When a parent loses control of a subsidiary in a transaction with an associate or joint venture (JV), there is a conflict between the existing guidance on consolidation and equity accounting.
Under the consolidation standard, the parent recognises the full gain on the loss of control. But under the standard on associates and JVs, the parent recognises the gain only to the extent of unrelated investors’ interests in the associate or JV.
In either case, the loss is recognised in full if the underlying assets are impaired.
In response to this conflict and the resulting diversity in practice, on 11 September 2014 the IASB issued Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28).
While the original conflict arose from the transfer of subsidiaries, the amendments are broader and cover the transfer of assets involving an associate or a JV.
The amendments require the full gain to be recognised when the assets transferred meet the definition of a ‘business’ under IFRS 3 Business Combinations.
Consider the following example. Company P sells its wholly owned subsidiary S to its 44% JV for cash of 300. As a result, P loses control of S.
The carrying amount of S’s net assets (including goodwill, if any) in P’s consolidated financial statements is 100.
How the amendments apply
|If S is a business||P recognises a gain in profit or loss of 200 on the loss of control (300 - 100).|
|If S is a collection of assets||Because P has a 44% interest in the JV, it eliminates 44% of the gain – i.e. a gain of only 112 is recognised.|
“This addresses a long-standing conflict on transactions with JVs, by creating a new dividing line – namely whether a business has been sold – with an occasionally surprising approach to step-ups.”
Similar to the recent amendments on the acquisition of an interest in a joint operation, the amendments place the focus firmly on the definition of a business.
This definition is key to determining the extent of the gain to be recognised, which places pressure on the judgement applied in making this determination.
The amendments also introduce new, unexpected accounting that involves neither cost nor full step-up of certain retained interests in assets that are not businesses.
IFRS 10 Consolidated Financial Statements now includes an example in which 70% of a subsidiary is sold to an existing associate, but the retained 30% is also stepped up for part, but not all, of the fair value of that 30% holding.
Although complex and conceptually difficult to grasp, this sort of transaction is not frequent.
The effective date for these changes has now been postponed until the completion of a broader review – which the IASB hopes will result in the simplification of accounting for such transactions and of other aspects of accounting for associates and joint ventures. For more on this topic, read the IASB’s press release.
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