DISPOSAL OF SUBSIDIARY

DISPOSAL OF SHAREHOLDING
THERE ARE 2 TYPES OF POSIBILITIES TO CONSIDER WITH THE DISPOSAL OF SHAREHOLDING IE

A) A full disposal of all shares held in subsidiary (F7)

B) A part disposal with movement from control to control(P2)

A FULL DISPOSAL EXPLAIN AND ILLUSTRATE EFFECT

I n this case a sub shareholding will be sold in its entirely, ie 100% of the shares
held by the parent will be sold.As such control is lost and the following must take
place;

1) De-recognize the assets and liabilities of the sub from the group at the
carrying value at the date of disposal.This will include the removal of any
unimpaired goodwill that may exist.
2) De-recognise the NCI at the date of loss of control (because the parent
does not have an NCI anymore.
3) Recognize the fair value of consideration received.
4) All entries are calculated in a disposal account and any gains or losses
arising as a result of this are then taken to the P&L.

THE DISPOSAL ACCOUNT

Proceeds of disposal @ fair value (benefit to the parent) X

Cancel the NCI @ disposal (benefit to parent) X

Less; Fair value of Sub”s separate net assets @ disposal date (X)

Less; Unimpaired goodwill (NBV of G/W ie not yet impaired at disposal date (X)

Gain/Loss on disposal to Consolidated P/L X

EXAMPLE

P bought 80% of the 1 million $1 equity shares in S on 1 Jan 2013 for

$50Million.The fair value of the non-controlling interest at this date was
$60Million .The fair value of the separately identifiable net assets of S was $460
Million.

P sold all of the shares that it held in S at 31 December 2016 for $625Million. The
fair value of the sub’s net assets at this date was $520M. There is no impairment
of G/W.

Calculate the gain/loss on disposal ;

A) In the Parent’s individual fin statements.

B) In the Consolidated financial Statements.

SOLUTION

A) PARENT’S INDIVIDUAL FIN STATEMENTS

$(M)

Proceeds 625
Bought for (500)
Gain on disposal 125

B) CONSOLIDATED FINANCIAL STATEMENTS (M)

Proceeds @ fair value 625

Cancel the NCI @ Disposal (W2)

Ie DR NCI

CR Disposal a/c 72

Less; fair value of Sub’s separable net assets @ disposal date (520)

Less; Unimpaired G/W ie carrying value of G/W

Ie DR Disposal a/c

Cr G/W (100)

Gain on disposal (to P/L) 77

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WORKINGS;

1) Goodwill at acquisition $M

Investment @cost

CI 500

NCI 60

560

Less; Net assets @ fair value @ acquisition (460)

G/W (no impairment) 100

2)NCI @ disposal date = $60M @ acquisition + $12M ie $72M (used in main

disposal calculation).The $12M is net assets @ acquisition 460 compared to 520
@ disposal. 60% growth x 20% = 12NCI.

***OR

Proceeds 625

Less ;Net assets 520

G/W 100

620

Less; NCI (72) (548)

Gain on disposal (to P/L) 77

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HOMEWORK EXAMPLE

Peanut purchased 75% of the shares of Salt 3 years ago for $80M.The fair value of
the net assets at the date of acquisition amounted to $90M.The fair value of the
non-controlling interest @ acquisition was $25M.Peanut measures the non-
controlling interest @ fair value.

On 30 June 2016, Peanut disposed off its entire holding in Salt for $98M when the
net assets of Salt were $110M.There had been no impairment of G/W since
acquisition.

REQUIRED

Calculate the profit/loss on disposal in;

A) Peanut’s own (individual) accounts, and

B) In the consolidated accounts.

SOLUTION TO PEANUTS

A) The gain on disposal in the Parent CO accounts is the difference between

the sale proceeds and the cost of investment. Ie;

$M

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 Fair value of consideration 98

Less; Carrying amount/cost of investment (80)

Gain/Loss on disposal to P/Los in Peanuts a/c 18

B) In the Consolidated Accounts $M

Fair value of consideration 98

Cancel the NCI @ disposal 30

Less; Fair value of Sub’s Net Assets @ disposal date (110)

Less; Unimpaired G/W (W1) (15)

Gain on disposal to consolidated P/L 3

Workings

1) Goodwill on Acquisition $M

Cost of investment

CI 80

NCI 25*

105

Less; Nest Assets acquired (90)

G/W on acquisition (no impairment) 15

A MORE DETAILED EXAMPLE

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Pen acquired 70% of Stokes for $93M several years ago when the Fair value of the
Net Assets of Stokes was amounted to $120M.For the purpose of calculating
G/W,the NCI was measured @ the acquisition date as $36M.

On 1 April 2016, Pen disposed off its full shareholding in Stokes for consideration
of $131M.The Net Assets of Stokes were $171M @ 1 Jan 2016 & $183M @ 31 Dec
2016.

The Statement of P/L of Pen and Stokes for the year ended 31 Dec 2016 was as
follows;

Pen ($M) Stokes($M)

Revenue 126.4 31.2

Cost of sales (43.2) (10.8)

Gross Profit 83.2 20.34

Distribution costs (18.9) (20.4)

Admin expenses ( 17.2) (2.6)

Profit on disposal of Sub 38 -

Profit from operations 85.1 16.0

Finance costs (10.2) (1.2)

Profit before Tax 74.9 14.8

Tax (15.0) (2.8)

Retained Profit for the year 59.9 12.00

Additional Information

 No dividends were paid by either company in the year.

 Neither company had any other comprehensive income.
 Goodwill in Stokes was impaired by 50% several years ago.
 The income and expenses of Stokes have accrued evenly over 2016.

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  Prior to disposal goods were sold to Pen by Stokes for $3M .These were
purchased by Pen and were all sold on to third parties by the year end.

REQUIRED

Prepare the consolidated SPL for the year ended 31 Dec 2016.You should ignore
any tax implications of the sale of Stokes.

TIP ; When a group has disposed off a subsidiary in the reporting period,its results
are only consolidated until the date of disposal.A group gain or loss on disposal is
calculated & included in the Consolidated statement of P/L.

CONSOLIDATED P/L FOR THE YEAR TO 31 DECEMBER 2016

P $M S$M ADJ$ CONSOL$M

Revenue 126.4 3/4x12=7,8 (3) 131.2

Cost of Sales (43.2) (2.7) 3 (42.9)

Gross Profit 83.2 5.1 - 88.3

Distribution cost (18.9) (0.45) - (19.35)

Admin expenses (17.2) (0.65) - (17.85)

Profit on disposal (w2) 38 - (33.3) 4.7

Profit from operations 85.1 4 (33.3) 55.8

Finance costs (10.2) (0.3) (10.5)

Profit before tax 45.3

Taxation (15) (0.7) (15.7)

59.9 3 (33.3) 29.6

Profit attributable to: NCI 30% x 3 0.9

:Owners of the Parent 28.7

29.6

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WORKINGS

1) GROUP STRUCTURE

Sub S was 70% for first 3 months of the year pre disposal.

2) GROUP GAIN ON DISPOSAL $M

Fair value of consideration 131

Cancel the NCI @ disposal (w4) 52G

Less; Fair value of sub’s net assets @ disposal date (171 given

Plus 3 for this year,from CSPL,or ¾ x12 from Sub’s P/L in question (74)

Less; Unimpaired G/W (w3) (4.5)

Gain on Disposal to consolidated P/L 4.7

NOTE; Part gain on disposal (sold for $131M less bought for 93) 38

Group share of increase in reserves from acquisition to disposal

70%(174 @disp- 120 @ acqn) 37.8

Impaired G/W (4.5) 33.3

Group gain on disposal 47

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 3 Goodwill on Acquisition $M

Cost of Investment

CI 93

Fair Value of NCI (given in question) 36

129

Less; Net Assets acquired (given in Ques) (120)

Less; impairment (given in Ques 50%) ( 4.5 )

G/w @ disposal (impaired) 4.5

4) NCI @ disposal date ,$52.2M calculated as follows ;

$36M @ acquisition + $15.3M + $0.9M for current year ie, 30%x12 retained
profit per Ques for Sub x ¾ of the year pre-disposal = $52.2M. (used in main
disposal calculation above).

The $15.3M is Net Assets @ acquisition ,$120M compared to $171M @ start

of current year, ie = $51M growth x 30%= $15.3M NCI.

THE END

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