International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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financial statements is as follows:
€m
€m
DR
CR
Cash proceeds from the disposal
28.00
Retained 20% investment at fair value
8.00
Derecognition of net assets of the subsidiary
30.00
Derecognition of non-controlling interest
3.00
Reserves reclassified to profit or loss
–
Cash flow hedge reserve (a)
2.70
–
Cumulative translation reserve (b)
3.60
Reserves transferred to retained earnings
–
PP&E revaluation reserve (c)
1.80
–
IAS 19 net remeasurement loss reserve (d)
1.35
Retained earnings resulting from above transfers
0.45
Gain on disposal (attributable to parent)
15.30
The parent:
(a) reclassifies its €2.7 million cash flow hedge reserve to profit or loss for the period. This is reflected in
the gain on disposal. The remaining 10% (i.e. €0.3 million) is included as part of the carrying amount
Consolidation procedures and non-controlling interests 491
of the non-controlling interest that is derecognised as part of the gain or loss recognised on disposal of
the subsidiary, but is not reclassified to profit or loss nor is it transferred within equity;
(b) reclassifies its cumulative translation reserve of €3.6 million (90% × €4 million) relating to the parent’s
interest to profit or loss. Again, this is reflected in the gain on disposal. The €0.4 million (10% ×
€4 million) relating to the non-controlling interest is included as part of the carrying amount of the non-
controlling interest that is derecognised in calculating the gain or loss recognised on disposal of the
subsidiary, but is not reclassified to profit or loss nor is it transferred within equity;
(c) transfers its revaluation reserve of €1.8 million relating to its 90% share of the revaluation surplus on
property, plant and equipment within equity to retained earnings. It is not reclassified to profit or loss.
The remaining 10% attributable to the non-controlling interest is included as part of the carrying amount
of the non-controlling interest that is derecognised in calculating the gain or loss recognised on disposal
of the subsidiary, but is not reclassified to profit or loss nor is it transferred within equity; and
(d) transfers its reserve of €1.35 million relating to its 90% share of the net remeasurement losses on the
defined benefit liability within equity to retained earnings. It is not reclassified to profit or loss. The
remaining 10% attributable to the non-controlling interest is included as part of the carrying amount of
the non-controlling interest that is derecognised in calculating the gain or loss recognised on disposal of
the subsidiary, but is not reclassified to profit or loss nor is it transferred within equity. This results in
the same position as if the parent had not recognised a separate reserve for the net remeasurement losses
on the defined benefit liability, but had included them within retained earnings.
If, instead, the parent follows Approach (2) for the cash flow hedge reserve, the impact of the disposal on the
parent’s consolidated financial statements is as follows:
€m
€m
DR
CR
Cash proceeds from the disposal
28.00
Retained 20% investment at fair value
8.00
Derecognition of net assets of the subsidiary
30.00
Derecognition of non-controlling interests
3.00
Reserves reclassified to profit or loss
– Cash flow hedge reserve (a)
2.70
– Cumulative translation reserve (b)
3.60
Non-controlling interest (reclassification of cash flow hedge reserve) (a)
0.30
Reserves transferred to retained earnings
– PP&E revaluation reserve (c)
1.80
– IAS 19 net remeasurement loss reserve (d)
1.35
Retained earnings resulting from above transfers
0.45
Gain on reclassification of cash flow hedge reserve (attributable to non-
0.30
controlling interests) (a)
Gain on disposal (attributable to parent)
15.30
The parent:
(a) reclassifies the entire €3 million surplus on the cash flow hedge reserve to profit or loss for the period.
The 90% of the balance (i.e. €2.7 million) attributable to the parent is included within the gain on
disposal that is attributable to the parent, while the remaining 10% (i.e. €0.3 million) attributable to the
non-controlling interests is reclassified to profit or loss, and is included within the profit or loss
attributable to the non-controlling interest;
(b) reclassifies its cumulative translation reserve of €3.6 million (90% × €4 million) relating to the parent’s
interest to profit or loss. Again, this is reflected in the gain on disposal. The €0.4 million (10% ×
€4 million) relating to the non-controlling interest is included as part of the carrying amount of the non-
controlling interest that is derecognised in calculating the gain or loss recognised on disposal of the
subsidiary, but is not reclassified to profit or loss nor is it transferred within equity;
(c) transfers its revaluation reserve of €1.8 million relating to its 90% share of the revaluation surplus on property,
plant and equipment within equity to retained earnings. It is not reclassified to profit or loss. The remaining 10%
492 Chapter
7
attributable to the non-controlling interest is included as part of the carrying amount of the non-controlling
interest that is derecognised in calculating the gain or loss recognised on disposal of the subsidiary, but is not
reclassified to profit or loss nor is it transferred within equity; and
(d) transfers its reserve of €1.35 million relating to its 90% share of the net remeasurement losses on the
defined benefit liability within equity to retained earnings. It is not reclassified to profit or loss. The
remaining 10% attributable to the non-controlling interest is included as part of the carrying amount of
the non-controlling interest that is derecognised in calculating the gain or loss recognised on disposal of
the subsidiary, but is not reclassified to profit or loss nor is it transferred within equity. This results in
the same position as if the parent had not recognised a separate reserve for the net remeasurement losses
on the defined benefit liability, but had included them within retained earnings.
3.6 Deemed
disposal
A subsidiary may cease to be a subsidiary, or a group may reduce its interest in a
subsidiary, other than by actual disposal. This is commonly referred to as a ‘deemed
disposal’. Deemed disposals may arise for many reasons, including:
• a group does not take up its full allocation in a rights issue by a subsidiary in the group;
• a subsidiary declares scrip dividends that are not taken up by its parent, so that the
parent’s proportional interest is diminished;
• another party exercises its options or warrants issued by a subsidiary;
• a subsidiary issues share
s to third parties; or
• a contractual agreement by which a group obtained control over a subsidiary is
terminated or changed.
A deemed disposal that results in the loss of control of a subsidiary is accounted for as
a regular disposal. This accounting is illustrated in Example 7.10 below.
Example 7.10: Deemed disposal through share issue by subsidiary
A parent entity P owns 600,000 of the 1,000,000 shares issued by its subsidiary S, giving it a 60% interest.
The carrying value of S’s net identifiable assets in the consolidated financial statements of P is £120 million.
P measured the non-controlling interest using the proportionate share of net assets; therefore, the non-
controlling interest is £48 million (40% of £120 million). In addition, goodwill of £15 million was recognised
upon the original acquisition of S, and has not subsequently been impaired. The goodwill is allocated to S
for the purposes of impairment testing.
Subsequently, S issues 500,000 shares to a new investor for £80 million. As a result, P’s 600,000 shares now
represent 40% of the 1,500,000 shares issued by S in total and S becomes an associate of P.
IFRS 10 requires the remaining interest in the former subsidiary to be recognised at fair value. P considers
that, based on the requirements of IFRS 13, the fair value of its 600,000 shares in S is £96 million.
This results in a gain of £9 million on disposal, recognised as follows:
£m
£m
DR
CR
Interest in S
96
Non-controlling interest
48
Gain on disposal
9
Net assets of S (previously consolidated)
120
Goodwill (previously shown separately)
15
As indicated at 3.3.2.D above, the IASB has discussed issues relating to the unit of
account for investments in subsidiaries, joint ventures and associates, and their fair
value measurement under IFRS 13.
Consolidation procedures and non-controlling interests 493
3.7
Demergers and distributions of non-cash assets to owners
Groups may dispose of subsidiaries by way of a demerger. This situation typically
involves the transfer of the subsidiaries to be disposed of, either:
• directly to shareholders, by way of a dividend in kind; or
• to a newly formed entity in exchange for the issue of shares by that entity to the
shareholders of the disposing entity.
IFRS 10 requires recognition of a distribution of shares of the subsidiary to owners in
their capacity as owners, but does not describe how to account for such transactions.
[IFRS 10.26, B98(b)]. Instead, IFRIC 17 – Distributions of Non-cash Assets to Owners –
addresses distributions of subsidiary shares to shareholders. The application of IFRIC 17
in the context of demergers is discussed below. The application of IFRIC 17 to assets in
general is discussed in Chapter 8 at 2.4.2.
3.7.1
Scope of IFRIC 17
IFRIC 17 applies to the following types of distribution (described by IFRIC 17 as ‘non-
reciprocal’) by an entity to its owners in their capacity as owners: [IFRIC 17.3]
(a) distributions of non-cash assets such as items of property, plant and equipment,
businesses as defined in IFRS 3 (see Chapter 9 at 3.2), ownership interests in
another entity or disposal groups as defined in IFRS 5 (see Chapter 4 at 2.1); and
(b) distributions that give owners a choice of receiving either non-cash assets or a
cash alternative.
The scope of IFRIC 17 is limited in several respects:
• it only applies to distributions in which all owners of the same class of equity
instruments are treated equally; [IFRIC 17.4]
• it does not apply to ‘a distribution of a non-cash asset that is ultimately controlled
by the same party or parties before and after the distribution’, [IFRIC 17.5], which
means that IFRIC 17 does not apply when:
• a group of individual shareholders receiving the distribution, as a result of
contractual arrangements, collectively have the power to govern financial
and operating policies of the entity making the distribution so as to obtain
benefits from its activities; [IFRIC 17.6] or
• an entity distributes some of its ownership interests in a subsidiary but
retains control of the subsidiary. The entity making a distribution that
results in the entity recognising a non-controlling interest in its
subsidiary accounts for the distribution in accordance with IFRS 10.
[IFRIC 17.7]. In this situation, the requirements of IFRS 10 discussed at 4
below would be applied.
This exclusion applies to the separate, individual and consolidated financial
statements of an entity that makes the distribution; [IFRIC 17.5] and
• it only addresses the accounting by an entity that makes a non-cash asset
distribution. It does not address the accounting by shareholders who receive the
distribution. [IFRIC 17.8].
494 Chapter
7
3.7.2
Recognition and measurement in IFRIC 17
An entity making a non-cash distribution to its owners recognises a liability to pay a
dividend when the dividend is appropriately authorised and is no longer at the
discretion of the entity. This is the date: [IFRIC 17.10]
(a) when declaration of the dividend (e.g. by management or the board of directors) is
approved by the relevant authority (e.g. shareholders) if the jurisdiction requires
such approval; or
(b) when the dividend is declared (e.g. by management or the board of directors) if the
jurisdiction does not require further approval.
An entity measures the liability at the fair value of the assets to be distributed. [IFRIC 17.11].
If the owners have a choice between receiving a non-cash asset or cash, the entity
estimates the dividend payable by considering both the fair value of each alternative and
the associated probability of owners selecting each alternative. [IFRIC 17.12]. IFRIC 17 does
not specify any method of assessing probability nor its effect on measurement. In a
demerger involving the distribution of shares in a subsidiary, the fair value will be
determined based on the guidance in IFRS 13. As indicated at 3.3.2.D above, the IASB has
been discussing issues relating to the unit of account for investments in subsidiaries, joint
ventures and associates, and their fair value measurement under IFRS 13.
IFRS 5’s requirements apply also to a non-current asset (or disposal group) that is
classified as held for distribution to owners acting in their capacity as owners (held for
distribution to owners). [IFRS 5.5A, 12A]. This means that a non-current asset (or disposal
group) classified as held for sale within scope of IFRS 5 will be carried at the lower of its
carrying amount and fair value less costs to distribute (i.e. incremental costs directly
attributable to the distribution, excluding finance costs and income tax expense).
[IFRS 5.15A]. Assets not subject to the measurement provisions of IFRS 5 are measured in
accordance with the relevant standard. [IFRS 5.5]. See further discussion at Chapter 4 at 2.
At the end of each reporting period and at the date of settlement, the carrying amount
of the dividend payable is adju
sted to reflect any changes in the fair value of the assets
being distributed and changes are recognised in equity as adjustments to the amount of
the distribution. [IFRIC 17.13].
When the dividend payable is settled, any difference between the carrying amount of
the assets distributed and the carrying amount of the dividend payable is recognised as
a separate line item in profit or loss. [IFRIC 17.14-15]. IFRIC 17 does not express any
preference for particular line items or captions in the income statement.
The non-cash assets that are to be distributed are measured in accordance with other
applicable IFRSs up to the time of settlement as IFRIC 17 does not override the
recognition and measurement requirements of other IFRSs. While the Interpretations
Committee recognised concerns about the potential ‘accounting mismatch’ in equity
resulting from measuring the dividend payable and the related assets on a different
basis, [IFRIC 17.BC55], it concluded that:
‘... there was no support in IFRSs for requiring a remeasurement of the assets
because of a decision to distribute them. The IFRIC noted that the mismatch
concerned arises only with respect to assets that are not carried at fair value already.
Consolidation procedures and non-controlling interests 495
The IFRIC also noted that the accounting mismatch is the inevitable consequence
of IFRSs using different measurement attributes at different times with different
triggers for the remeasurement of different assets and liabilities.’ [IFRIC 17.BC56].
3.7.3
Presentation and disclosure
An entity discloses the following information in respect of distributions of non-cash
assets within the scope of IFRIC 17:
• the carrying amount of the dividend payable at the beginning and end of the
reporting period; [IFRIC 17.16]
• the increase or decrease in the carrying amount recognised in the reporting period