Loss of control in a subsidiary

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kst
Posts: 1
Joined: 14 Jun 2021, 05:20

Loss of control in a subsidiary

Post by kst »

Dear

I have been asked by the management of one of my clients about the reason behind why the IASB has determined that the changes in ownership interests in subsidiaries as a result of acquiring equity interest from NCI shall be recognized as a reserve in equity instead of recognizing as a profit in the statement of income. The management of my client asked this question because the company recently entered into the aforesaid step acquisition with the consideration paid less than the fair value of the net assets acquired. However, the company has a plan to divest this subsidiary in the near future and believes that there will be loss from the sale of this subsidiary. I understand that the reason behind this accounting treatment is because the IASB has applied the "control concept" but the management of my client has no idea how they should explain to the company's investors why the profit from the bargain purchase power when acquiring equity interest in the subsidiary cannot be recognized as a profit in the statement of income but when the company loses control over its subsidiary with loss from this transaction, the company has to recognize loss and cannot recycle such previous profit from the equity to offset against loss in the statement of income.

Thanks for sharing your thought.
Regards,
Leo
Posts: 214
Joined: 05 Apr 2020, 22:31

Re: Loss of control in a subsidiary

Post by Leo »

Hi,

Maybe other experts could confirm, but, I understand that negative goodwill is always recognized in P&L and never in equity. Only goodwill is recognized in equity.
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Marek Muc
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Posts: 1710
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland

Re: Loss of control in a subsidiary

Post by Marek Muc »

Hi Leo, different question is being asked :D

@kst, the reasoning of the IASB is set out in Basis for Conclusions paragraphs to IFRS 10: BCZ168–BCZ179

I guess the management needs to blame those silly accounting standards :D
Warren Buffet often does that, e.g.:
As I’ve emphasized many times, Charlie and I view Berkshire’s holdings of marketable stocks – at year end worth $281 billion – as a collection of businesses. We don’t control the operations of those companies, but we do share proportionately in their long-term prosperity. From an accounting standpoint, however, our portion of their earnings is not included in Berkshire’s income. Instead, only what these investees pay us in dividends is recorded on our books. Under GAAP, the huge sums that investees retain on our behalf become invisible.
https://www.berkshirehathaway.com/letters/2020ltr.pdf

another workaround is to use adjusted non-GAAP measures in their investor communication
Leo
Posts: 214
Joined: 05 Apr 2020, 22:31

Re: Loss of control in a subsidiary

Post by Leo »

Ah ok sorry !! totally missed the point lol
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