Disposal of entity consolidated by equity method

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Leo
Posts: 102
Joined: 05 Apr 2020, 22:31

Disposal of entity consolidated by equity method

Post by Leo »

Hi guys,

We are selling an entity consolidated by using equity method.

I just want to validate that my accounting treatment is correct.

I'll apply the following formula :

If the operation happens in Q3 :

Selling Price less (-) Carrying amount the investment by equity method (book value) Plus/Less (+/-) P&L realized during the current exercise * pourcentage of share . = Gain & Loss on disposal to be booked in P&L

That's all.

Because I have a doubt on the goodwill. From my understanding, there should neverbe goodwill in equity method investment because we book the initial transaction at cost

Am I correct?

Thank you !
pub_acco
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Joined: 19 Mar 2020, 16:40

Re: Disposal of entity consolidated by equity method

Post by pub_acco »

In the simplest case, the disposal gain/loss is the proceed less the carrying amount at the date of disposal, which includes the initial cost and accumulated equity-method profit/loss and impairment. But, it can easily be much more complex.

The first thing that comes to mind is IFRS 5. You have to classify the investment as held for sale when the sale plan becomes highly probable, and then you will discontinue the equity method and recognize impairment, if any. The second thing is accumulated OCI, some of which will not be reclassified to P&L at disposal. Third, you might need to account for retained interests properly, if any.

Generally, accounting for disposal of an associate isn’t an easy job at all, and a thorough analysis is necessary. But I don’t find any connection with goodwill.
pub_acco
Trusted Expert
Posts: 156
Joined: 19 Mar 2020, 16:40

Re: Disposal of entity consolidated by equity method

Post by pub_acco »

*Fourth, tax effect.
Leo
Posts: 102
Joined: 05 Apr 2020, 22:31

Re: Disposal of entity consolidated by equity method

Post by Leo »

Hi there,

Thank you all for your reply.

What I can't understand is that, when you acquire a company at equity method (lets say 50%), you book in the account "Investments in subsidiaries by equity method" at the purchase value.

In subsequent measurements, you increase or decrease the item Investments in subsidiaries by equity method" by the P&L of the subsidiary plus or less any dividends.

I can't think about a case that there'll be something in the OCI and in retained interests... because for me, everything goes into the one account which is Investments in sib by equity method".

What do you mean when you mention OCI and retained interests?

Could you give me an example ?

Thank you very much?

BR
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Marek Muc
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Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland

Re: Disposal of entity consolidated by equity method

Post by Marek Muc »

Leo, first of all, subsidiaries are not accounted for using the equity method.

Re. OCI, if your associate recognises something in OCI (e.g. actuarial gains), your share goes to your OCI as well

re. retained interest - applies when you don't sell all your interest (e.g. when you retain 10% interest)
https://ifrscommunity.com/knowledge-bas ... ity-method
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