Section 9 – 9.10 Acquisition and Disposal of Subsidiaries

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Section 9 – Consolidated and Separate Financial Statements

9.1 Scope

9.2 Requirement to present consolidated financial statements

9.2.1 Extract from FRS102: Section 9.2-9.3

9.2.2 OmniPro comment

9.2.2.1 No exception on the basis of activities being dissimilar or causing undue cost of effort

9.3 Definition of a subsidiary

9.3.1. Extract from FRS102: Section 9.4-9.6 and Section 9.8A

9.3.2.1 Definition of a parent

9.3.2.2 Definition of a subsidiary and control

9.3.2.2.1 Strategic, financial and operating decisions

9.3.2.2.2 Interpretation of benefits to be obtained as a result of power to control

9.3.2.2.3 Power to control even if not exercise

9.3.2.3 Potential voting rights

9.3.2.4 Less than 50% of share capital held but still have control

9.3.2.5 Greater than 50% of share capital owned but still not have control

9.3.2.6 Agreement entered into by a party with other shareholders

9.3.2.7 Shares held in bare trust

9.4 Subsidiaries excluded from consolidation

9.4.1 Extract from FRS102: Section 9.9-9.9B

9.4.2 OmniPro Comment

9.4.2.1 a) Long term restrictions

9.4.2.1.1 Accounting policy choice

9.4.2.2 b) Subsidiary held with a view to a subsequent sale

9.4.2.2.1 Accounting requirements

9.5 Special purpose entities

9.5.1 Extract from FRS102: Section 9.10-9.12

9.5.2 OmniPro comment

9.6 Consolidation procedures

9.6.1 Extract from FRS102: Section 9.13 – 9.14

9.6.2 OmniPro comment – The Subsidiary

9.6.2.1 Process of consolidation

9.6.2.3 Allocation to non-controlling interests where options are exercisable

9.7 Intragroup balances and transactions

9.7.1 Extract from FRS102: Section 9.15

9.7.2 OmniPro comment

9.7.2.1 Overview

9.7.2.2 Deferred tax

9.7.2.3 Eliminating intra group transactions 100% owned – not in inventory at year end

9.7.2.4 Eliminating intra group transactions 100% owned – in inventory at year end

9.7.2.5 Eliminating intra group transactions not 100% owned – not in inventory at year end

9.7.2.6 Eliminating intra group transactions not 100% owned – some in inventory at year end

9.7.2.7 Year-end intra-group balance

9.7.2.8 Intra-group balances – sale of fixed assets within a group

9.7.2.9 Transactions between subsidiaries not consolidated

9.7.2.10 Elimination of notional amounts on intercompany/group loans not at market rates

9.7.2.11 Elimination of Intergroup dividends

9.7.2.12 Restatement of investment property to PPE for group purposes

9.8 Uniform reporting date and reporting period

9.8.1 Extract from FRS102: Section 9.16

9.8.2 OmniPro comment

9.9 Uniform accounting policies

9.9.1 Extract from FRS102: Section 9.17

9.9.2 OmniPro comment

9.10 Acquisition and disposal of subsidiaries

9.10.1 Extract from FRS102: Section 9.18-9.19D

9.10.2 OmniPro comment

9.10.2.1 Overview

9.10.2.2 Accounting for an acquisition where control is achieved in one transaction

9.10.2.3 Accounting for an acquisition where control is achieved in stages

9.10.2.4 Acquisitions where controlling interest is increased

9.10.2.5 Disposals where controlling interest is still retained

9.10.2.6 Disposal of a subsidiary where control is lost fully

9.10.2.6.1 Control lost but less than controlling interest still held

9.10.2.6.2 Indicators that control is lost
(see further details of how control is attained and by definition how control could be lost at 9.3.2)

9.11 Non-controlling interest in subsidiaries

9.11.1 Extract from FRS102: Section 9.20-9.22

9.11.2 OmniPro comment

9.12 Transferring a business within a group

9.12.1 OmniPro comment

9.13 Intermediate payment arrangements

9.13.1 Extract from FRS102: Section 9.33-9.38

9.13.2 OmniPro comment

9.14 Individual and separate financial statements

9.14.1 Extract from FRS102: Section 9.23A-9.26A

9.14.2 OmniPro comment

9.14.2.1 Overview and accounting policy choices

9.14.2.2 Fair Value through Profit and Loss Account

9.14.2.3 Fair Value through Other Comprehensive IncomeExample 18B: Adoption of fair value through other comprehensive income on transition

9.15 Disclosures requirements

9.15.1 Disclosures in consolidated financial statements

9.15.1.1 Extract from FRS102: Section 9.23

9.15.1.2 OmniPro comment

9.15.1.2.1 Accounting Policies

9.15.1.2.1.1 Basis of consolidation

9.15.1.2.1.2 Subsidiary undertakings

9.15.1.2.1.3 Associates and joint ventures

9.15.1.2.1.4 Transactions eliminated on consolidation

9.15.1.2.1.5 Business combinations and goodwill

9.15.1.2.1.6 Goodwill

9.15.1.2.1.7 Impairment

9.15.1.2.1.8 Intangible assets

9.15.1.2.1.9 Contingent acquisition consideration

9.15.1.2.2 Notes to the Financial Statements

9.15.1.2.2.1 Business combinations.

9.15.1.2.2.2 Financial assets – Group disclosure.

9.15.1.2.2.3 Financial assets note for the parent company in the consolidated financial statements.

9.15.1.2.2.4 Contingent consideration note.

9.15.1.2.3 Consolidated Profit and Loss account and other comprehensive income sharing split between controlling and non-controlling interest.

9.15.1.2.4 Changes in Equity showing the movement on the cash flow hedge reserve in line with Section 9 and Section 12 disclosure requirements.

9.15.1.2.5 Extract from the consolidated Balance Sheet for negative goodwill and also showing non-controlling interest.

9.15.2 Disclosures in separate financial statements.

9.15.2.1 Extract from FRS102: Section 9.27.

9.15.2.2 OmniPro comment.

9.15.2.2.1 Accounting Policies.

9.15.2.2.1.1 Consolidated accounts.

9.15.2.2.1.2 Investments.

9.15.2.2.1.3 Dividend income.

9.15.2.2.1.4 Goodwill.

9.15.2.2.1.5 Intangible assets.

9.15.2.2.1.6 Contingent acquisition consideration.

9.15.2.2.2. Notes to the financial statements.

9.15.2.2.2.1 Intangible assets.

9.15.2.2.2.2 Investments.

9.15.2.2.2.3 Extract from the notes in the consolidated financial statements – negative goodwill.

9.15.2.2.3 Profit and Loss account.

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9.10 Acquisition and disposal of subsidiaries

9.10.1 Extract from FRS102: Section 9.18-9.19D

9.18 The income and expenses of a subsidiary are included in the consolidated financial statements from the acquisition date, except when a business combination is accounted for by using the merger accounting method under Section 19 or, for certain public benefit entity combinations, Section 34 Specialised Activities. The income and expenses of a subsidiary are included in the consolidated financial statements until the date on which the parent ceases to control the subsidiary. A parent may cease to control a subsidiary with or without a change in absolute or relative ownership levels. This could occur, for example, when a subsidiary becomes subject to the control of a government, court, administrator or regulator.

Disposal – where control is lost

9.18A Where a parent ceases to control a subsidiary, a gain or loss is recognised in the consolidated statement of comprehensive income (or in the income statement if presented) calculated as the difference between:

(a) the proceeds from the disposal (or the event that resulted in the loss of control);

AND

(b) the proportion of the carrying amount of the subsidiary’s net assets, including any related goodwill, disposed of (or lost) as at the date of disposal (or date control is lost).

The cumulative amount of any exchange differences that relate to a foreign subsidiary recognised in equity in accordance with Section 30 Foreign Currency Translation is not recognised in profit or loss as part of the gain or loss on disposal of the subsidiary and shall be transferred directly to retained earnings.

9.18B The gain or loss arising on the disposal shall also include those amounts that have been recognised in other comprehensive income in relation to that subsidiary, where those amounts are required to be reclassified to profit or loss upon disposal in accordance with other sections of this FRS. Amounts that are not required to be reclassified to profit or loss upon disposal of the related assets or liabilities in accordance with other sections of this FRS shall be transferred directly to retained earnings.

9.19 If an entity ceases to be a subsidiary but the investor (former parent) continues to hold:

(a) an investment that is not an associate (see paragraph 9.19(b)) or a jointly controlled entity (see paragraph 9.19(c)), that investment shall be accounted for as a financial asset in accordance with Section 11 Basic Financial Instruments or Section 12 Other Financial Instruments Issues from the date the entity ceases to be a subsidiary;

(b) an associate, that associate shall be accounted for in accordance with Section 14 Investments in Associates; or

(c) a jointly controlled entity, that jointly controlled entity shall be accounted for in accordance with Section 15 Investments in Joint Ventures.

The carrying amount of the net assets (and goodwill) attributable to the investment at the date that the entity ceases to be a subsidiary shall be regarded as the cost on initial measurement of the financial asset, investment in associate or jointly controlled entity, as appropriate. In applying the equity method to investments in associate or jointly controlled entities as required in sub-paragraphs (b) and (c) above, paragraph 14.8(c) shall not be applied.

Disposal – where control is retained

9.19A Where a parent reduces its holding in a subsidiary and control is retained, it shall be accounted for as a transaction between equity holders and the resulting change in non-controlling interest shall be accounted for in accordance with paragraph 22.19. No gain or loss shall be recognised at the date of disposal.

Acquisition – Control achieved in stages

9.19B Where a parent acquires control of a subsidiary in stages, the transaction shall be accounted for in accordance with paragraphs 19.11A and 19.14 applied at the date control is achieved.

Acquisition – Increasing a controlling interest in a subsidiary

9.19C Where a parent increases its controlling interest in a subsidiary, the identifiable assets and liabilities and a provision for contingent liabilities of the subsidiary shall not be revalued to fair value and no additional goodwill shall be recognised at the date the controlling interest is increased.

9.19D The transaction shall be accounted for as a transaction between equity holders and the resulting change in non-controlling interest shall be accounted for in accordance with paragraph 22.19.

9.10.2 OmniPro comment

9.10.2.1 Overview

Section 9.18 of FRS 102 makes it clear that only results achieved since acquiring control are recognised in the consolidated financial statements. Likewise, when control is lost, the results of the subsidiary are only included up to the date of disposal. This is not the case where merger accounting is applied. If merger accounting is applied then the consolidated accounts include the results from the start of the comparative period.

9.10.2.2 Accounting for an acquisition where control is achieved in one transaction

Section 19 –Business combinations and goodwill deals with the requirement to determine the goodwill and fair value of assets and liabilities at the date of acquisition. See Section 19 of this website for further details.

The journals usually required on consolidation where a 100% interest was obtained would be:

	CU	CU
Dr Goodwill	XXX
Dr Fair Value of Net Asset of Company B	XXX
Cr Investment in the Individual Entity Financial Statements		XXX

The journals usually required on consolidation where a 100% interest was not obtained would be (assuming positive net assets and goodwill):

	CU	CU
Dr Goodwill	XXX
Dr Net Asset of Company B	XXX
Cr Investment in the Individual Entity Financial Statements		XXX
Cr Non-Controlling Interest in Equity (carrying value of net asset –note fair value*XX% of non-controlling interest retained)		XXX

Where consolidation is performed in excel and the results of each subsidiary added to come to the consolidated numbers (i.e. the P&L, balance sheet etc.) then below journal would be required:

	CU	CU
Dr Goodwill	XXX
Dr Ordinary Share Capital of Company B	XXX
Dr Profit and Loss Reserves	XXX
Cr Investment in the Individual Entity Financial Statements		XXX
Cr Non-Controlling Interest in Equity (carrying value of net asset –note fair value*XX% of non-controlling interest retained)		XXX

9.10.2.3 Accounting for an acquisition where control is achieved in stages

Section 9.19B of FRS 102 provides where the control is achieved in stages then the rules in Section 19.11 to 19.14 of FRS 102 must be followed. See the application of these rules below.

Example 14: Business combination achieved in stages

Company A acquired 5% of Company B for CU50,000 at the start of year 1. At the end of year 2 Company A acquired a further 30% for CU100,000 giving significant influence. At the end of year 3 a further 50% was acquired for CU110,000. At the time of the 50% acquisition the fair value of the net assets was CU200,000 which equaled the net asset value. The carrying amount of the associate holding on the consolidated balance sheet at the end of year 3 was CU170,000 being the net assets of Company B at that time (difference between CU150,000 cost and the CU170,000 is the profit share for the 3 years).

In this example we have ignored any profit earned since acquisition as an associate or amortisation on deemed goodwill when significant influence was acquired.

Goodwill is Calculated in Accordance 19.11A as follows:

Cost of Acquisition of first 5% of Company B	CU50,000
Cost of Acquisition of second 30% of Company B	CU100,000
Cost of Acquisition of third 50% of Company B	CU110,000
Total Cost of Investment on Acquiring Control	CU260,000
Total portion of the fair value of Company B acquired on obtaining control at the end of year 3 (CU200,000*(50%+30%+5%)	(CU170,000)
Total goodwill to be recognised	CU90,000

The journal required on acquisition of control at the end of year 3 is:

	CU	CU
Dr Goodwill	90,000
Dr Net Asset of Company B	200,000
Cr Associate Investment in Company B in Consolidated Balance Sheet		170,000
Cr Bank		110,000
Dr Other Comprehensive Income	20,000*
Cr Non-Controlling Interest in Equity (CU200,000*15%)		30,000

*this difference is the difference between the previous cash paid prior to obtaining control of CU150,000 and the share of the net assets at the date control is obtained of CU170,000. As it is not a profit or loss it is posted to OCI.

9.10.2.4 Acquisitions where controlling interest is increased

Under Section 9.19C to 9.19D of FRS 102, an increase in a controlling interest is accounted for as an equity transaction and no goodwill is recognised and no fair valuing of assets and liabilities are required. Transaction costs associated with the acquisition should also be posted against equity.

Example 15: Acquiring a further controlling interest

Parent A previously owned 55% of Company B which was consolidated in the financial statements. At the time of acquisition of the 55% its fair value of net assets was CU500,000 which was equal to book value. The purchase cost was CU300,000. The goodwill recognised was CU25,000 (CU500,000*55%=CU275,000-CU300,000). During the year the company acquired a further 25% from the non-controlling interest for CU220,000. The fair value of the net assets of Company B at the date of acquisition of the additional 25% was CU800,000 (the NBV of the net assets was CU700,000). The carrying amount of the 45% non-controlling interest in the consolidated financial statements was CU250,000 at the date of purchase of the 25% interest.

The journals posted in the parent individual TB would be:

	CU	CU
Dr Investment in Subsidiary	220,000
Cr Bank		220,000

The journals required to account for this transaction in the consolidated financial statements are:

	CU	CU
Dr Equity -Profit and Loss Reserves (CU220,000-CU138,889)	81,111
Dr Equity-Non Controlling Interest (CU250,000/45 being original amount owned by the MI *25 being the amount disposed of)	138,889
Cr Investment in Subsidiary		220,000

Being journal to reflect the acquisition as an equity transaction

Example 16: Acquiring a further controlling interest to get 100% ownership

Parent A previously owned 55% of Company B which was consolidated in the financial statements. During the year the company acquired the remaining 45% from the non-controlling interest for CU1,300,000. The non-controlling interest shown in the financial statements prior to the acquisition was CU1,000,000. The journals posted in the parent individual TB would be:

	CU	CU
Dr Investment in Subsidiary	1,300,000
Cr Bank		1,300,000

The journals required to account for this transaction in the consolidated financial statements are:

	CU	CU
Dr Equity -Profit and Loss Reserves (CU1,300,000 – CU1,000,000)	300,000
Dr Equity-Non Controlling Interest	1,000,000
Cr Investment in Subsidiary		1,300,000

Being journal to reflect this as an equity transaction

Example 16A: Acquiring a further controlling interest but 100% interest still not attained

During the year Parent Co. acquired a further 10% of Subsidiary A from the non-controlling interest for €220,000 to increase the holding from 55% to 65%. The fair value of the net assets of Subsidiary A at the date of acquisition of the additional 10% was €800,000 (the book amount of the net assets was €500,000). The carrying amount of the 45% non-controlling interest in the consolidated financial statements was €350,000 at the date of purchase of the 10% interest.

The journals required to account for this transaction in the consolidated financial statements are:

	€	€
Dr Equity -Profit and Loss Reserves (€220,000-€77,778)	142,222
Dr Equity-Non Controlling Interest (€350,000/45 being original amount owned by the MI *10 being the amount disposed of)	77,778
Cr Investment in Subsidiary A		220,000

Being journal to reflect the acquisition as an equity transaction

9.10.2.5 Disposals where controlling interest is still retained

Under Section 9.19A of FRS 102, where a disposal results in the controlling interest still being retained, this is treated as an equity transaction. No gain or loss is recognised on disposal. Transaction costs associated with the disposal should also be posted against equity. The carrying amount of the non-controlling interest is adjusted to reflect the change in the parent’s interest in the subsidiary’s net assets. Any difference between the amount by which the non-controlling interest is so adjusted and the fair value of the consideration paid or received, if any should be recognised in equity. See illustration below

Example 17: Disposing of controlling interest but controlling interest retained

Parent A previously owned 100% of Company B which was consolidated in the financial statements. During the year the company disposed of 25% to a third party for CU300,000. The original cost of the investment in the individual entity accounts was CU1,300,000. The net assets of the subsidiary at the date of disposal was CU800,000 plus goodwill of CU50,000 in the consolidated accounts.

The journals posted in the parent individual TB would be:

	CU	CU
Dr Loss on Disposal	25,000
Dr Bank	300,000
Cr Investment in Subsidiary (CU1,300,000*25%)		325,000

The journals required to account for this transaction in the consolidated financial statements are:

	CU	CU
Dr Investment in Subsidiary	300,000
Cr Equity -Profit and Loss Reserves (CU300,000-CU212,500)		87,500
Cr Equity-Non Controlling Interest (CU850,000*25%)		212,500

Being journal to reflect disposal as an equity transaction assuming usual goodwill journals were posted.

9.10.2.6 Disposal of a subsidiary where control is lost fully

Section 9.18A to 9.19 of FRS 102 provides the rules where control is lost. Effectively a profit or loss is recognised in the consolidated P&L for the difference between the carrying around of assets/liabilities in the consolidated financial statements and the amount of proceeds received. Note any foreign exchange reserve created where it relates to a foreign subsidiary cannot be included in any gain or loss, instead it is shown merely as a transfer between retained earnings and the foreign currency translation reserve.

9.10.2.6.1 Control lost but less than controlling interest still held

Where a parent loses control but it still holds an interest, then under Section 9.19 of FRS 102 the following applies in the consolidated financial statements:

the carrying amount including goodwill in the consolidated financial statements at the date control is lost becomes the cost of the investment after applying the percentage that remains.
How this reduced investment is accounted for in the consolidated financial statements going forward depends on whether it represents an associate, joint venture or less than a significant interest held. If an associate/JV interest is held, then the equity method of accounting as detailed in Section 14 and 15 of FRS 102 If less than a significant interest is held then the rules in Section 11 must be followed (fair valued with movements recognised in the consolidated P&L unless it cannot be reliably measured in which case it would be held at cost less impairment).

9.10.2.6.2 Indicators that control is lost

Instances indicating control is lost are:

sale of the parent of all or part of its investment such that it owns less than 50% of the voting rights
a power of veto is given to a third party
another party gets access to appoint and remove directors from the board
an agreement is entered into with the non-controlling party such that joint control exists
insolvency

(see further details of how control is attained and by definition how control could be lost at 9.3.2)

See application of the above guidance in the example below.

Example 18: Disposal of a subsidiary where control is lost

Parent A previously owned 100% of Company B. During the year the company sold 80% of the interest to a third party for CU100,000.

The original cost of the investment when acquired in the Parent entity financial statements was CU50,000.

Assume the net assets of the subsidiary including goodwill in the consolidated financial statements at the date of disposal was CU80,000.

The journals required in the consolidated financial statements are:

	CU	CU
Dr Bank (CU80,000*20%)	100,000
Cr Net Assets of Subsidiary inc Goodwill in Consolidated Accounts		80,000
Dr Investment in associate (CU80,000*20%)	16,000
Cr Profit on Disposal of Subsidiary in P&L		36,000*