Investment in subsidiaries

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Sander
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Joined: 19 Dec 2021, 18:43

Investment in subsidiaries

Post by Sander »

Hi all,

I would really appreciate some feedback to the following questions:
In the case Company A buys 100% shares of Subsidiary B (both under common control of same ultimate parent) is it correct to measure the investment at cost as per IAS 27 10 (a) or would this fall within discussion paper for business combination under common control?
If it does fall under IAS 27 which shall the be the approach to measure the investment at cost (since cost is not defined by the standard)?
If for example the Company pays 100 $ and receives 120 $ would be it correct to book:
Investment in subsidiary DR 100
Goodwill DR 20
Cash CR 120
Or will the goodwill be part of the fair value paid by the acquiring company and the booking shall be?:
Investment in subsidiary DR 120
Cash CR 120

Thanks in advance.
JRSB
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Re: Investment in subsidiaries

Post by JRSB »

There was common control before the transaction?

You may be confusing standalone accounts with group accounts in your journals. If you paid £100 then investment in sub £100, cash/loan £100.

Whether there is goodwill arising depends on the accounting policy you choose, eg business combination or not
Sander
Posts: 3
Joined: 19 Dec 2021, 18:43

Re: Investment in subsidiaries

Post by Sander »

Hi JRSB,

Yes, there was common control before the transaction.

Can you "choose" which policy to use or this will be depend on whether share acquisition falls business combination scope or not (first part of my question)?

Also, I want to change the example because the one I gave was wrong :oops: , since a) that will not generate goodwill and b) that would not be the correct entry .

So let's say Company A pays $120 (cash) and investment fair value is $100 so in this case if we follow business combination entry would be:

Investment in subsidiary DR 100
Common control DR 20
Cash CR 120

So would this be correct or shall I follow IAS 27? and if IAS 27 applies would this generate goodwill or the price paid in excess over the investment (the goodwill) would be part of the "cost" of the investment in subsidiary ?
So
Investment in subsidiary DR 120 Cash CR 120

or
Investment in subsidiary DR 100 Goodwill DR 20 Cash CR 120
JRSB
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Re: Investment in subsidiaries

Post by JRSB »

There's a lot of choices here which makes it slightly tricky.

IFRS 3 scopes out common control transactions so you have to design your own policy (https://ifrscommunity.com/knowledge-bas ... of-ifrs-3/) . You've noticed that there are discussion papers about a new standard on that. However for now there isn't one.

As for the parent's standalone financial statements, it has the choice of cost, fair value or equity accounting. 99% of the time I would guess cost is used. So Dr Investment 120 Cr Bank 120 (if you paid in cash). If the fair value is 100 at year end then impair so Cr Inv in sub 20, Dr Impairment loss 20.

You'll still confusing I think standalone accounts with group accounts. Assuming you're applying IFRS 3 here then goodwill of 20 arises at consolidation level.

Investment in subsidiary only arises at standalone company level. It comes out on consolidation because you bring in all the assets and liabilities etc. check out the business combination pages on the knowledge bank here. https://ifrscommunity.com/knowledge-bas ... ccounting/
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Marek Muc
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Re: Investment in subsidiaries

Post by Marek Muc »

Hi Sander, I also think that you're mixing up separate and consolidated financial statements. You normally don't recognise goodwill in separate financial statements, unless in very limited circumstances such as legal mergers when two (or more) entities become one legal entity.

Follow useful framework that JRSB gave you
Sander
Posts: 3
Joined: 19 Dec 2021, 18:43

Re: Investment in subsidiaries

Post by Sander »

Thanks both for the help
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