Issue
Consider the following example.
Parent (P) sells wholly owned Subsidiary (S) to Associate (A). The structure before and after sale is given
below.
In P’s CFS, the carrying amount of
the net assets of S at the date of the sale is INR 10,000. For simplicity, assume S has no accumulated
balance of OCI. The fair value of S and the selling price is INR 18,000, which
is the consideration received by P in cash. P recognises a profit of INR 8,000
on the sale of S in CFS.
The next step is to determine how
much of this profit of INR 8,000 is required to be eliminated on
consolidation. Essentially, there are
two approaches, which are explained below.
Ind AS 110 Approach
Paragraph 25 of Ind AS 110 –
Consolidated Financial Statements states as follows:
If a parent loses control of a
subsidiary, the parent:
a) Derecognises the assets and
liabilities of the former subsidiary from the consolidated balance sheet.
b) Recognises any investment
retained in the former subsidiary at its fair value when control is lost and
subsequently accounts for it and for any amounts owed by or to the former
subsidiary in accordance with relevant Ind ASs. That fair value shall be
regarded as the fair value on initial recognition of a financial asset in
accordance with Ind AS 109 or, when appropriate, the cost on initial
recognition of an investment in an associate or joint venture.
c) Recognises the gain or loss associated
with the loss of control attributable to the former controlling interest.
If P applies the Ind AS 110
approach, then it recognizes the full profit on the sale of S. The amount
included in the carrying amount of A for the sale of S in P’s CFS is INR 4,500
(18,000 x 25%)
Ind AS 28 Approach
Paragraph 28 of Ind AS 28 – Investments
in Associates and Joint Ventures states as follows:
Gains and losses resulting from
‘upstream’ and ‘downstream’ transactions between an entity (including its
consolidated subsidiaries) and its associate or joint venture are recognised in
the entity’s financial statements only to the extent of unrelated investors’
interests in the associate or joint venture. ‘Upstream’ transactions are, for
example, sales of assets from an associate or a joint venture to the investor.
‘Downstream’ transactions are, for example, sales or contributions of assets
from the investor to its associate or its joint venture. The investor’s share
in the associate’s or joint venture’s gains or losses resulting from these
transactions is eliminated.
If P applies the Ind AS 28
approach, then it eliminates 25% of the profit recognised on the sale of S
against the carrying amount of the investment in A. The amount included in the
carrying amount of A for the sale of S in P’s CFS is INR 2,500 [(18,000 x 25%)
– (8000 x 25%)]
P records the following entries in
its CFS for the transaction and the subsequent elimination
|
|
Debit
|
Credit
|
|
Cash
Net assets of S
Gain on sale ( P & L)
(To recognise sale of S)
|
18,000
|
10,000
8,000
|
|
Gain on sale (P & L) 8000 x 25%
Investment in associate
(To recognise elimination of 25% of profit on sale of $
|
2,000
|
2,000
|
The
amount included in the carrying amount of A for the net assets of S in P’s
consolidated financial statements, after elimination. is INR 2,500 (18,000 x
25% – 2,000). This equals to the carrying amount of the net assets of S in P’s
CFS before the sale, which was INR 2,500 (10,000 x 25%).
Author’s view
Both approaches discussed above
are acceptable, as both are supported by the respective standards.
In September 2014, the IASB issued
amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an
Investor and its Associate or Joint Venture. The amendments address the
conflict between the requirements of IAS 28 and IFRS 10 Consolidated
Financial Statements regarding non-monetary contributions in exchange for
an interest in an equity-method investee.
The September 2014 amendments are
designed to address this conflict and eliminate the inconsistency; by requiring
different treatments for the sale or contribution of assets that constitute a
business and of those that do not.
When a non-monetary asset that
does not constitute a business as defined in IFRS 3 Business Combinations,
is contributed to an associate or a joint venture in exchange for an equity
interest in that associate or joint venture:
– The
transaction should be accounted for in accordance with IAS28.28, except when
the contribution lacks commercial substance; and
– Unrealised
gains and losses should be eliminated against the investment accounted for
using the equity method and should not be presented as deferred gains or losses
in the entity’s CFS in which investments are accounted for using the equity
method.
The gain or loss resulting from a
downstream transaction involving assets that constitute a business, as defined
in IFRS 3, between an entity and its associate or joint venture is recognised
in full in the investor’s CFS.
However, the IASB identified
several practical challenges with the implementation of the amendments. Consequently, the IASB has issued a proposal
to defer the effective date of the September 2014 amendments pending
finalisation of a larger research project on the equity method of accounting.
Conclusion
Till such time the IASB takes a final decision,
and is followed up by appropriate amendments in Ind AS’s, both approaches
discussed above with respect to elimination of profits on sale of subsidiary to
the associate are acceptable under Ind AS.
