Selling 50% of a level of consolidation

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Leo
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Joined: 05 Apr 2020, 22:31

Selling 50% of a level of consolidation

Post by Leo »

Hi Guys,

Our company has one subsidiary lets call it Child 1 we hold at 100% (full consolidation). This Subsidiary has two other subsidiaries that it holds at 100%, lets call them Grandchildren 1 (Full consolidation) and Grandchildren 2 (Full consolidation).

Our company plans to sell 50% of the Child 1 to another company, we will transit from full consolidation into equity method for child1 and as a consequence, GC1 and 2 will be out of the scope.

In order to calculate the gain&loss from this opération, I have to compare the price consideration paid with the carrying amount of those entities. From my opinion, for the carrying amount, I should take :

Equity of Child 1 + equity of grandchild 1 + 2, add them together.

I think that I should take the Equity of child 1 before consolidation and equity of grandchild 1 + 2 after consolidation, like if I was doing a intermediate level consolidation.

My question is that I'm not sure that I should take the equity of child 1 before or after consolidation.

So what(s your opinion on this please, do I have to take vision of the equity of child 1 after consolidation + GC 1 + 2 after consolidation

or

CHild 1 before consolidation + GC 1 + 2 before consolidation.

Thank you.

BR
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Marek Muc
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Re: Selling 50% of a level of consolidation

Post by Marek Muc »

The answer to your question depends on mechanics of your consolidation. In the end, you should derecognise assets and liabilities of those 3 entities from the perspective of the consolidated financial statements of the parent. It won't necessarily equal the equity in standalone accounts of those entities or in Child's consolidated accounts, because of goodwill and fair value adjustments. And if Child 1 acquired Grandchildren before you acquired Child 1, things will get complicated further.

And remember that equity method will be based on consolidated accounts of Child 1, so your Grandchildren will still be in 'your scope'
Leo
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Joined: 05 Apr 2020, 22:31

Re: Selling 50% of a level of consolidation

Post by Leo »

Thank you Marek for your reply.

I agree, after child 1 pass from 100% to 50%, the grandchildren will be consolidated also by using equity method at 50%. (not out of scope as I stated earlier).

I was looking also into the IFRS5 which says that when the entity is committed to a sale plan involving a loss of control of a subsidiary it should classify all the assets and liabilities of that subsidiary as held for sale.

So I should record 100% of assets and liabilities of child 1, Grandchildren 1 + 2 into one item in my balance sheet called (assets & liabilities held for sale). The remaining part which is the equity of those entities will stay in equity in consolidation, which will go out when the sell will happen.

do you agree with me?
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nauman
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Re: Selling 50% of a level of consolidation

Post by nauman »

When you classify a line of business or subsidiary as held for sale you classify all its assets (current and non current) in a separate line after current assets as assets held for sale and the liabilities are classified as held for sale in a separate line after current liabilities. You could either call them liabilities held for sale or liabilities associated with assets held for sale. The equity portion stays in equity.

However, you would also need to check whether it qualifies as discontinued operations under IFRS 5 and accordingly make classification changes on the income statement and cash flow statement. Last, any expected gain / loss on sale of subsidiary would also be recognized in the period in which you are classifying the subsidiary as held for sale.
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Marek Muc
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Re: Selling 50% of a level of consolidation

Post by Marek Muc »

Leo wrote: 21 Oct 2020, 01:15 The remaining part which is the equity of those entities will stay in equity in consolidation, which will go out when the sell will happen.
do you agree with me?
Equity is not derecognised once a subsidiary is sold, just assets and liabilities
Leo
Posts: 99
Joined: 05 Apr 2020, 22:31

Re: Selling 50% of a level of consolidation

Post by Leo »

Hi,

Thank you Marek, thank you, Naumann.

If the cession of 50% of the part is just to continue the activities but with a new partner, we don't want to sell it, we want just manage the activities with a new partner who'll bring its know how.

Do I still need to relass all the assets and liabilities in IFRS5?

Thank you !

BR
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Marek Muc
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Re: Selling 50% of a level of consolidation

Post by Marek Muc »

a sale is a sale, even if you intend to continue trading with those entities under new ownership
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