-current assets held for sale acquired in a business combination
Non-current assets or disposal groups held for sale are measured at fair value less costs to sell at the acquisition date. The difference between this and IFRS 3’s normal rules is that generally identifiable assets, liabilities and contingent liabilities are measured at fair value on acquisition.
IFRS 3 contains no exemptions from disclosure for non-current assets or disposal groups within IFRS 5’s scope. All of the disclosures required by IFRS 3 should be given for identifiable assets and liabilities, apart from subsidiaries held for sale that qualify as discontinued operations. For these subsidiaries, if the short-cut method is used, the fair value table should show separately the ascertained value of the assets and the fair value of liabilities of any subsidiaries that are held for sale on acquisition. An entity applying the full valuation method for a subsidiary acquired exclusively with a view to resale will not be able to take this option and will need to give full IFRS 3 disclosures.
Other disclosures that, in our view, do not need to be given, or need to be adapted in respect of subsidiaries held for sale, are:
- A description of the factors contributing to recognition of goodwill. Goodwill does not have to be separately recognised under IFRS 5; it is part of the overall fair value less costs to sell of the assets of a subsidiary held for sale.
- The amount of the acquiree’s profit or loss since acquisition date. [IFRS 3 para B64(q)]. Since the subsidiary held for sale is measured and remeasured at fair value less costs to sell, it is not practicable to separate the profit or loss since acquisition date from any remeasurement gains or losses. The overall amount recorded in the income statement can be disclosed to satisfy this disclosure requirement and will be included in the overall result of the acquired entity (that is, including that part that is not being sold).
- The revenue and profit or loss of the combined entity, as if the acquisition date had been at the beginning of the accounting period. Revenue will not include the revenue of the subsidiary that is held for sale, because group revenue includes only that of continuing operations. Profit or loss will include the pre-acquisition profit or loss of the operation that is classified as discontinued on acquisition, but it would be helpful to readers if it were separated in the disclosures.
Interaction between IFRS 5 and IFRS 10 – Loss of control, disposals of subsidiaries, transactions with non-controlling interest and inter-company transactions
Loss of control and disposals of subsidiaries
When a parent loses control of an investee, that investee ceases to be a subsidiary of the parent. Control is defined in IFRS 10. Consideration should be given to all of the factors to determine the date on which the parent loses control of the investee.
If control of a subsidiary is lost:
- Assets (including goodwill), liabilities and non-controlling interest (including attributable other comprehensive income) of the former subsidiary are de-recognised from the balance sheet.
- Any retained interest (including amounts owed by and to the former subsidiary) is remeasured to its fair value at the date when control is lost, and it is subsequently accounted for in accordance with relevant IFRSs. That fair value should be regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9 or, where appropriate, the cost on initial recognition of an investment in an associate or joint venture.
- Any amounts of other comprehensive income in relation to the subsidiary are reclassified to profit or loss, or transferred directly to retained earnings if required by other IFRSs.
- The resulting gain or loss, on loss of control, is recognised in profit or loss and is attributed to the former controlling interest.
- Any gain or loss on disposal will comprise that attributed to the portion disposed of and the remeasurement of the portion retained.
Calculation of gain on outright sale of subsidiary
A parent purchased an 80% interest in a subsidiary for C80,000 on 1 January 20X4, when the fair value of the subsidiary’s net assets was C87,500. Goodwill of C10,000 arose on consolidation under the partial goodwill method. An impairment of goodwill of C4,000 was charged in the consolidated financial statements to 31 December 20X5. No other impairment charges have been recorded. The parent sold its investment in the subsidiary on 31 December 20X6 for C100,000. The book value of the subsidiary’s net assets in the consolidated financial statements on the date of the sale was C112,500 (not including goodwill of C6,000). When the subsidiary met the criteria to be classified as held for sale under IFRS 5, no write-down was required, because the expected fair value less costs to sell (of 100% of the subsidiary) was greater than the carrying value.
No cumulative translation differences have been recorded in other comprehensive income that would be required (by IAS 21) to be recycled on disposal. Similarly, no FVOCI debt investment reserve has been recorded in other comprehensive income that would require recycling.
The parent carried the investment in the subsidiary at cost, as permitted by IAS 27. The parent’s separate profit and loss account for 20X6 would show a gain on the sale of the investment of C20,000, calculated as follows:
C’000 Sale proceeds 100 Less: cost of investment in subsidiary (80) Gain on sale in parent’s accounts s However, the group’s profit and loss account for 20X6 would show a gain on the sale of the subsidiary of C4,000, calculated as follows: C’000 C’000 Sale proceeds 100 Less: share of net assets at date of disposal (C112,500 × 80%) * (90) Goodwill on consolidation at date of sale** (6) (96) Gain on sale in the group’s accounts 4 *Assuming NCI equals 20% of net assets **The goodwill on consolidation (assuming partial goodwill method is followed) is calculated as follows: C’000 Fair value of consideration at date of acquisition 80.0 Non-controlling interest, measured at proportionate share of the acquiree’s identifiable net assets (87,500 × 20%) 17.5 Less: fair value of net assets of subsidiary at date of acquisition (87.5) Goodwill arising on consolidation 10 Impairment at 31 December 20X5 (4) Goodwill at 31 December 20X6
6 The difference between the gain in the parent’s income statement and the gain reported in the group’s consolidated income statement is C16,000 (C20,000 − C4,000). This difference represents the share of post-acquisition profits retained in the subsidiary of C20,000 ((C112,500 − C87,500) × 80%) that have been reported in the group’s income statement up to the date of sale, less the goodwill impairment of C4,000 recorded in the group’s income statement.
Partial disposal where subsidiary becomes an associate
A parent purchased a 100% subsidiary for C500,000 at the end of 20X3, when the fair value of the subsidiary’s net assets was C400,000. Therefore, goodwill is C100,000. The parent sold 60% of its investment in the subsidiary in December 20X5 for C675,000, leaving the parent with 40% and significant influence. At the date of disposal, the carrying value of the net assets of the subsidiary, excluding goodwill, is C800,000. Assume that the fair value of the investment in the associate retained is proportionate to the fair value of the 60% sold (that is, C450,000).
The parent’s income statement for 20X5 would show a gain on the sale of the investment of C375,000, calculated as follows:
C’000 Sale proceeds 675 Less: cost of investment in subsidiary (C500,000 × 60%) (300) Gain on sale in the parent’s financial statements 375 In the consolidated financial statements, the group will calculate the gain or loss on disposal differently. The carrying amounts of all of the assets, including goodwill and the full amount of any cumulative exchange differences and any FVOCI-reserve previously recognised in equity, are derecognised. when control is lost. This is compared to the proceeds received and the fair value of the investment retained.
The gain on disposal will, therefore, be calculated as follows:
C’000 Sale proceeds 675 Fair value of 40% interest retained 450 1,125 Less: Net assets disposed, including goodwill (800,000 + 100,000) (900) Gain on sale in the group’s financial statements 225 This gain on loss of control would be recorded in profit or loss. The gain or loss includes the gain of C135,000 (C675,000 – (C900,000 × 60%)) on the portion sold. However, it also includes a gain on remeasurement of the 40% retained interest of C90,000 (C450,000 – C360,000). The entity will need to disclose the portion of the gain that is attributable to remeasuring any remaining interest to fair value (that is, C90,000).
Partial disposal where 10% investment in former subsidiary is retained
Assume the same facts as in previous FAQ, except that the group disposes of a 90% interest for C855,000, leaving the parent with a 10% investment. The fair value of the remaining interest is C95,000 (assumed, for simplicity, to be pro rata to the fair value of the 90% sold).
The parent’s income statement, in its separate financial statements for 20X5, would show a gain on the sale of the investment of C405,000, calculated as follows:
C’000 Sale proceeds 855 Less: cost of investment in subsidiary (C500,000 × 90%) (450) Gain on sale in the parent’s financial statements 405
In the consolidated financial statements, all of the assets (including goodwill and the full amount of any cumulative exchange differences and any FVOCI reserve previously recognised in other comprehensive income and accumulated in equity) are de-recognised. when control is lost. This is compared to the proceeds received and the fair value of the investment retained.
C’000 Sale proceeds 855 Fair value of 10% interest retained 95 950 Less: Net assets disposed, including goodwill (800,000 + 100,000) (900) Gain on sale to the group 50 The gain on loss of control will be recognised in profit or loss. The gain on sale includes C45,000 related to the 90% portion sold (C855,000 – (C900,000 × 90%)), as well as C5,000 related to the remeasurement to fair value of the 10% retained interest (C95,000 – C90,000).
In this situation, the entity will no longer be treated as a subsidiary, but it will be accounted for in accordance with IFRS 9. Subsequent to initial measurement it would, therefore, be remeasured to fair value.
The investment, however, is only recorded in the parent at C50,000 (that is, C500,000 × 10%). The double entry needed for the consolidated financial statements, to ensure that the reserves reconcile on consolidation, would be as follows:
Dr Investment C40,000
Cr Reserves C40,000
This entry recognises the group’s share of post-acquisition reserves previously recognised in the consolidated financial statements that relates to the 10% investment retained.
The reserves of C40,000 have already been recognised in the consolidated reserves, because they represent the share retained of the post-acquisition reserves that have arisen from the subsidiary’s original acquisition up to the date of sale (10% × C400,000).
Parent subscribes for proportionally fewer rights than other equity holders and loses control
At the end of the year, a group had a 55% interest in a subsidiary. The goodwill arising on the acquisition was capitalised and impaired, and its carrying amount is C450,000. The subsidiary’s share capital was C2 million (ordinary C1 shares) and its net assets, excluding goodwill, were C10 million immediately prior to the rights issue. At the end of the year, the subsidiary made a ‘1 for 2’ rights issue, priced at C6 per share. The fair value of each share after the rights issue is C7. The group exercised its rights to 100,000 shares and neither exercised nor sold its remaining rights. All of the minority shareholders exercised their rights, so a further 450,000 shares were issued.
The group owned 55% of the share capital prior to the rights issue (that is, 1,100,000 shares). Because it exercised rights to 100,000 shares, it owns 1,200,000 shares after the rights issue.
2,000,000 + 100,000 + (450,000 (as stated above)) = 2,550,000 shares
Before After No % No % Group 1,100,000 55 1,200,000 47 Other party 900,000 45 1,350,000 53 2,000,000 100 2,550,000 100 Net assets C’000 % C’000 % The net assets of the entity, excluding goodwill, post-rights issue were: C10,000,000 + (550,000 × C6) = C13,300,000 Group’s share 5,500 55 6,251 47 Other party’s share 4,500 45 7,049 53 10,000 100 13,300 100
Calculation of group gain on deemed disposal C’000 Fair value of interest retained (C7 × 1,200,000) 8,400 Less: 4,500 Net assets disposed (10,000) Non-controlling interest de-recognised. Goodwill (450) Consideration paid (C6 × 100,000) (600) Gain on deemed disposal 1,850 Because control of the subsidiary is lost, the retained interest is recognised at its fair value at the date when control is lost. The resulting remeasurement gain is recognised in profit and loss.
IFRS 10 also requires the net assets disposed of to include an appropriate portion of any cumulative exchange differences and any FVOCI-reserve previously recognised in other comprehensive income and accumulated in equity. For debt instruments, the portion of the FVOCI-reserve is recognised in profit or loss, whereas for equity-instruments, there is no recycling to profit or loss.
Deemed disposal after sale of rights in rights issue, with loss of control by parent
At the end of the year, a group had a 55% interest in a subsidiary. The goodwill arising on the acquisition was capitalised and impaired, and its carrying amount is C450,000. At the end of the year, the subsidiary made a ‘1 for 2’ rights issue, priced at C6 per ordinary C1 share. The fair value of each share after the rights issue is C7. The group did not exercise its rights, but it sold them to a third party for C200,000. The third party then exercised those rights, as did other minority shareholders owning 40% of the remaining 45% of the entity’s share capital. The rights issue was, therefore, taken up by 95% of the shareholders. The subsidiary’s share capital was C2 million (ordinary C1 shares) and its net assets (excluding goodwill) were C10 million immediately prior to the rights issue.
The group owned 55% of the share capital prior to the rights issue (that is, 1.1 million shares). Because it exercised no rights, it also owned 1.1 million shares following the issue.
The number of the subsidiary’s shares in issue following the rights issue was: 2,000,000 + (2,000,000 × 0.95 × ½) = 2,950,000 shares
Net assets
The net assets of the company, excluding goodwill, post-rights issue were: C10,000,000 + (950,000 × C6) = C15,700,000
C’000 % C’000 % Group’s share 5,500 55 5,809 37 Other party’s share 4,500 45 9,891 63 10,000 100 15,700 100 Calculation of group gain on deemed disposal
C’000 Fair value of interest retained (C7 × 1,100,000) 7,700 Proceeds from sale of rights 200 7,900 Less: Net assets disposed (10,000) Non-controlling interest de-recognised. 4,500 Goodwill (450) Gain on deemed disposal 1,950 Because control of the subsidiary is lost, the retained interest is recognised at its fair value at the date when control is lost. The resulting remeasurement gain is recognised in profit and loss.
IFRS 10 also requires the net assets disposed of to include an appropriate portion of any cumulative exchange differences and any FVOCI-reserve previously recognised in other comprehensive income and accumulated in equity. For debt instruments, the portion of the FVOCI-reserve is reclassified to profit or loss, whereas for equity-instruments, there is no recycling to profit or loss.
Contingent consideration receivable
Entity A sells its entire controlling stake in wholly owned subsidiary B. The proceeds of the sale includes C150 million in cash paid upfront, plus contingent proceeds payments of 5% of revenue for the next three years. Net assets of subsidiary B were C100 million. Entity A accounted for the contingent consideration arrangement based on the following information:
· The fair value of the contingent consideration proceeds, as of the disposal date, is C10 million (assessed based on expected sales over the next three years of C70 million in year 1, with a 15% annual growth rate for years 2 and 3 and using a 10% discount rate that does not change over the period of the arrangement).
· At the end of year 1, while revenue was equal to the projections for the year, it was determined that the revenue growth rate for years 2 and 3 would increase to 30%.
· The contingent consideration arrangement is considered a financial asset.
· Interest income is recognised using the effective interest method.
The following analysis evaluates how entity A should account for the contingent proceeds (excluding the accounting for any tax effects of the transaction).
The journal entry, to record the sale of subsidiary B at the disposal date, is as follows:
C’m C’m Dr Cash 150 Dr Contingent consideration – asset 10 Cr Net assets 100 Cr Gain on sale 60 Entity A records the following journal entries at the end of year 1. Similar journal entries would be recorded for years 2 and 3.
For ease of illustration, this example assumes that there is a 100% probability that the annual growth rates noted above will be achieved (companies would have to use a valuation technique, such as considering multiple scenarios and probability-weighting each scenario to determine the fair value).
The journal entry, to record cash received from the contingent consideration arrangement after year 1, is as follows:
C’m C’m Dr Cash (A) 3.5 Cr Contingent consideration – asset 3.5 The journal entries to record interest income and the remeasurement of contingent consideration due to the change in growth rate expectation are as follows:
C’m C’m Dr Contingent consideration – asset 1.0 Cr Interest income (B) 1.0 C’m C’m Dr Contingent consideration – asset 1.5 Cr Gain (C) 1.5 Expected revenues at sale date (15% growth rate and 10% discount rate):
Revenue 5% of revenue Present value C’m C’m C’m Year 1 70.0 3.5 3.2 Year 2 80.5 4.0 3.3 Year 3 92.6 4.6 3.5 Total 12.1 10.0 Expected revenues after year 1 (30% growth rate and 10% discount rate):
Revenue 5% of revenue Present value C’m C’m C’m Year 2 91.0 4.6 4.1 Year 3 118.3 5.9 4.9 Total 10.5 9.0 A = 70 × 5% B = 10 × 10% C = 9 − (10 − 3.5 + 1.0)
Since the contingent consideration asset was classified as a financial asset, and there are no changes in the market discount rate during the three years, fair value would not differ from amortised cost, and so there is nothing to recognise in other comprehensive income.
The amount receivable might need to be discounted to its present value at the disposal date when consideration is simply deferred (and, hence, not contingent on future performance), depending on the length of time over which it has been deferred and whether or not it bears interest.
Where any resolution of contingent consideration relates to a discontinued operation, it should be presented within the ‘discontinued operations’ line item in the income statement.
Interaction between IFRS 10 and IAS 28 – Disposal of a subsidiary in exchange for an interest in an associate or joint venture
There is an accounting policy choice available when an entity makes a non-monetary contribution to an associate or a joint venture. This arises because of an acknowledged conflict between the requirements of IFRS 10 and IAS 28. IAS 28 indicates that, when non-monetary contributions are made to an associate or to a joint venture, a gain or loss is recognised only to the extent of the portion that has been disposed of to the other investors (partial gain recognition). However, IFRS 10 specifies that, when control of a subsidiary is lost, a gain or loss is recognised on the portion of the retained interest in addition to the gain or loss on the portion no longer owned (full gain recognition). Entities should adopt an accounting policy and consistently apply either the partial gain approach under IAS 28, or the full gain approach under IFRS 10, to contributions of a subsidiary or business to associates or to joint ventures.
Proposed amendments to clarify the accounting for the contribution of a subsidiary or business in exchange for an interest in an associate or joint venture
The interaction between IFRS 10 and IAS 28 is currently unclear. IAS 28 indicates that, when non-monetary contributions are made to an associate or to a joint venture, a gain or loss is recognised in relation to the portion no longer owned. IFRS 10 contains guidance on how to account for changes in ownership of a subsidiary, including transactions with non-controlling interests and transactions where control is gained or lost. IFRS 10 specifies that, when control of a subsidiary is lost, any retained interest should be remeasured to its fair value, with any resulting gain or loss recognised in profit and loss. As such, a gain or loss is recognised on the portion retained, in addition to the gain or loss on the portion no longer owned.
IFRS 10 specifies that any transaction with a non-controlling interest (where control is maintained) should be accounted for as an equity transaction. As such, when a subsidiary remains a subsidiary after a partial disposal, any gain or loss is recognised directly in equity.
IAS 28 applies to associates and joint ventures. The guidance in IAS 28 should not be analogised to when a subsidiary or business is contributed to an entity in exchange for shares where control or a financial asset is retained. However, if a subsidiary or business is contributed to an associate or to a joint venture in exchange for a significant influence or a jointly controlled interest, there is a conflict between IAS 28 and IFRS 10. Entities should adopt a policy and consistently apply either IAS 28 or IFRS 10 when dealing with contributions of a subsidiary or business to associates or to jointly controlled entities.
In September 2014, the IASB published amendments to IFRS 10 and IAS 28 to resolve the inconsistency between the two standards. The amendments clarify that a full gain or loss will be recognised by the investor where the nonmonetary assets sold or contributed constitute a business; but, where the assets do not meet the definition of a business, the gain or loss is recognised by the investor to the extent of the other investors’ interests. The amendments were intended to be effective for periods commencing on or after 1 January 2016 and would require prospective application. However, the effective date was postponed indefinitely, to be addressed as part of a broader project on equity accounting. Until a new effective date has been determined, investors have an accounting policy choice and should apply it consistently.
Assets that are to be exchanged
For an asset to qualify as held for sale, it is necessary that the carrying amount will be recovered principally through sale, i.e., that sale proceeds will be received. It is not necessary that the intended sale of a non-current asset should be in exchange for cash; it is, however, necessary that the expected exchange would qualify for recognition as a completed sale (see 3.1.6.2). Thus, if an entity intends to exchange a non-current asset for another non-current asset, the IFRS 5 conditions for classification as held for sale cannot be met unless the exchange will have commercial substance in accordance with IAS 16.
IAS 16 states that an entity should determine whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if: [IAS 16:25]
either:
the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred; or
the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the exchange; and
the difference arising in either of the two circumstances outlined above is significant relative to the fair value of the assets exchanged.
Disposal of a subsidiary in exchange for an interest in a joint venture
Entity A owns 100% of entity B. The book value of entity B’s net assets is C400,000 and their fair value is C600,000. Goodwill on the acquisition of entity B was C150,000, which has been impaired and stands at a book value of C100,000. The fair value of entity B’s business is estimated at C800,000 for the purpose of the transaction. Entity C owns 100% of entity D. The book value of entity D’s assets is C300,000 and their fair value is C400,000. The fair value of entity D’s business is C800,000.
A new joint venture entity, Newco, is formed, into which entities A and C contribute the businesses of entities B and D respectively, and entities A and C receives shares in Newco, giving each a 50% share. The fair value of Newco at its inception is C1.6 million (being the sum of the fair value of entity B’s business and the fair value of entity D’s business).
Entity A can apply the IAS 28 principles model as a policy option only if the resulting interest is an associate or a joint venture, as defined in IAS 28 and IFRS 11.
Under the principles set out, entity A accounts for the gain or loss arising and the goodwill arising on acquisition of its 50% share in Newco as follows:
Calculation of gain/(loss) on disposal of 50% of entity B C’000 Share of net assets disposed of at book value (50% × C400,000) 200 Share of goodwill disposed of (50% × C100,000) 50 250 Share of value of entity D received as consideration (fair value of consideration being 50% of fair value of entity D’s business) 400 Gain on disposal 150 Calculation of goodwill on acquisition of 50% of entity D Fair value of 50% of business of entity B given up 400 Fair value of net assets acquired (50% × C400,000) 200 Goodwill arising 200 Applying the principles of IAS 28, this transaction would be recognised in entity A’s consolidated financial statements as follows:
C’000 C’000 Dr Investment in joint venture 650* Cr Net assets of entity B 400 Cr Goodwill of entity B 100 Cr Gain on disposal 150 * The carrying value of the investment in the joint venture can be recalculated as 50% of the book value of the business contributed by entity A (that is, 50% of C500,000) plus 50% of the fair value of the business contributed by entity C (that is, 50% of C800,000).
Entity A can apply the IFRS 10 model or the IAS 28 principles model (see above) as a policy option if the resulting interest is an associate or a joint venture, as defined in IAS 28 and IFRS 11.
Under the principles set out in IFRS 10, entity A will also recognise a gain on the remeasurement of the retained interest in entity B to its fair value, given that it has lost control of entity B. Entity A, therefore, accounts for the gain or loss arising on acquisition of its 50% share in Newco as follows:
Calculation of gain/(loss) on disposal of 50% of entity B – same as above C’000 Gain on disposal 150 Calculation of gain/(loss) on remeasurement of retained interest in entity B Share of net assets retained at book value (50% × C400,000) 200 Share of goodwill retained (50% × C100,000) 50 Book value of retained interest in entity B 250 Fair value of retained interest in entity B (assuming proportional to the fair value of 100% at C800,000) 400 Gain on remeasurement of retained interest in entity B 150 Total gain recognised by entity A 300 As a result, entity A recognises the gain arising on, in effect, a disposal of 100% of entity B, because entity A has lost control, and the remaining interest held via Newco is initially recognised at fair value.
Applying the principles of IFRS 10, this transaction would be recognised in entity A’s consolidated financial statements as follows:
C’000 C’000 Dr Investment in joint venture 800* Cr Net assets of entity B 400 Cr Goodwill of entity B 100 Cr Gain on disposal 300 *The carrying value of the investment in the joint venture can be recalculated as 50% of the fair value of the business contributed by entity A (that is, 50% of C800,000) plus 50% of the fair value of the business contributed by entity C (that is, 50% of C800,000).
The initial value of investment in the joint venture is different when using the IFRS 10 and IAS 28 principles, being C800,000 and C650,000 respectively. The difference of C150,000 is the share of the unrealised gain, which is eliminated against the investment value under the IAS 28 approach.
Entity C can apply the IAS 28 principles model as a policy option only if the resulting interest is an associate or a joint venture, as defined in IAS 28 and IFRS 11.
Entity C accounts for the gain or loss arising and the goodwill arising on the acquisition of a 50% share in Newco as follows:
C’000 Calculation of gain/(loss) on disposal of 50% of entity D Share of net assets disposed of at book value (50% × C300,000 assuming no goodwill in books of entity C) 150 Share of value of entity B business received as consideration (fair value of consideration being half of fair value of entity B’s business) 400 Gain on disposal 250 Calculation of goodwill on acquisition of 50% of entity B Value of half of business of entity D given up 400 Fair value of net assets acquired (50% × C600,000) 300 Goodwill 100 Applying the principles of IAS 28, this transaction would be recognised in entity C’s consolidated financial statements as follows:
C’000 C’000 Dr Investment in joint venture 550* Cr Net assets of entity B 300 Cr Goodwill of entity B 250 *The carrying value of the investment in the joint venture can be recalculated as 50% of the book value of the business contributed by entity C (that is, 50% of C300,000) plus 50% of the fair value of the business contributed by entity A (that is, 50% of C800,000).
Entity C can apply the IFRS 10 model or the IAS 28 principles model (see above) as a policy option if the resulting interest is an associate or a joint venture, as defined in IAS 28 and IFRS 11.
Under the principles of IFRS 10, entity C also recognises a gain on the remeasurement of the retained interest in entity D to its fair value, given that it has lost control of entity D. Entity C accounts for the gain or loss arising on acquisition of its 50% share in Newco as follows:
C’000 Gain on disposal of 50% of entity D – calculation is same as above 250 Calculation of gain/(loss) on remeasurement of retained interest in entity D: Share of net assets retained at book value (50% × C300,000, assuming no goodwill for entity C) 150 Fair value of retained interest in entity D (assuming proportional to the fair value of 100% at C800,000) 400 Gain on remeasurement of retained interest in entity D 250 Total gain recognised by entity C 500 As a result, entity C recognises the gain arising on, in effect, a disposal of 100% of entity D, because entity C has lost control, and the remaining interest held via Newco is initially recognised at fair value.
Applying the principles of IFRS 10, this transaction would be recognised in entity C’s consolidated financial statements as follows:
C’000 C’000 Dr Investment in joint venture 800* Cr Net assets of entity D 300 Cr Gain on disposal 500 *The carrying value of the investment in the joint venture can be recalculated as 50% of the fair value of the business contributed by entity C (that is, 50% of C800,000) plus 50% of the fair value of the business contributed by entity A (that is, 50% of C800,000).
The initial value of investment in the joint venture is different when using the IFRS 10 and IAS 28 principles, being C800,000 and C550,000 respectively. The difference of C250,000 is the share of unrealised gain, which is eliminated against the investment value under the IAS 28 approach.
Disposal of a subsidiary in exchange for an interest in a joint venture where other venturer contributes cash
Assume the same facts as in previous FAQ, except that the fair value of entity D is not C800,000 but C500,000. In order to make up the difference, entity C pays C300,000 in cash into the joint venture.
Entity A can apply the IAS 28 principles model as a policy option only if the resulting interest is an associate or a joint venture, as defined in IAS 28 and IFRS 11.
Calculation of gain/(loss) on disposal of 50% of entity B C’000 Share of value of entity D received 400 Share of net assets and goodwill disposed of (at book value) 250 Gain on disposal 150 Applying the principles of IAS 28, this transaction would be recognised in entity A’s consolidated financial statements as follows:
C’000 C’000 Dr Investment in joint venture 650* Cr Net assets of entity B 400 400 Cr Goodwill of entity B 100 100 Cr Gain on disposal 150 150 *The carrying value of the investment in the joint venture can be recalculated as 50% of the book value of the business contributed by entity A (that is, 50% of C500,000) plus 50% of the fair value of the business contributed by entity C (that is, 50% of C500,000) plus 50% of the cash contributed by entity C (that is, 50% of C300,000).
Entity A can apply the IFRS 10 model or the IAS 28 principles model (see above) as a policy option only if the resulting interest is an associate or a joint venture, as defined in IAS 28 and IFRS 11.
If IFRS 10 is followed, the retained interest in entity B would also be remeasured to fair value, resulting in a gain on remeasurement of C150,000, calculated consistently with the prior example. Thus, the total gain recognised on the transaction by entity A would be C300,000.
The net assets compared should include an appropriate portion of any cumulative exchange differences and any reserve on FVOCI debt investments previously recognised in other comprehensive income and accumulated in equity:
Calculation of gain/(loss) on disposal of 50% of entity D C’000 Fair value of businesses given up (half of entity B) 400 Fair value of net assets acquired (50% × C400,000) 200 Share of cash 150 350 Goodwill 50 Applying the principles of IFRS 10, this transaction would be recognised in entity A’s consolidated financial statements as follows:
C’000 C’000 Dr Investment in joint venture 800* Cr Net assets of entity B 400 Cr Goodwill of entity B 100 Cr Gain on disposal 300 *The carrying value of the investment in the joint venture can be recalculated as 50% of the fair value of the business contributed by entity A (that is, 50% of C800,000) plus 50% of the fair value of the business contributed by entity C (that is, 50% of C500,000) plus 50% of the fair value of the cash contributed by entity C (that is, 50% of C300,000).
The initial value of investment in the joint venture is different when using the IFRS 10 and IAS 28 principles, being C800,000 and C650,000 respectively. The difference of C150,000 is the share of unrealised gain, which is eliminated against the investment value under the IAS 28 approach.
Entity C can apply the IAS 28 principles model as a policy option only if the resulting interest is an associate or a joint venture, as defined in IAS 28 and IFRS 11.
Calculation of gain/(loss) on disposal of 50% of entity D:
C’000 Share of net assets disposed of (50% × C300,000)1 50 Cash (50%) 150 300 Share of value of entity B received as consideration 400 Gain on disposal 100 Applying the principles of IAS 28, this transaction would be recognised in entity C’s consolidated financial statements as follows:
C’000 C’000 Dr Investment in joint venture 700* Cr Net assets of entity D 300 Cr Cash 300 Cr Gain on disposal 100 *The carrying value of the investment in the joint venture can be recalculated as 50% of the book value of the business contributed by entity C (that is, 50% of C300,000) plus 50% of the cash contributed by entity C (that is, 50% of C300,000) plus 50% of the fair value of the business contributed by entity A (that is, 50% of C800,000).
Entity C can apply the IFRS 10 model as a policy option only if the resulting interest is an associate or a joint venture, as defined in IAS 28 and IFRS 11.
If the IFRS 10 model is followed, the retained interest in entity D would also be remeasured to fair value, resulting in a gain on remeasurement of C100,000, calculated as the difference between the book value of the interest retained of C150,000 (50% × C300,000) and its fair value of C250,000 (50% × C500,000). Note that this assumes that the fair value of 50% of entity D is proportional to the fair value of 100% of entity D and there is no control premium. In this case, the total gain recognised by entity C on the transaction would be C200,000:
C’000 Share of net assets disposed of (50% × C300,000)1 50 Cash (50%) 150 300 Share of value of entity B received as consideration 400 Gain on disposal 100
C’000 Calculation of goodwill on acquisition of 50% of entity B 50 Value of businesses and cash contributed ((C500,000 + C300,000) × 50%) 150 Fair value of assets acquired (50% × C600,000) 300 Goodwill 100 Applying the principles of IFRS 10, this transaction would be recognised in entity C’s consolidated financial statements as follows:
C’000 C’000 Dr Investment in joint venture 800* Cr Net assets of entity D 300 Cr Cash 300 Cr Gain on disposal 200 *The carrying value of the investment in the joint venture can be recalculated as 50% of the fair value of the business contributed by entity C (that is, 50% of C500,000) plus 50% of the cash contributed by entity C (that is, 50% of C300,000) plus fair value of the business contributed by entity A (that is, 50% of C800,000).
The initial value of investment in the joint venture is different when using the IFRS 10 and IAS 28 principles, being C800,000 and C700,000 respectively. The difference of C100,000 is the share of unrealised gain, which is eliminated against the investment value under the IAS 28 approach.
Analysed a different way, entity A starts with net assets of C400,000 and goodwill of C100,000 in entity B at book value. In this example, it finishes with a share of assets of Newco of half of the book value of assets contributed by itself (50% × C400,000), half of the fair value of the assets contributed by entity C (50% × C400,000) and half of the cash contributed by entity C (50% × C300,000), making C550,000 in all. The difference (C550,000 less C500,000) is a net gain of C50,000, which, when added to the C50,000 of goodwill that entity A retains relating to entity B, makes a net gain of C100,000. This is the same as the difference between the gain calculated (as above) of C150,000 and the goodwill of C50,000.
In entity C’s case, it starts with net assets in entity D at book value of C300,000 and cash of C300,000. It finishes with half of the original net assets at book value (C150,000), half of the cash (C150,000) and half of the fair value of the assets of entity B contributed by entity A (50% × C600,000). This gives C600,000 less C600,000, that is neither gain nor loss on a net basis. This is the same as the difference between the gain calculated (as above) of C100,000 and the goodwill of C100,000.
Calculation of gain or loss on disposal of subsidiary with retained interest as associate or joint venture
The book value used to calculate any gain or loss on the sale of a subsidiary will take account of measurement under IFRS 5 if the subsidiary qualifies as held for sale. This will not affect situations where there is a gain on the exchange, because the subsidiary held for sale will be held at the lower of carrying amount and fair value less costs to sell. However, if there otherwise would have been a loss on the exchange, this will be an IFRS 5 remeasurement (taking carrying value down to the fair value of the consideration received less any costs to sell).
Interaction between IFRS 5 and IAS 1
The guidance in IAS 1 on fair presentation, judgements and estimation uncertainty should be considered in relation to non-current assets (or disposal groups) classified as held for sale and discontinued operations. Additional disclosures might be necessary to explain, For example, the judgements made about whether a disposal is highly probable (thus triggering classification as held for sale) and/or whether an operation meets the definition of a discontinued operation. Furthermore, disclosures might be required to highlight uncertainty, assumptions and judgements in relation to the fair value less costs to sell measure used for a disposal group or noncurrent asset.
Interaction between IFRS 5 and IAS 7
IAS 7 requires the aggregate cash flows arising from disposals of subsidiaries and other business units to be presented separately and classified as investing activities in the cash flow statement. It also requires disclosure of the following, in aggregate, for disposals of subsidiaries and other business units: the total disposal consideration; the portion of the disposal consideration discharged by means of cash and cash equivalents; the amount of cash and cash equivalents in the subsidiary or business unit disposed of; and the amount of the assets and liabilities other than cash or cash equivalents in the subsidiary or business unit disposed of, summarised by each major category.
This disclosure is in addition to the cash flow presentation that is required in respect of discontinued operations by paragraph 33(c) of IFRS 5.
Interaction between IFRS 5 and IAS 10
Announcement, after the year end, of plans to dispose of an asset or disposal group is not an adjusting event under IAS 10, unless there is an indication that the assets were impaired at the balance sheet date.
Disposals of assets and settlement of liabilities might occur after the year end. A non-current asset or disposal group might also meet the criteria to be classified as held for sale after the balance sheet date. Where this is the case, disclosure might be required in accordance with IAS 10. IAS 10 includes an example of non-adjusting events that might require disclosure if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions: “announcing a plan to discontinue an operation …, classification of assets as held for sale in accordance with IFRS 5, other disposals of assets, or expropriation of major assets by government”.
Interaction between IFRS 5 and IAS 21
The carrying amount of a disposal group does not include any cumulative translation differences (CTDs) on the translation of a foreign entity. On disposal, the CTDs should be recognised as income or expense in the same period in which the gain or loss on disposal is recognised.
Other standards
Disclosures required by other standards do not apply to non-current assets or disposal groups held for sale, unless those IFRSs explicitly require disclosure for non-current assets and disposal groups.