Equity transactions of Associates

All topics related to IFRS Standards.
Post Reply
yvonne
Posts: 23
Joined: 23 Jun 2020, 04:51

Equity transactions of Associates

Post by yvonne »

A holds a 100% interest in B and B holds a 60% interest in C (a subsidiary of B). On 1 Sep 2020, there's a share swap arrangement in which B issued new shares for $2m (to C's NCI) to acquire the remaining 40% interest in C. As a result of the share swap, A's holding in B dropped from 100% to 40% (become an associate) while B's holding in C increased from 60% to 100%.

Net assets of B before share swap: $1.6m
Net assets of C before share swap: $0.5m --> $0.3m attributable to owners of B (60%), $0.2m attributable to NCI

Net assets of B after share swap: $3.6m ($1.6m + $2m)
Net assets of C after share swap: $0.5m --> $0.5m attributable to owners of B (100%)

My questions:
1. I assume that the share swap will result in 2 major transactions: (1) Deemed disposal of subsidiary B; and (2) Acquisition of C's NCI. Please let me know if my understanding is not correct. Are they common control transactions and is there any more issue I should take note?

2. In accordance with IFRS 10, as there is no loss of control, B should account for its transaction with NCI as an equity transaction during consolidation. That will give rise to a Debit in equity of $1.8m (difference between the share issue $2m and NCI $0.2m). As such, in B's consolidated FS, my workings are (hope they are correct):

Net assets attributable to the owners of B (before share swap):$1.9m ($1.6m + $0.3m)
Net assets attributable to the owners of B (after share swap): $2.3m ($3.6m + $0.5m - $1.8m)
Change in the net assets = $0.4m

Understand that under the equity method, the investment is initially recognised at cost and adjusted thereafter for the "post-acquisition change" in the investor’s share of the investee’s net assets.
In this case, the initial cost of the associate is the fair value of 40% interest retained after the deemed disposal. When A is preparing its consolidated FS as at 31 Dec 2020, should A share the change in net assets of B's group, ie. 40% x $0.4m = $0.16m? I'm not sure if such change in net assets should be treated as pre or post acquisition...

Would appreciate your inputs and guidance. Thanks a lot!
yvonne
Posts: 23
Joined: 23 Jun 2020, 04:51

Re: Equity transactions of Associates

Post by yvonne »

Sorry guys, I'm getting lost and I think my example above is confusing. Please allow me to edit my example and questions.

A holds a 100% interest in B and B holds a 60% interest in C (a subsidiary of B). On 1 Sep 2020, there's a share swap arrangement in which B issued new shares for $2m (to C's NCI) to acquire the remaining 40% interest in C. As a result of the share swap, A's holding in B dropped from 100% to 40% (become an associate) while B's holding in C increased from 60% to 100%.

Before the share swap, B's consolidated FS show:
Net Assets (from B) 1.1m
Net Assets (from C) 0.5m
= Total Net Assets 1.6m
Equity attributable to parent 1.4m
NCI 0.2m
= Total Equity 1.6m

After the share swap, I suppose B's consolidated FS will show:
Net Assets (from B) 1.1m
Net Assets (from C) 0.5m
= Total Net Assets 1.6m
Equity attributable to parent 3.4m ($1.4m + Share issue $2m)
Equity transaction with NCI -1.8m (NCI $0.2m - Share issue $2m)
= Total Equity 1.6m

My questions:
1. I assume that the share swap will result in 2 major transactions: (1) Deemed disposal of subsidiary B; and (2) Acquisition of C's NCI. Are they common control transactions and any more issue I should take note?

2. It seems that as a result of the share swap, there's no change in the net assets of B's group? Please correct me if my consolidated numbers after the share swap are wrong.

3. After the deemed disposal of B's group, A needs to calculate the gain/loss on disposal and determine the fair value of interest retained in B's group. Understand probably the easiest way to get the FV of interest retained is $2m/60% x 40% = $1.33m, resulting in a loss on disposal of $0.07m ($1.33m - $1.4m), am I right?
Another thing is that when A prepares its consolidated FS, A will have a share of the post-acquisition change in B's net assets as part of the carrying value of associate. Is it done by comparing B's group net assets as at FYE with the net assets after the share swap (ie. $1.6m)? Should I ignore the debit equity balance of $1.8m in calculating the change in B's group net assets?

4. However, if I'm going to use the Book Value of interest retained as its fair value, should it be $0.64m (Total Net Assets after share swap $1.6m x 40% retained)?

Thanks everyone.
Post Reply