Investment in Subsidiaries at no consideration

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SaadOlath
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Investment in Subsidiaries at no consideration

Post by SaadOlath »

Company X has acquired a Subsidiary within the same Group at No consideration? The Share Capital of the Subsidiary was USD 15,000 on the date of acquisition.

I have made the following entries at Company X level:

Dr Investment in subsidiary $40,000
CR Capital Contributions $40,000

Please advise if it's correct?
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Marek Muc
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Re: Investment in Subsidiaries at no consideration

Post by Marek Muc »

This approach seems sensible, this $40,000 is the fair value of shares received?
JRSB
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Re: Investment in Subsidiaries at no consideration

Post by JRSB »

So it was previously owned by Company X's parent company?
SaadOlath
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Re: Investment in Subsidiaries at no consideration

Post by SaadOlath »

Yes, it was a direct subsidiary of the Ultimate Parent.

The Auditor (Big 4) of Parent X said that, it should not be accounted as Investment in Subsidiaries, since no consideration was transferred.

In my opinion, it should be accounted as a capital contribution & investment in sub.

My only issue is, how to value this gift?
pub_acco
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Re: Investment in Subsidiaries at no consideration

Post by pub_acco »

Isn’t it outside the scope of IFRS and thus any reasonable accounting policy is acceptable? I’m curious about this case because I usually talk to relevant accounting managers and just select some easiest treatment that is legal under local tax laws and corporate laws, because from the parent’s perspective, the separate FSs of parent and sub and elimination entries have to be all consistent so that no change is made to the parent’s consolidated FSs.
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Re: Investment in Subsidiaries at no consideration

Post by JRSB »

Yes, we have done this driven by local tax to avoid mismatch., eg in the event of calculating a future gain on disposal (I suppose deferred tax could equally address).
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Marek Muc
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Re: Investment in Subsidiaries at no consideration

Post by Marek Muc »

This is not covered in IFRS. What we have here is not even an 'acquisition' as the receiving entity did not pay anything. To me it's nothing more than a capital contribution, and the only sensible way to recognise it is at fair value. We can make some analogy to IFRIC 17, where non-cash capital distributions are measured at fair vale, but obviously we're not in the scope of IFRIC 17.

Personally I don't think that 'tax value' is a good idea unless it corresponds to some accounting measure, but I can't think of any measurement basis other than fair value.

@JRSB and @pub_acco - when you went for tax values, did you try to label it using IFRS measures?
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Re: Investment in Subsidiaries at no consideration

Post by JRSB »

well, for tax it was most useful to have 'market value' = fair value, no issues. Just disclose the basis recorded, no IFRS references.
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Marek Muc
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Re: Investment in Subsidiaries at no consideration

Post by Marek Muc »

sure, I wouldn't expect IFRS references, I was just wondering about 'labelling' measurement basis, but if it was recognised at fair value, then no problem as it is an IFRS measurement basis

BTW if tax approach is different, deferred tax cannot be recognised due to initial recognition exemption
pub_acco
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Re: Investment in Subsidiaries at no consideration

Post by pub_acco »

In my country, laws allow to use the carrying amount on the parent's separate book in such a case as the measurement basis used in the parent's and sub's separate books. This treatment obviously distorts sub's separate FSs but nobody seriously cares the separate FSs of a wholly-owned entity. Neither does the tax authority partly because large groups usually file consolidated tax returns and partly in order to facilitate corporate reorganization.

I agree to the fair value idea and I think that is the only working way in a cross-border situation where transfer price taxation comes into play.
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Marek Muc
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Re: Investment in Subsidiaries at no consideration

Post by Marek Muc »

I see, it's interesting to hear that there are consolidated tax returns. In Poland, each legal entity does its own tax settlements, but there are transfer pricing laws in place and lately the general anti-abuse rule
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Re: Investment in Subsidiaries at no consideration

Post by JRSB »

Yes, in UK all corporate tax returns are entity only (which can mean a lot of returns for very large groups!).
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