Changes in ownership — Approach under Ind AS

When there is a change (increase or decrease) in parent’s ownership in a subsidiary without loss of control, such change is accounted for as a transaction with owners in their own capacity i.e., any acquisition of minority interest is recorded as a capital transaction.

As a result, no gain or loss on such changes is recognised in the income statement. Also, no change in the carrying amounts of assets (including goodwill) or liabilities is recognised as a result of such transactions. Any difference between the consideration paid and the acquired minority interest is adjusted against reserves.

Example 1

Acquisition by parent of Non-Controlling Interest (NCI) of a subsidiary that has other comprehensive income Company P owns 80% of the shares in Company S. On 1st January 2011, P acquires an additional 10% of S for cash of INR 350. The carrying amount of the NCI in S before the acquisition is INR 500, which includes 100 in respect of the NCI’s portion of gains recognised in other comprehensive income in relation to foreign exchange movements.

In P’s consolidated financial statements the decrease in NCI in S is recorded as follows:

The amounts are based on the following calculation:

Example 2

Disposal of shares in an existing subsidiary without losing control

Company P owns 100% of the shares in Company S. On 1st January 2011, P sells 10% of S for cash of INR 350, thereby reducing its interest to 90%. The carrying amount of the net assets of S (including goodwill) in the consolidated financial statements of P on 1st January 2011 before the sale is INR 3,000. S has no other comprehensive income.

 In P’s consolidated financial statements the sale of the 10% interest in S is recorded as follows:

The amounts are based on the following calculation:

P recognises the difference between the adjustment to the carrying amount of NCI and the fair value of the consideration received directly in equity. No adjustments are made to the recognised amounts of assets, including goodwill, and liabilities.

Example 3

Subsidiary issues new shares — Control retained but ownership interest changes

Company S has 100 ordinary shares outstanding and the carrying amount of its equity (net assets) is INR 400. Company P owns 90% of S, i.e., 90 shares. S has no other comprehensive income. S issues 20 new ordinary shares to a third party for INR 150 in cash, as a result of which:

•  S’s net assets increase to INR 550.
• P’s ownership interest in S reduces from 90% to 75% (P now owns 90 shares out of 120 issued).
•  NCI in S increases from INR 40 (400 x 10%) to INR 137.5 (550 x 25%). In P’s consolidated financial statements the increase in NCI in S arising from the issue of shares is recorded as follows:

P recognises the difference between the adjustment to the carrying amount of NCI and the fair value of the consideration received directly in equity. No adjustments are made to the recognised amounts of assets and liabilities or to goodwill.

One of the common situations under which a subsidiary issues new shares which affect the parent’s percentage holding is when employees exercise share options granted to them under Employee Stock Option Plan (ESOP) schemes. Similar to example 3 above, there is a change in ownership interest but control is retained. Therefore, the accounting treatment in the consolidated financial statements to record the change in shareholding is similar to example 3 above.

B. Control acquired by purchasing additional stake in an existing equity method investment

Sometimes controlling stake in an entity is obtained in stages, for example Entity A acquires 20% of interest in entity B on 1st January 2009 and thereafter on 1st January 2010, entity A acquires another 40%.

In such cases, the fair value of any non-controlling equity interest in the acquiree that is held immediately prior to obtaining control is used in the determination of goodwill, i.e., it is re-measured to fair value at the acquisition date with any resulting gain or loss recognised in profit or loss. The basis of fair valuing the original interest is that the economic nature of the investment changes and hence this is akin to disposing of the original investment and recording a new investment in the books.

In such step acquisitions

• the previously-held non-controlling equity interest is re-measured to its fair value at the acquisition date, with any resulting gain or loss recognised in profit or loss;
•  the acquirer de-recognises the previouslyheld non-controlling equity interest and recognises 100% of the acquiree’s identifiable assets acquired and liabilities assumed; and
• any amounts recognised in other comprehensive income relating to the previously-held equity interest are recognised on the same basis as would be required if the acquirer had disposed of the previously-held equity interest.

 Example 4:

Associate becomes subsidiary

 On 1st January 2011, Company P acquired 30% of the voting ordinary shares of Company S for INR 50,000. P accounts its investment in S under Ind AS-28 Investments in Associates.

At 31st December 2011, P recognised equity accounted earnings of INR 8,500 in profit or loss. The carrying amount of the investment in the associate on 31st December 2011 was therefore INR 58,500 (50,000 + 8,500). On 1st January 2011, P acquires the remaining 70% of S for cash of INR 200,000. At this date the fair value of the 30% interest owned already is INR 70,000 and the fair value of S’s identifiable assets and liabilities is INR 250,000.

The transaction would be accounted for as follows:

Note 1

Calculation of goodwill

Note 2

Calculation of gain on previously held interest in S recognised in profit and loss

Another example where similar accounting treatment as above would be followed is when control is obtained through the acquiree repurchasing its own shares. For example, an investor holds a non-controlling equity investment in an investee. If the investee buys back enough of its own shares such that the investor obtains control of the investee, then the investor company needs to adopt consolidation procedures and account the investee company as a subsidiary i.e., Entity A owns 40% interest in entity B. On 1st January 2011, B repurchases a number of its shares such that A’s ownership interest increases to 65%. The repurchase transaction results in A obtaining control of B.

C.    Dilution of ownership interest by disposal of shares resulting in loss of control

Under Ind AS, when a change in controlling interest results in loss of control (e.g., due to sale of investment in the subsidiary), such a change is accounted for in two parts.

•     Firstly de-recognise the net assets and good-will of the subsidiary and recognise the relating gain or loss in income statement (by comparing it to the fair value of consideration received).

•     Secondly, recognise any balance investment in the former subsidiary at fair value.

Example 5

Subsidiary becomes associate

Entity A owns 60% of the shares in Entity B. On 1st January 2011, Entity A disposes of a 30% interest in Entity B and loses control over Entity B. The consideration received for the sale of shares of Entity B is INR 700. At the date that Entity A disposes of a 30% interest in Entity B, the carrying amount of the net assets of Entity B is INR 2000. The amount of non-controlling interest in the consolidated financial statements of Entity A on 1st January 2011 is INR 800. The fair value of the remaining 30% investment is determined to be INR 700.

Entity A would record the following entry to reflect its disposal of a 30% interest in Entity B at 1st January 2011:

The gain represents the increase in the fair value of the retained 30% investment of INR 100 [700 — (30% x 2,000)], plus the gain on the sale of the 30% interest disposed of INR 100 [700 — (30% x INR 2,000)].

The remaining interest of 30% represents an associate, the fair value of INR 700 represents the cost on initial recognition and Ind AS 28 — Account