Chapter

20

Group disposals
Chapter learning objectives

Upon completion of this chapter you will be able to:

• explain how a disposal is treated in the parent company

financial statements
• explain how a disposal is treated in the consolidated financial
statements
• account for the disposal of an entire subsidiary.

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In this chapter we will be considering how to deal with the situation where a
parent sells its shareholding in a subsidiary during the year. We will have to
calculate a profit or loss on disposal in the statement of profit or loss of both the
parent and the group.
In the FR exam, a 20 mark group accounts preparation question will not include
disposal of a subsidiary, but aspects of this can be tested elsewhere in the
exam, including within interpretations questions, where candidates may be
required to analyse the impact of a disposal. This chapter contains an example
of a disposal showing the effect on the consolidated financial statements as an
illustration, but a candidate will not be required to do this in the exam.

1 Disposals
When a shareholding in a subsidiary is disposed of it must be reflected in:
• the parent company’s individual financial statements and
• the group financial statements.

2 Parent company financial statements

Gain to parent company

The gain/loss on disposal in the parent company’s accounts is calculated as

follows:
$
Sale proceeds X
Carrying amount of investment (X)
––––
Parent gain/loss on disposal X(X)
––––

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The gain is reported as an exceptional item –

• must be disclosed separately on the face of the parent’s SPL
• after profit from operations.
Any tax on the gain is calculated by reference to the gain in the parent's
individual financial statements.

3 Consolidated financial statements – Full disposal

Disposal of whole subsidiary

The impact of the disposal on the financial statements can be seen below.
• Statement of profit or loss
– 100% of the subsidiary’s results consolidated up to date of disposal
– Gain/(loss) on disposal.
• Statement of financial position
– At the year-end no shares are held by the parent and therefore the
disposed subsidiary is not included in the group statement of
financial position.
– Gain/loss on disposal to be included within retained earnings

Gain on disposal
$ $
Sales proceeds X
Net assets at date of disposal X
Net goodwill at date of disposal X
NCI at date of disposal (X)
––––
(X)
––––
Group gain/loss on disposal X(X)
––––
This gain will be included in the consolidated statement of profit or loss.
Note: Any tax on the gain is calculated using the gain in the parent's individual
financial statements.

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Carrying amount of goodwill at the date of disposal

$
Calculated as seen before:
Consideration transferred X
NCI at acquisition (fair value or proportional method) X
––––
X
100% of the fair value of net assets at acquisition (X)
––––
Goodwill at acquisition X
Less: Impairments to date of disposal (X)
––––
Goodwill at disposal X
––––
Carrying amount of net assets at date of disposal
Calculated as follows:
Net asset b/f X
Profit/(loss) for current period to disposal date X(X)
Dividends paid prior to disposal (X)
––––
Net assets at disposal X
––––
Note: The net assets at disposal may also include any remaining fair value
adjustments to the subsidiary's net assets. The amount to include in net assets
at disposal is the fair value adjustment made on acquisition, less fair value
depreciation to date between acquisition and disposal. It may be helpful to use
a standard W2 for the figures at the disposal date.

Non-controlling interest (NCI) at disposal

(i) Fair value (FV) method
If using the FV method, you will either be given the FV at the date of
disposal, or you will need to calculate as below:
NCI at acquisition X
NCI % of S's retained profits post-acquisition up to disposal X
NCI % of impairment (X)
––––
Non-controlling interest at date of disposal X
––––

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(ii) Proportion of net assets method

If non-controlling interest is valued as the proportion of net assets, then
the NCI at disposal is NCI % of S's net assets at the date of disposal.
Alternatively, you can use the method below.
NCI at acquisition X
NCI % of S's retained profits post-acquisition up to disposal X
––––
Non-controlling interest at date of disposal X
––––

Test your understanding 1

Rock acquired a 70% investment in Dog for $2,000 two years ago. It is
group policy to measure non-controlling interests at fair value at the date
of acquisition. The fair value of the non-controlling interest in Dog at the
date of acquisition was $800 and the fair value of Dog's net assets was
$1,900. The goodwill has not been impaired.
Rock disposed of all of its shares in Dog for sale proceeds of $3,000.
The fair value of Dog’s net assets at the date of disposal was $2,400.

Required:
Calculate the profit/loss on disposal that would be recorded in:
1 Rock's individual statement of profit or loss.
2 Rock's consolidated statement of profit or loss.

Test your understanding 2 – Kathmandu

The statements of profit or loss for the year ended 31 December 20X9
are as follows:
Statements of profit or loss for the year ended 31 December 20X9
Kathmandu Nepal
$ $
Revenue 553,000 450,000
Operating costs (450,000) (400,000)
––––––– –––––––
Operating profits 103,000 50,000
Investment income 8,000 –
––––––– –––––––
Profit before tax 111,000 50,000
Income tax expense (40,000) (14,000)
––––––– –––––––
Profit for the period 71,000 36,000
––––––– –––––––

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Additional information:
On 1 January 20X5 Kathmandu acquired 70% of the shares of Nepal for
$100,000 when the fair value of Nepal's net assets was $110,000. Nepal
has equity capital of $50,000. At that date, the fair value of the non-
controlling interest was $40,000. It is group policy to measure the NCI at
fair value at the date of acquisition.
Nepal paid a $10,000 dividend on 31 March 20X9.
Nepal had retained earnings of $80,000 on 1 January 20X9.
Goodwill has not been impaired.

Required:
Prepare the group statement of profit or loss for the year ended 31
December 20X9 for the Kathmandu group on the basis that Kathmandu
sold its holding in Nepal on 1 July 20X9 for $200,000. This disposal is not
yet recognised in any way in Kathmandu’s statement of profit or loss.

Alternative presentation – if subsidiary represents a discontinued

operation
The disposal of a subsidiary may meet the definition of a discontinued operation
in accordance with IFRS 5, and would therefore be presented as such.
This would mean that in the statement of profit or loss, the results from the
subsidiary would be presented as a single line 'Profit/(loss) from discontinued
operations', rather than being consolidated line by line.

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4 Chapter summary

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