Practical Insights into Accounting for change in Ownership Interest in a Subsidiary under IND AS

There could be mainly four scenarios for change in ownership interest over an investee, where the change in ownership interest in the investee leads to:

(1)    dilution of ownership interest that leads to loss of control over a subsidiary;
(2)    dilution of ownership interest, but the control over a subsidiary is retained;
(3)    acquisition of additional ownership interest in an existing subsidiary; and
(4)    acquiring control over the investee that is not a subsidiary at the time of acquisition.

Scenario 2 and 3 as mentioned above relate to dilution of existing interest and acquisition of additional interest, respectively, that does not change the control conclusion i.e., the investee would be classified as a subsidiary before and after the change in ownership interest. As the accounting principles for such transactions are common, we shall combine the scenario 2 and scenario 3 for the purpose of this discussion.

The accounting for change in ownership interest in an investee that is not classified as a subsidiary, associate or joint venture in accordance with Ind AS shall be accounted based on guidance provided under the Ind AS-32 and Ind AS- 39 relating to financial instruments and is beyond the discussion under this article.

Let us consider each of the above scenarios.

Dilution leading to loss of control

Dilution and loss of control

The dilution of ownership interest in a subsidiary may be in the nature of absolute change or a relative change in ownership interest and takes various forms such as:

— the parent selling all or part of its ownership interest in its subsidiary;
— the subsidiary issues shares to third parties, thereby reducing the parent’s ownership interest in the subsidiary.

Such a dilution may lead to loss of control over the subsidiary. However, sometimes the loss of control may not involve change in ownership interest (absolute or relative), but may be effected

through contractual arrangements, such as:

— a contractual agreement that gave control of the subsidiary to the parent expires; or

— substantive participating rights are granted to other parties.

Accounting for loss of control

When a parent loses control of a subsidiary, broadly the following steps are involved in accounting for the loss of control over a subsidiary, whereby the parent:

—  de-recognises the assets (including any good-will) and liabilities of the subsidiary at their carrying amounts in the consolidated financial statements at the date when control is lost;

— de-recognises the carrying amount of any non-controlling interests (NCI) in the subsidiary in the consolidated financial statements at the date when control is lost (including any components of other comprehensive income attributable to them);

— recognises the fair value of the consideration received, if any, from the transaction, event or circumstances that resulted in the loss of control;

— recognises any investment retained in the former subsidiary at its fair value at the date when control is lost;

— reclassifies to profit or loss (or transfers directly to retained earnings if required in accordance with other Ind AS) gain or loss previously recognised in other comprehensive income (OCI); and

— recognises any resulting difference as a gain or loss in profit or loss attributable to the parent.

Based on the above broad steps, there is a two-fold impact for the loss of control in the profit or loss account (i) reclassification of amounts accumulated in the OCI; (ii) loss or gain due to loss of control over subsidiary.

Reclassification from OCI to profit or loss

The amounts accumulated in OCI are transferred to profit or loss account as on losing control, components of other comprehensive income related to the subsidiary’s assets and liabilities are accounted for on the same basis as would be required if the individual assets and liabilities had been disposed of directly.

Loss or gain due to loss of control

If the loss of control is pursuant to sale of all of the parent’s investment in the former subsidiary, then the loss or gain would only comprise of loss or gain on sale of subsidiary.

However, if the parent retains some or all of its investment in the former subsidiary after losing control (i.e., a non-controlling interest), then such investments would be measured at its fair value as at the date of losing control and the impact would be recognised as part of loss or gain in profit or loss account. In such a case, the loss or gain due to loss of control would comprise of two elements i.e.,

—  loss or profit on disposal of subsidiary; and

—  loss or gain on remeasurement of investments to the extent retained at the time of losing control.

Illustration
The above principles can be explained with the help of the following example:

— Company A owns 60% of the shares in Company B.

— On 1 April 2010 A disposes of a 20% interest in B for cash of Rs. 200 and loses control over B.

—  The fair value of the remaining 40% (i.e., 60 – 20) investment is determined to be Rs. 400.

— At the date that A disposes of a 20% interest in B, the carrying amount of the net assets of B is Rs. 875.

— Before allocation to NCI, the OCI included foreign currency translation reserve (FCTR) of Rs. 50 and available-for-sale revaluation reserve (AFS reserve) of Rs. 100 relating to the subsidiary.

— The amount of NCI in the consolidated financial statements of A on 1 April 2010 is Rs. 350. The carrying amount of NCI includes an amount of Rs. 20 and Rs. 40 relating to NCI’s share (i.e., 40%) in the FCTR and AFS reserve, respectively.

A shall record the following entry to reflect its loss of control over B at 1st April 2010:

— the increase in the fair value of the retained 40% investment of Rs. 50 [400 – (875 x 40%)];

— the gain on the disposal of the 20% interest of Rs. 25 [200 – (875 x 20%)],

— the reclassification adjustments for transfer from OCI of Rs. 90 (30 + 60).

The remaining interest of 40% represents the cost on initial recognition of that investment and the subsequent accounting for the said investment would be as per Ind AS-28 (Investment in Associates) or Ind AS-39 (Financial Instruments: Recognition and Measurement), depending upon whether the investee qualifies as an associate.

Change in ownership interest while retaining control

After a parent has obtained control of a subsidiary, it may change its ownership interest in that subsidiary without losing control. This can happen, for example, through the parent buying shares from, or selling shares to, the NCI or through the subsidiary issuing new shares or reacquiring its shares.

Transactions that result in changes in ownership interests while retaining control are accounted for as transactions with equity holders in their capacity as equity holders. As a result, no gain or loss on such changes is recognised in profit or loss; instead it is recognised in equity. Also, no change in the carrying amounts of assets (including goodwill) or liabilities is recognised as a result of such transactions. This approach is consistent with NCI being a component of equity.

The interests of the parent and NCI in the subsidiary are adjusted to reflect the relative change in their interests in the subsidiary’s equity. Any difference between the amount by which NCI are adjusted and the fair value of the consideration paid or received is recognised directly in equity. Similar principles also apply when a subsidiary issues new shares and the ownership interests change due to that issuance.

Broadly, the following steps are involved in accounting for such transactions:

— Calculate the amount of adjustment required in NCI

— Recognise the difference between the adjustment to NCI and consideration, in equity. Illustrations:

The above principles can be explained with the help of the following examples:

Illustration 1: Subsidiary issues fresh shares leading to change in relative interest

— Company B has 100 ordinary shares outstanding and the carrying amount of its equity (net assets) is Rs. 100. S has no other comprehensive income.

—  Company A owns 90% of B, i.e., 90 shares.

— B issues 20 new ordinary shares to a third party for Rs. 40 in cash, as a result of which B’s net assets increase to Rs. 140;

— A’s ownership interest in B reduces from 90% to 75% (A now owns 90 shares out of 120 issued); and

— NCI in B increase from Rs. 10 (100 x 10%) to Rs. 35 (140 x 25%).

Company A records the following entry in its consolidated financial statements to recognise the increase in NCI in B arising from the issue of shares as follows:

— Company A acquired 80% of Company B in a business combination several years ago. A sub-sequently purchases an additional 10% interest in B from third parties for Rs. 300;

—  The carrying value of B’s net assets, NCI and parent’s share of equity was Rs. 1000, Rs. 200 and Rs. 800, respectively.

Consequent to the additional purchase of 10% interest in B, the NCI shall adjusted by Rs. 100 for the 10% interest and the difference between the consideration paid (i.e., Rs. 300) and the adjustment to NCI (i.e., Rs. 100) shall be recognised in equity.

Illustration 3: Sale of interest

— Company A acquired 80% of Company B in a business combination several years ago. A subsequently sells a 20% interest in S for Rs. 300, but retains control of B.

— The carrying value of B’s net assets, NCI and parent’s share of equity was Rs. 1000, Rs. 200 and Rs. 800, respectively.

Consequent to the sale of 20% interest in B, the NCI shall be adjusted (i.e., increase) by Rs. 200 for the 20% interest and the difference between the consideration received (i.e., Rs. 300) and the adjustment to NCI (i.e. difference of Rs. 100) shall be recognised in equity.

Acquisition control over the investee that is not a subsidiary at the time of acquisition

The fourth scenario discussed above is in relation to acquisition of shares in an investee resulting in the investor acquiring control over the investee. Such transactions are covered within Ind AS-103 (Business Combinations) to the extent the investee constitutes a business. If the investee does not constitute a business, then the accounting should be in line with the other applicable Ind ASs. We will cover these in subsequent articles.

Summary

Overall, the implementation of the above guidance would involve exercise of judgment as the accounting for change in ownership interest is dependent on whether the control conclusion has changed. In case the change in ownership interest leads to:

— gaining control over an investee that constitutes a business, then such arrangements are recognised as business combinations as per Ind AS-103;

—  losing of control over an existing subsidiary, then any profit or loss on change of ownership (including fair value movements of retained interest) is recognised as part of profit or loss; and

— any change in absolute or relative interest that does not change the control conclusion in case of a subsidiary, is recognised in equity.