required, inter alia, to:
(a) derecognise the assets and liabilities of the subsidiary;
(b) recognise any investment retained in the former subsidiary at fair value at the date
when control is lost; and
(c) recognise any resulting gain or loss in profit or loss.
However, it is unclear how these requirements should be applied when the retained
interest is in the assets and liabilities of a joint operation. One view is that the retained
interest should be remeasured at fair value. Another view is that the retained interest
should not be derecognised or remeasured at fair value, but should continue to be
recognised and measured at its carrying amount. This is an issue that the Interpretations
Committee has previously considered as part of a wider discussion of other transactions
of changes of interests in a joint operation that is a business, for which there is a lack of
guidance, or where there is diversity of views.
In July 2015, the Interpretations Committee agreed an initial scope of the project, which
included transactions involving loss of control resulting in the entity having joint control
in a joint operation or being a party to a joint operation subsequent to the transaction.13
In July 2016, the Interpretations Committee discussed whether an entity should remeasure
its retained interest in the assets and liabilities of a joint operation when the entity loses
control of a business, or an asset or group of assets that is not a business. In the transaction
discussed, the entity either retains joint control of a joint operation or is a party to a joint
operation (with rights to assets and obligations for liabilities) after the transaction.
The Interpretations Committee noted that paragraphs B34–B35 of IFRS 11 specify that
an entity recognises gains or losses on the sale or contribution of assets to a joint
operation only to the extent of the other parties’ interests in the joint operation.
[IFRS 11.B34, B35]. The requirements in these paragraphs could be viewed as conflicting
with the requirements in IFRS 10, which specify that an entity remeasures any retained
interest when it loses control of a subsidiary.
The Interpretations Committee observed that the IASB had issued amendments to IFRS 10
and IAS 28 in September 2014 to address the accounting for the sale or contribution of
assets to an associate or a joint venture. Those amendments (which are discussed at 3.3.2.B
above and 7.1 below) address a similar conflict that exists between the requirements in
IFRS 10 and IAS 28. The IASB decided to defer the effective date of the amendments to
IFRS 10 and IAS 28 and further consider a number of related issues at a later date. The
Interpretations Committee observed that the Post-implementation Review of IFRS 10 and
IFRS 11 would provide the IASB with an opportunity to consider loss of control
transactions and a sale or contribution of assets to an associate or a joint venture.
Because of the similarity between the transaction discussed by the Interpretations
Committee and a sale or contribution of assets to an associate or a joint venture (see 3.3.2
above), the Interpretations Committee concluded that the accounting for the two
transactions should be considered concurrently by the IASB. Consequently, the
Interpretations Committee decided not to add this issue to its agenda but, instead, to
recommend that the IASB consider the issue at the same time that it further considers the
Consolidation procedures and non-controlling interests 487
accounting for the sale or contribution of assets to an associate or a joint venture.14 In the
meantime, we believe that, where a parent loses control over a subsidiary but retains an
interest in a joint operation that is a business, entities have an accounting policy choice as
to whether to remeasure the retained interest at fair value or not.
3.4
Loss of control in multiple arrangements
If a parent loses control of a subsidiary in two or more arrangements or transactions,
sometimes they should be accounted for as a single transaction. [IFRS 10.26, B97]. IFRS 10
only allows a parent to recognise a gain or loss on disposal of a subsidiary when the
parent loses control over it. This requirement could present opportunities to structure
the disposal in a series of disposals, thereby potentially reducing the loss recognised.
Example 7.7 below illustrates the issue in IFRS 10 as follows. [IFRS 10.BCZ185].
Example 7.7:
Step-disposal of a subsidiary (1)
A parent controls 70% of a subsidiary. The parent intends to sell all of its 70% controlling interest in the
subsidiary. The parent could structure the disposal in two different ways:
• the parent could initially sell 19% of its ownership interest without loss of control and then, soon
afterwards, sell the remaining 51% and lose control; or
• the parent could sell its entire 70% interest in one transaction.
In the first case, any difference between the amount by which the non-controlling interests are adjusted and the
fair value of the consideration received upon sale of the 19% interest would be recognised directly in equity (as
it is a transaction with owners in their capacity as owners. [IFRS 10.23].), while the gain or loss from the sale of
the remaining 51% interest would be recognised in profit or loss (once control is lost). In the second case,
however, a gain or loss on the sale of the whole 70% interest would be recognised in profit or loss.
However, even if an entity wanted to conceal losses on a disposal of a subsidiary, the
opportunities are limited given the requirements of IAS 36 – Impairment of Assets –
and IFRS 5, which usually require recognition of an impairment loss even before the
completion of any sale, [IFRS 10.BCZ185], (although they do not require reclassification of
losses recognised in other comprehensive income).
In determining whether to account for the arrangements as a single transaction, a parent
considers all the terms and conditions of the arrangements and their economic effects.
One or more of the following circumstances indicate that it is appropriate for a parent
to account for multiple arrangements as a single transaction: [IFRS 10.26, B97]
• they are entered into at the same time or in contemplation of each other;
• they form a single transaction designed to achieve an overall commercial effect;
• the occurrence of one arrangement is dependent on the occurrence of at least one
other arrangement; or
• one arrangement considered on its own is not economically justified, but it is
economically justified when considered together with other arrangements. An
example is a disposal of shares priced below market and is compensated by a
subsequent disposal priced above market.
These indicators clarify that arrangements that are part of a package are accounted for
as a single transaction. However, there is a risk that by casting too wide a net, an entity
might end up accounting for a transaction that is truly separate as part of transaction in
which the loss of control occurred.
488 Chapter
7
IFRS 10 is silent on how an entity accounts for multiple arrangements that are part of a
single transaction. Depending on the facts and circumstances, the parent accounts for
these transact
ions in one of the following ways:
• Advance payment – If the parent does not lose control over the subsidiary and
access to the benefits associated with ownership until later steps in the transaction,
then it accounts for the first step of the transaction as an advance receipt of
consideration and continues to consolidate the subsidiary until the later date. In
many cases, the assets and liabilities of the consolidated subsidiary would be a
disposal group held for sale under IFRS 5 (see Chapter 4 at 2.1.3.A).
• Immediate disposal – If the parent loses control and access to benefits associated
on the first step of the transaction, then it ceases to consolidate the former
subsidiary immediately, recognises a gain or loss on disposal, and accounts for the
consideration due in the second step as deferred consideration receivable.
Example 7.8 below illustrates a fact pattern where the entity would need to evaluate
how to account for transactions that are linked.
Example 7.8:
Step-disposal of a subsidiary (2)
A parent initially controls 70% of a subsidiary that has net assets of $1,000,000 and a foreign currency translation
loss that was recognised in other comprehensive income and is accumulated within equity of $100,000. Of this
amount, $30,000 was allocated to non-controlling interest, and is included within the non-controlling interest of
$300,000. In November 2018, the parent sells 19% of its ownership interest for $200,000. In February 2019, the
parent sells the remaining 51% for $550,000 in an arrangement that is considered part of a single overall
transaction. It is assumed that there are no gains or losses in the intervening period.
The net assets of the subsidiary are not impaired under IAS 36, which is confirmed by the fact that the total
sales price exceeds the parent’s share in the net assets by $50,000 ($750,000 less $700,000). The total loss
on disposal can be calculated as follows:
$’000
$’000
DR
CR
Proceeds from the sale ($200,000 + $550,000)
750
Net assets of the subsidiary derecognised
1,000
Non-controlling interest derecognised
300
Reclassification of parent’s share of the loss in other
70
comprehensive income
Loss on disposal of the subsidiary attributable to the parent
20
If the parent is considered not to have lost control over the investment in the subsidiary until February 2019
then it accounts for the $200,000 received in the first step of the transaction as an advance receipt of
consideration. The parent continues to consolidate the subsidiary until the later date, at which point the loss
on disposal of $20,000 would be recognised.
If the parent is considered to have lost control over the investment in the subsidiary on the first step of the
transaction, then it ceases to consolidate the former subsidiary immediately, recognises a loss on disposal of
$20,000, and accounts for the consideration of $550,000 due in the second step as deferred consideration receivable.
3.5
Other comprehensive income
If a parent loses control of a subsidiary, all amounts previously recognised in other
comprehensive income are accounted for on the same basis as would be required if the
parent had directly disposed of the related assets or liabilities. If a gain or loss previously
recognised in other comprehensive income would be reclassified to profit or loss on
Consolidation procedures and non-controlling interests 489
the disposal of the related assets or liabilities, the parent reclassifies the gain or loss
from equity to profit or loss (as a reclassification adjustment) when it loses control of
the subsidiary. Therefore:
(a) if a revaluation surplus previously recognised in other comprehensive income
would be transferred directly to retained earnings on the disposal of the asset, the
parent transfers the revaluation surplus directly to retained earnings when it loses
control of the subsidiary; [IFRS 10.26, B99]
(b) remeasurement gains or losses on a defined benefit plan recognised in other
comprehensive income would not be reclassified to profit or loss when the parent
loses control of the subsidiary, but may be transferred within equity; [IAS 19.122] and
(c) on disposal of a subsidiary that includes a foreign operation, the cumulative
amount of the exchange differences relating to that foreign operation (that is
recognised in other comprehensive income and accumulated in the separate
component of equity) is reclassified from equity to profit or loss, except for the
amounts that have been attributed to the non-controlling interests. Those amounts
are derecognised, and not reclassified to profit or loss. [IAS 21.48-48B]. This would
appear to mean that it is only the parent’s share of the cumulative exchange
differences that is reclassified; those attributable to the non-controlling interests
are not reclassified as they have already been included within the carrying amount
of the non-controlling interest that is derecognised as part of calculating the gain
or loss attributable to the parent.
There are two different interpretations of how to treat other comprehensive income
accumulated in equity that would be reclassified to profit or loss on the disposal of the
related assets or liabilities, both of which are acceptable. Approach (1) below is more
consistent with the treatment of exchange differences relating to foreign operations, as
described at (c) above.
(1) Reclassification of other comprehensive income related to parent interest only –
IFRS 10 requires derecognition of the non-controlling interests (including any
components of other comprehensive income attributable to them) at the date
when control is lost, which implies derecognition of the non-controlling interests
without any need for reclassification. [IFRS 10.26, B98(a)]. In addition, IFRS 10 requires
recognition of a gain or loss in profit or loss to be attributable to the parent,
[IFRS 10.26, B98(d)], which again implies that there should be no reclassification of
other comprehensive income in respect of the non-controlling interests.
(2) Reclassification of other comprehensive income related to parent and the non-
controlling interest – IFRS 10 specifically requires that ‘if a gain or loss previously
recognised in other comprehensive income would be reclassified to profit or loss on
the disposal of the related assets or liabilities, the parent shall reclassify the gain or
loss from equity to profit or loss (as a reclassification adjustment) when it loses control
of the subsidiary.’ [IFRS 10.26, B99]. That would clearly require reclassification of the
entire balance of other comprehensive income accumulated within equity. However,
where this is done, the portion of the reclassification adjustment attributable to the
non-controlling interest should be included as part of the profit or loss attributable to
the non-controlling interests, not as part of the profit or loss attributable to the parent.
490 Chapter
7
Example 7.9 below illustrates the application of the above requirements.
Example 7.9:
Reclassification of other comprehensive income
&nbs
p; A parent sells a 70% interest in a 90%-owned subsidiary to a third party for a cash consideration of
€28 million. The fair value of the 20% interest retained by the parent is €8 million.
At the date of disposal, the net assets of the subsidiary were €30 million. Included within those net assets,
the subsidiary had recognised, in its own financial statements, the following:
• property, plant and equipment of €5 million that has resulted in a revaluation reserve of €2 million;
• derivative financial assets of €3.2 million (designated in a cash flow hedge) that have resulted in a cash
flow hedge reserve of €3 million;
• a net defined benefit liability of €3 million that has resulted in a reserve relating to net remeasurement
losses of €1.5 million; and
• net assets of a foreign operation of €10 million that has resulted in a cumulative translation reserve in
respect of net translation gains on the foreign operation of €4 million.
In the parent’s consolidated financial statements, the parent has recognised 90% of these reserves in
equivalent equity reserve balances, with the 10% attributable to the non-controlling interest included as part
of the carrying amount of the non-controlling interest.
The impact of the subsidiary on the statement of financial position included in the parent’s consolidated
financial statements immediately prior to the disposal is as follows:
€m
€m
Net assets of the subsidiary
30.00
Equity attributable to parent
– PP&E revaluation reserve
1.80
– Cash flow hedge reserve
2.70
– IAS 19 net remeasurement loss reserve
1.35
– Cumulative translation reserve
3.60
– Other
equity/retained earnings
20.25
Non-controlling interest 3.00
If the parent follows Approach (1) for the cash flow hedge reserve and makes a reserve transfer for the IAS 19
– Employee Benefits – net remeasurement loss reserve, the impact of the disposal on the parent’s consolidated
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 97
