In a operation of selling 50% of a company, where should the fees go?

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Leo
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In a operation of selling 50% of a company, where should the fees go?

Post by Leo »

Hi,

In the case that you control an entity in full consolidation (100% of shares), and you'll sell 50% of the shares for example (joint control), so you'll change the consolidation method from full consolidation to equity method.

So, you'll calculate a gain&loss from the selling of 50% of the entity (but in the calculation, you'll consider that you are selling 100%), and recognise a goodwill (included in interest in associate) for entering the same entity by using the equity method.

Our company will do a transaction like this in a few months, and we are already spending millions on advocate, accounting, and banking fees.

We would like to know, if those fees should be included in the calculation of the gain&loss from the selling of 50% of the entity or in the goodwill of the entity which will enter as equity method.

Our CFO would prefer to included in the goodwill in order to show a better P&L.

Thank you very much for your opinion.

BR
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JRSB
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by JRSB »

There's a lot to talk about there, but ultimately, acquisition costs aren't capitalised into goodwill.
"I am always ready to learn although I do not always like being taught" - Churchill
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exIFRS
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by exIFRS »

This is one of those areas where the Standards are a little frustrating in their lack of guidance, at least when is comes to step-up and step-down acquisitions.

While JRSB is absolutely correct that acquisition costs in a Business Combination under IFRS 3 are not capitalised, this was a subsequent amendment to IFRS3 (which initially allowed capitalisation) that was not also applied to IAS 28. This issue caused confusion, but it was confirmed by the IFRIC (https://cdn.ifrs.org/-/media/feature/su ... y-2009.pdf) that the accounting for cost is just inconsistent between IFRS 3 and IAS 28. But this doesn't change the fact that accounting for a step down as described is not clear. I have not dealt with the specific circumstances outlined, but as I sit here, it would seem a possible acceptable approach to capitalise some of the fees as related to the acquisition or a joint arrangement (but I think you would need to apportion). But I am happy to be proved wrong on that.

BUT... BUT... BUT

I would want a lot of evidence that this really is a change of control. Simply moving to 50% shareholding does not automatically make this a joint arrangement. You would need to carefully test the criteria, especially the requirement that the relevant activities require the unanimous consent of all parties. I would be surprised if your organisation has accepted this, as I often see ultimate decision making still residing with one party, therefore giving them ultimate control.
Leo
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by Leo »

Thank you guys !!!

The joint control is really something we discussed a lot with our auditors, and they'd approved that it'll be a joint control.

It seems to me that the acquisition costs istn't treated the same way between IAS28 and IFRS3, thus, we could capitalize a portion of it.

This is really good news.

Now do you think that we could capitalize 100% ? because, there is nothing written about capitalizing a portion. So, I suppose that when there is a lack of guidance, I can do it in my way?

Thank you very much !

BR
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exIFRS
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by exIFRS »

I wouldn't celebrate too early :D it would certainly be worth hearing the thoughts of the others. There could be something about a step down I have missed, or a key point I have glossed over for sure!
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Marek Muc
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by Marek Muc »

I'm here to spice up the discussion! ;)

We're in the realm of IFRS 10 here:
https://ifrscommunity.com/knowledge-bas ... of-control

"any interest retained in former subsidiary is recorded at fair value", not fair value + cost of disposing the controlling stake

I'm of the opinion that these costs go to P/L immediately, even economically/ business-wise speaking: aren't they costs of selling the shares? If the gain/loss of disposal goes to P/L, why would you exclude from P/L expenses leading to that disposal?
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exIFRS
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by exIFRS »

I knew something was niggling the back of my mind.
Jonny
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by Jonny »

I confirm and agree.

They are costs of selling the shares.

We had a similar case this year. The postings were agreed with the auditors.

We expensed the transaction costs. The interest retained in former subsidiary was recorded at fair value. The Fair value was calculated like this: gain of the 50% less the transaction costs.

In other words, the gain is exactly double netted by the transaction cost.

Example:
The gain of selling 50% of the subsidiary 1.000EU; transactions cost 100EU.

The total gain recorded in P&L at consolidated level for the disposal of 100% of subsidiary and reacquiring the 50% was 1.800 EU (1000-100 + 900).
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Marek Muc
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by Marek Muc »

Even under the most simplistic approach, the fair value of retained shareholding (50%) should equal the price received for the sold shares, not the gain, right?
Jonny
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by Jonny »

the FV of the 50% is the Price but the effect in P&L is equal to the gain. Is this what to mean?
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Marek Muc
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by Marek Muc »

yes, under this approach total gain is 2x the gain on disposing 50%
Jonny
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Re: In a operation of selling 50% of a company, where should the fees go?

Post by Jonny »

I agree
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