generally on arm’s length terms as non-controlling shareholders are impacted.
Therefore, in a situation where such a transaction is not done on arm’s length
terms the reasons for and implications of the transaction must be assessed and
carefully analysed.
4.4
Application of the principles in practice
The following sections deal with common transactions that occur between entities
under common control. While the scenarios depict transactions between a parent and
its subsidiaries they apply similarly to transactions between subsidiaries. Most of the
examples in these sections deal with transactions having a non-arm’s length element. As
for any other transactions undertaken at fair value (at arm’s length), respective IFRSs
that are applicable have to be taken into account.
Deferred tax has been ignored for the purposes of the examples.
4.4.1
Transactions involving non-monetary assets
The same principles apply when the asset that is acquired for a consideration different
to its fair value is inventory (IAS 2 – Inventories – Chapter 22), property, plant and
568 Chapter
8
equipment (‘PP&E’) (IAS 16 – Chapter 18), an intangible asset (IAS 38 – Chapter 17) or
investment property (IAS 40 – Chapter 19). These standards require assets to be initially
recognised at cost.
The same principles generally also apply to the acquisition of an investment in a
subsidiary, an associate or joint venture when the purchase consideration does not
reflect the fair value of the investment, and such investments are accounted for initially
at cost in the separate financial statements as discussed at 2.1 above. Investments
acquired in common control transactions are discussed at 2.1.1.B above.
4.4.1.A
Sale of PP&E from the parent to the subsidiary for an amount of cash not
representative of the fair value of the asset.
The parent and subsidiary are both parties to the transaction and both must recognise
it. As the asset is recognised by the acquiring entity at cost, and not necessarily at fair
value, a choice exists as to how the cost is determined. Does the consideration comprise
two elements, cash and equity, or cash alone?
In some jurisdictions, some entities are legally required to conduct such transactions at
fair value.
Example 8.6:
Sale of PP&E at an undervalue
A parent entity sells PP&E that has a carrying amount of 50 and a fair value of 100 to its subsidiary for
cash of 80.
Method (a)
Method (b)
Recognise the transaction at fair value, regardless Recognise the transaction at the consideration
of the values in any agreement, with any agreed between the parties, being the amount of
difference between that amount and fair value cash paid.
recognised as an equity transaction. (Note 1)
Subsidiary
€ €
€ €
Dr PP&E
100
Dr PP&E
80
Cr Cash
80
Cr Cash
80
Cr Equity
20
Parent
€ €
€ €
Dr Cash
80
Dr Cash
80
Dr Investment
20
Cr PP&E
50
Cr PP&E
50
Cr Gain (profit or loss)
30
Cr Gain (profit or loss)
50
Note 1 This may only be applied where fair value can be measured reliably
However, what if the asset is sold for more than fair value? What are the implications
if, in the above example, the PP&E sold for 80 has a carrying value of 80 but its fair
value is 75? There are a number of explanations that may affect the way in which
the transaction is accounted for:
Separate and individual financial statements 569
• The excess reflects additional services or goods included in the transaction, e.g.
future maintenance that will be accounted for separately;
• The excess reflects the fact that the asset’s value in use (‘VIU’) is at least 80. There
are instances when PP&E is carried at an amount in excess of fair value because its
VIU, or the VIU of the cash-generating unit of which it is a part, is unaffected by falls
in fair value. Plant and machinery often has a low resale value; vehicles lose much of
their fair value soon after purchase; and falls in property values may not affect the
VIU of the head office of a profitable entity (see Chapter 20). In such cases there is
no reason why the subsidiary cannot record the asset it has acquired for the cash it
has paid, which means that it effectively inherits the transferor’s carrying value. An
impairment test potentially would not reveal any requirement to write down the
asset, assuming of course that other factors do not reduce the asset’s VIU (e.g. the
fact that the asset will after the sale be part of a different cash generating unit).
• The excess over fair value is a distribution by the subsidiary to the parent that will be
accounted for in equity. This treatment is a legal requirement in some jurisdictions,
which means that the overpayment must meet the legal requirements for dividends,
principally that there be sufficient distributable profits to meet the cost.
• The asset is impaired before transfer, i.e. both its fair value and VIU are lower than
its carrying amount, in which case it must be written down by the transferor before
the exchange takes place. If it is still sold for more than its fair value, the excess
will be accounted for as a distribution received (by the parent) and a distribution
made by the subsidiary (as above).
4.4.1.B
The parent exchanges PP&E for a non-monetary asset of the subsidiary.
The parent and subsidiary are both parties to the transaction and both must recognise
it. The exchange of an asset for another non-monetary asset is accounted for by
recognising the received asset at fair value, unless the transaction lacks commercial
substance (as defined by IAS 16) or the fair value of neither of the exchanged assets can
be measured reliably. [IAS 16.24]. The requirements of IAS 16 are explained in Chapter 18
at 4.4; the treatment required by IAS 38 and IAS 40 is the same.
The mere fact that an exchange transaction takes place between entities under common
control does not of itself indicate that the transaction lacks commercial substance.
However, in an exchange transaction between unrelated parties the fair value of the
assets is usually the same but this does not necessarily hold true of transactions between
entities under common control.
If the fair value of both assets can be measured reliably there may be a difference
between the two. IAS 16 suggests that, if an entity is able to determine reliably the fair
value of either the asset received or the asset given up, then the fair value of the asset
given up is used to measure the cost of the asset received. [IAS 16.26]. However, IAS 16
actually requires an entity to base its accounting for the exchange on the asset whose
fair value is most clearly evident. [IAS 16.26]. If fair values are different
it is possible that
the group entities have entered into a non-reciprocal transaction. This means that the
entity has the policy choice described at 4.3 above, which in this case means that there
are three alternative treatments; it can recognise the transaction as follows:
570 Chapter
8
• Method (a) – an exchange of assets at fair value of the asset received with an equity
transaction. Any difference between the fair value of the asset received and the fair
value of the asset given up is an equity transaction, while the difference between the
carrying value of the asset given up and its fair value is recognised in profit or loss;
• Method (b) – an exchange of assets at fair value of the asset received without
recognising an equity element. The asset received is recognised at its fair value
with any resulting difference to the carrying value of the asset given up is
recognised in profit or loss; or
• Method (c) – apply a ‘cost’ method based on IAS 16 (the fair value of the asset given
up is used to measure the cost of the asset received) under which each entity
records the asset at the fair value of the asset it has given up. This could result in
one of the parties recording the asset it had received at an amount in excess of its
fair value, in which case it may be an indicator for impairment of the asset. It would
be consistent with the principles outlined at 4.3 above to treat the write down as
an equity transaction, i.e. an addition to the carrying value of the subsidiary by the
parent and a distribution by the subsidiary.
Example 8.7:
Exchange of assets with dissimilar values
A parent entity transfers an item of PP&E to its subsidiary in exchange for an item of PP&E of the subsidiary,
with the following values:
Subsidiary Parent
€ €
€ €
Carrying Value
20
Carrying Value
50
Fair Value
80
Fair Value
100
The fair value of both assets can be measured reliably.
The accounting for the transaction by the parent and the subsidiary under each of the methods is as follows:
Method (a)
Subsidiary Parent
€ €
€ €
Dr PP&E
100
Dr PP&E
80
Cr PP&E
20
Dr Investment
20
Cr Gain (profit or loss)
60
Cr PP&E
50
Cr Equity
20
Cr Gain (profit or loss)
50
Method (b)
Subsidiary Parent
€ €
€ €
Dr PP&E
100
Dr PP&E
80
Cr PP&E
20
Cr PP&E
50
Cr Gain (profit or loss)
80
Cr Gain (profit or loss)
30
Separate and individual financial statements 571
Method (c)
Subsidiary Parent
€ €
€ €
Dr PP&E
80
Dr PP&E (100 – 20)
80
Cr PP&E
20
Dr Investment
20
Cr Gain (profit or loss)
60
Cr PP&E
50
Cr Gain (profit or loss)
50
If the fair value of only one of the exchanged assets can be measured reliably, IAS 16
allows both parties to recognise the asset they have received at the fair value of the asset
that can be measured reliably. [IAS 16.26]. Underlying this requirement is a presumption
that the fair value of both assets is the same, but one cannot assume this about common
control transactions.
If the fair value of neither of the exchanged assets can be measured reliably, or the
transaction does not have commercial substance, both the parent and subsidiary
recognise the received asset at the carrying amount of the asset they have given up.
4.4.1.C
Acquisition and sale of assets for shares
These transactions include the transfer of inventory, property plant and equipment,
intangible assets, investment property and investments in subsidiaries, associates and
joint ventures by one entity in return for shares of the other entity. These transactions
are usually between a parent and subsidiary where the subsidiary is the transferee that
issues shares to the parent in exchange for the assets received.
(a) Accounting treatment by the subsidiary
Transactions that include the transfer of inventory, property plant and equipment, intangible
assets, and investment property are within the scope of IFRS 2, as goods have been received
in exchange for shares. The assets are recognised at fair value, unless the fair value cannot be
estimated reliably, and an increase in equity of the same amount is recognised. If the fair value
of the assets cannot be estimated reliably, the fair value of the shares is used instead. [IFRS 2.10].
Transactions in which an investment in a subsidiary, associate or joint venture is
acquired in exchange for shares is not specifically addressed under IFRS, since it falls
outside the scope of both IFRS 9 and IFRS 2. However, we believe that it would be
appropriate, by analogy with IFRS on related areas (like IFRS 3), to account for such a
transaction at the fair value of the consideration given (being fair value of equity
instruments issued) or the assets received, if that is more easily measured, together with
directly attributable transaction costs. As discussed at 2.1.1.B above, when the purchase
consideration does not correspond to the fair value of the investment acquired, in our
view, the acquirer has an accounting policy choice to account for the investment at fair
value of the consideration given or may impute an equity contribution or dividend
distribution and in effect account for the investment at its fair value. Alternatively, if the
investment in a subsidiary constitutes a business and is acquired in a share-for-share
exchange, it is also acceptable to measure the cost based on the original carrying amount
572 Chapter
8
of the investment in the subsidiary in the transferor entity’s separate financial
statements, rather than at the fair value of the shares given as consideration.
(b) Accounting treatment by the parent
The parent has disposed of an asset in exchange for an increased investment in a subsidiary.
Based on what has been said at 2.1.1 above, the cost of investment should be recorded at
the fair value of the consideration given i.e. the fair value of the asset sold. Such a
transaction has also the nature of an exchange of assets and by analogy to paragraph 24 of
IAS 16, the investment should be measured at fair value unless the exchange transaction
lacks commercial substance or the fair value of neither the investment received nor the
asset given up is reliably measurable. If the investment cannot be measured at fair value, it
is measured at the carrying value of the asset given up. [IAS 16.24].
The asset’s fair value may be lower than its carrying value but it is no
t impaired unless
its VIU is insufficient to support that carrying value (see 4.4.1.A above). If there is no
impairment, the parent is not prevented from treating the carrying value of the asset as
an addition to the investment in the subsidiary solely because the fair value is lower. If
the asset is impaired then this should be recognised before reclassification, unless the
reorganisation affects, and increases, the VIU.
If the fair value is higher than the carrying value and the investment is accounted for at
fair value as discussed above, the transferring entity recognises a gain. In certain
circumstances it might not be appropriate to account for the transaction at fair value
due to lack of commercial substance. For example, exchanging the asset for an
investment in the shares of a subsidiary that holds nothing but the asset given as
consideration may not give rise to a gain on transfer.
4.4.1.D
Contribution and distribution of assets
These transactions include transfers of inventory, property plant and equipment,
intangible assets, investment property and investments in subsidiaries, associates and
joint ventures from one entity to another for no consideration. These arrangements are
not contractual but are equity transactions: either specie capital contributions (an asset
is gifted by a parent to a subsidiary) or non-cash distributions (an asset is given by a
subsidiary to its parent). IFRIC 17 explicitly excludes intra-group non-cash distributions
from its scope (see 2.4.2 above). [IFRIC 17.5].
The relevant standards (IAS 2, IAS 16, IAS 38 and IAS 40) refer to assets being
recognised at cost. Similarly, investments in subsidiaries, associates and joint ventures
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 113
