11.5 Disposal of a Subsidiary and Loss of Control
Key Takeaways
- The FR syllabus restricts subsidiary disposals to the sale of the parent's entire investment, so control is always lost and no part-disposal accounting is required.
- The consolidated statement of profit or loss includes the subsidiary's results only up to the date control is lost, time-apportioned where the disposal falls mid-year.
- The group gain or loss on disposal is proceeds plus the non-controlling interest at the disposal date, less the subsidiary's net assets and the unimpaired goodwill at that date.
- The parent's own separate financial statements report a different gain, being proceeds less the cost of the investment, because they never recognised goodwill or post-acquisition profits.
- Where the subsidiary is a separate major line of business or geographical area, its result and the disposal gain are presented together as a single discontinued operations figure.
11.5 Disposal of a Subsidiary and Loss of Control
Scope note: The FR study guide requires you to explain and illustrate the effect of the disposal of a parent's investment in a subsidiary in the parent's individual financial statements and/or those of the group, including as a discontinued operation — and it adds an important restriction: disposals are restricted to the disposal of the parent's entire investment in the subsidiary. You will never be asked in FR to account for a part-disposal that leaves a retained associate or a retained financial asset. Control is always lost in full. That restriction removes most of the complexity and leaves one working to master.
1. Two Sets of Financial Statements, Two Different Gains
The single most common error in this topic is answering the wrong question. A disposal produces two entirely different gains, computed on different bases, and the requirement will tell you which one it wants.
+-------------------------------------+ +-------------------------------------+
| THE PARENT'S OWN (SEPARATE) | | THE CONSOLIDATED FINANCIAL |
| FINANCIAL STATEMENTS | | STATEMENTS |
+-------------------------------------+ +-------------------------------------+
| The investment was carried at COST | | The group recognised the |
| (or at fair value, or under the | | subsidiary's NET ASSETS, its |
| equity method) under IAS 27. | | GOODWILL and, each year, its share |
| | | of POST-ACQUISITION PROFITS. |
| | | |
| Gain = PROCEEDS | | Gain = PROCEEDS |
| - COST OF INVESTMENT | | + NCI at disposal date |
| | | - net assets at that date |
| | | - goodwill at that date |
+-------------------------------------+ +-------------------------------------+
The group gain is almost always the smaller of the two, because the group has already recognised its share of the subsidiary's post-acquisition profits in consolidated retained earnings, year by year. The parent's separate statements recognised none of that, so the whole accumulated value appears at once as a disposal gain.
2. How Long Is the Subsidiary Consolidated For?
Up to the date control is lost, and not a day longer. Where the disposal occurs part-way through the year:
- The consolidated statement of profit or loss includes the subsidiary's income and expenses time-apportioned to the disposal date, on the usual assumption that they accrue evenly unless the scenario says otherwise;
- The non-controlling interest's share of profit is calculated on that same apportioned figure;
- The consolidated statement of financial position at the year end includes none of the subsidiary's assets or liabilities — they have gone. What appears instead is the cash proceeds received;
- Intra-group balances and transactions are eliminated only up to the disposal date.
[!WARNING] The statement of financial position and the statement of profit or loss disagree on purpose. Candidates who consolidate nine months of Selby's revenue and then also include Selby's year-end receivables have mixed the two rules. After disposal the subsidiary is simply gone from the group balance sheet.
3. The Group Gain or Loss Working
GROUP PROFIT OR LOSS ON DISPOSAL OF A SUBSIDIARY $
---------------------------------------------------------------------------
Fair value of consideration received X
Add: Non-controlling interest at the date of disposal X
Less: Net assets of the subsidiary at the date of disposal (X)
Less: Goodwill at the date of disposal (cost less cumulative
impairment recognised to that date) (X)
---------------------------------------------------------------------------
Group profit / (loss) on disposal X
===========================================================================
Why each line is there
| Line | Reason |
|---|---|
| Consideration received | What the group actually obtained in exchange for giving up control |
| Add NCI at the disposal date | The group is derecognising the subsidiary's whole net assets, not just its own share. The NCI balance represents the portion of those net assets that never belonged to the group, so it is added back to avoid charging the group with a loss of value it never owned |
| Less net assets at the disposal date | The assets and liabilities that leave the group. Remember to include the unamortised effect of any fair value adjustments recognised at acquisition — those form part of the group's carrying amount of the subsidiary's net assets even though they never appear in the subsidiary's own books |
| Less goodwill at the disposal date | Goodwill disappears with the subsidiary. Use the carrying amount, that is, goodwill at acquisition less any impairment already recognised |
Computing the NCI figure at the disposal date
The NCI balance is the usual Working 4, rolled forward to the disposal date:
NCI at acquisition (at fair value, or at the proportionate share
of net assets at acquisition) X
Add: NCI% x post-acquisition movement in the subsidiary's net
assets, up to the disposal date X
Less: NCI share of goodwill impairment (only where NCI was measured
at FAIR VALUE -- under the proportionate method the NCI bears none) (X)
---------------------------------------------------------------------------
NCI at the date of disposal X
4. Presentation: When It Is a Discontinued Operation
If the subsidiary represents a separate major line of business or geographical area of operations, or was acquired exclusively with a view to resale, its disposal meets the IFRS 5 definition of a discontinued operation (see section 9.4). In that case:
- The subsidiary's post-tax result to the disposal date and the post-tax group gain or loss on disposal are combined into the single discontinued operations figure that IFRS 18 places in its own profit or loss category;
- An analysis of that single amount is given on the face of the statement or in the notes;
- The prior period comparative statement of profit or loss is re-presented so that the same operation is shown as discontinued in both years.
If the subsidiary is not a separate major line of business — the sale of one of eight similar trading subsidiaries in the same market, for example — there is no discontinued operation. The results are consolidated to the disposal date within continuing operations and the disposal gain is presented within the appropriate category, with separate disclosure if it is material.
5. Worked Example
Scenario — Marchmont plc, year ended 31 December 20X6
- Marchmont acquired 80% of Selby Co on 1 January 20X1 for $3,400,000 cash, when the fair value of Selby's identifiable net assets was $3,600,000. Marchmont elected to measure the non-controlling interest at its fair value of $850,000 at the acquisition date.
- Cumulative impairment of the goodwill recognised up to the date of disposal was $150,000.
- Selby's net assets at 1 January 20X6 were $5,200,000. Selby's profit after tax for the year to 30 September 20X6 was $720,000, accruing evenly, and Selby paid no dividends.
- On 30 September 20X6 Marchmont sold its entire 80% holding for $6,200,000 cash. Selby was Marchmont's only healthcare business, the rest of the group being an engineering operation, and therefore represents a separate major line of business.
Step 1: Goodwill at acquisition and at the disposal date
Consideration transferred 3,400,000
Add: NCI at fair value at acquisition 850,000
---------
4,250,000
Less: Fair value of identifiable net assets at acquisition (3,600,000)
---------
Goodwill at acquisition 650,000
Less: Cumulative impairment to the disposal date (150,000)
---------
Goodwill at the date of disposal 500,000
Step 2: Selby's net assets at the disposal date
Net assets at 1 January 20X6 5,200,000
Add: Profit for the 9 months to 30 September 20X6 720,000
---------
Net assets at 30 September 20X6 5,920,000
Step 3: Non-controlling interest at the disposal date
NCI at acquisition (fair value) 850,000
Add: NCI 20% x post-acquisition movement in net assets
20% x ($5,920,000 - $3,600,000) = 20% x $2,320,000 464,000
Less: NCI 20% share of goodwill impairment (NCI measured at
fair value, so it bears its share) 20% x $150,000 (30,000)
---------
NCI at 30 September 20X6 1,284,000
Step 4: The group profit on disposal
Fair value of consideration received 6,200,000
Add: NCI at the date of disposal 1,284,000
---------
7,484,000
Less: Net assets of Selby at the date of disposal (5,920,000)
Less: Goodwill at the date of disposal (500,000)
---------
GROUP PROFIT ON DISPOSAL 1,064,000
=========
Step 5: The gain in Marchmont's own separate financial statements
Proceeds 6,200,000
Less: Cost of the investment in Selby (3,400,000)
---------
PROFIT ON DISPOSAL IN THE PARENT'S OWN STATEMENTS 2,800,000
=========
Step 6: Reconciling the two figures
The difference of $1,736,000 is not an error; it is the value the group had already recognised.
Parent's separate gain 2,800,000
Less: Group's share of Selby's post-acquisition retained profits,
already recognised in consolidated reserves
80% x ($5,920,000 - $3,600,000) = 80% x $2,320,000 (1,856,000)
Add: Group share of goodwill impairment already charged to
consolidated profit or loss 80% x $150,000 120,000
---------
Group gain 1,064,000
Step 7: Presentation in the consolidated statement of profit or loss
Selby is a separate major line of business, so it is a discontinued operation.
MARCHMONT PLC -- CONSOLIDATED STATEMENT OF PROFIT OR LOSS (extract), year ended 31 Dec 20X6
CONTINUING OPERATIONS
... the engineering business only ...
Profit for the year from continuing operations X
DISCONTINUED OPERATIONS
Profit for the year from discontinued operations 1,784,000
PROFIT FOR THE YEAR X
Analysis of the discontinued operations figure (note):
Profit after tax of Selby for the 9 months to 30 September 20X6 720,000
Group profit on disposal of Selby 1,064,000
---------
1,784,000
Profit attributable to:
Owners of the parent (continuing X) + (1,784,000 - 144,000) = X + 1,640,000
Non-controlling interest 20% x $720,000 for the 9 months to disposal = 144,000
The consolidated statement of financial position at 31 December 20X6 contains none of Selby's assets or liabilities and no goodwill in respect of Selby. The $6,200,000 of cash proceeds is included in cash and cash equivalents, and the receipt is presented as an investing cash inflow in the consolidated statement of cash flows.
6. Common Exam Traps
[!WARNING] Trap 1: Omitting the NCI from the working. Forgetting to add the NCI at the disposal date understates the group gain by the NCI balance, which in this example would have cost $1,284,000 — the single largest error available in the question.
[!WARNING] Trap 2: Using goodwill at acquisition instead of the carrying amount. Goodwill leaves the group at its impaired carrying amount. Using the acquisition figure double-counts impairment already charged.
[!WARNING] Trap 3: Consolidating the subsidiary for the full year. Income and expenses are included only to the date control is lost. Twelve months of revenue against a mid-year disposal contradicts the gain calculation in the same answer.
[!WARNING] Trap 4: Reporting the parent's separate gain as the group gain. Read the requirement. "In the consolidated financial statements" and "in the parent's own financial statements" ask for two different numbers, and a well-set question asks for both so that it can test whether you understand why they differ.
[!TIP] Lay the working out vertically every time, even under time pressure. Proceeds, add NCI, less net assets, less goodwill. Four lines, four marks, and the method marks are available even if one of the component figures is wrong under the own-figure rule.
Ampleforth plc disposed of its entire 75% holding in Kirkby Co on 30 June 20X6, its year end being 31 December 20X6. Kirkby's revenue for the full year to 31 December 20X6 was $12,000,000, accruing evenly, and Kirkby's trade receivables at 31 December 20X6 were $1,900,000. What amounts in respect of Kirkby should appear in Ampleforth's consolidated financial statements for the year?
Hovingham plc sold its entire 70% investment in Thirsk Co for $5,000,000. At the date of disposal Thirsk's net assets were $4,800,000, the goodwill arising on acquisition was $900,000 of which $200,000 had been impaired, and the non-controlling interest stood at $1,560,000. What is the group profit or loss on disposal?
Easingwold plc bought 60% of Malton Co several years ago for $2,000,000 and sells the entire holding for $7,500,000. In the consolidated financial statements the group records a profit on disposal of $1,900,000. Why does the parent's own separate statement of profit or loss report a much larger gain of $5,500,000?