Deconsolidation of Protected Cell Company, while retaining control of a cell

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GLab0207
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Joined: 22 Jun 2022, 12:23

Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by GLab0207 »

Company A owns a protected cell company ("PCC") (Cell Captive insurer), Company B with NAV of $20m.
It intends to sell Company B, to Company C for $1, but Company A will move all of the material assets of Company B into a separate cell within Company B, which Company A will own subsequent to the sale, thereby retaining all the economic benefit of the assets.
Company A will recognise a loss on disposal of Company B of $20m.

IFRS10 is clear that a cell within a PCC is consolidated into the PCC and not deemed a separate entity, therefore Company A will not be allowed to consolidate its new cell subsequent to disposal of COmpany B, and will have to account for it's investment in the cell under IFRS 9 and the reinsurance risk under IFRS 4.

However, if we hypothetically assume for a second that Company A can demonstrate ultimate control of the cell (both power and economics) and can consolidate the standalone cell that now contains the $20m assets as a deemed separate entity, is there any way that the two transactions can happen together whereby Company A does not need to recognise the $20m loss on the sale, seeing that it will simply reconsolidate the new cell with the same assets?
Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by Leo »

That's so interesting, it's the first time I see something like this.

So, it's true that IFRS 10 doesn't allow consolidation of the cell :
https://cover.co.za/ifrs-10-what-about- ... nce-sheet/

From what I understand, you'll have to deconsolidate the entity by recognising a loss but isn't this compensated by the fact that you'll recognise those assets (IFRS9 or IFRS4 whatsoever) in your balance sheet (20m) without consideration paid, meaning that you'll book a gain of 20m in your consolidated P&L statement, so in the end, your effect in your P&L will be nil ?
GLab0207
Posts: 10
Joined: 22 Jun 2022, 12:23

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by GLab0207 »

Yes, you are correct on IFRS 10. In most cases the key issue is the cell's asset and liabilities are ring fenced from the other cells, but not from the insurer itself. So if the insurer goes insolvent, creditors have access to the individual cell assets and therefore they are not deemed separate silos.

On your questions about simply recognising the gain again:
Under our accounting policies, the FV gain on the investment goes through OCI, so it will not compensate for the loss on sale in our PnL, although our equity is essentially protected.

Was hoping of guidance on whether a partial derecognition of the assets, thereby combining the two transactions, would be permissible. But under IFRS10 B97 it looks like it is only probably to combine transactions when losing control of 1 entity, not when losing control of 1 entity and gaining control of another under the same transaction.
Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by Leo »

but if you can't consolidate the cell, how this could be a partial derecognition (which I think only concerns partial loss of control) ?

I think also IFRS 10 B97 applies to loss of control in multiple transaction not the regain of control.

"On your questions about simply recognising the gain again:
Under our accounting policies, the FV gain on the investment goes through OCI, so it will not compensate for the loss on sale in our PnL, although our equity is essentially protected."

You can still elect certain instruments through FVTP&L because it's on a deal by deal basis ?
GLab0207
Posts: 10
Joined: 22 Jun 2022, 12:23

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by GLab0207 »

Thanks Leo. Yep, we will try to argue consolidation of the cell under Bermudan law (where the cell and company is based) where there are case law supporting completed ring-fencing/fire-walling/silo-ing of cells. But it is a long shot.

But before we go on a legal and accounting opinion route to argue consolidation of the cell, I wanted to make sure what the implication would be if we can consolidate. No point in spending $$$ chasing something if the ultimate outcome doesn't work.

Noted on the FVPNL. We have similar investments in other cell captives already designated FVOCI and although it is on a case by case basis, auditors might fight us on the single one being classified differently if it is essentially the same as all the others we own through a different insurer (which we don't consolidate, by the way :D )
Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by Leo »

In case that if you can consolidate the cell, I don't know if there is something saying when you deconsolidate one entity and reconsolidate another with the same NAV, you can ignore both, or something in that sense.

In case the answer is no, from my point of view, that's gonna be a loss of 20m in the consolidated financial statement P&L for the disposal of PCC (sold for 1 USD), and a gain (Bargain purchase, badwill, negative goodwill call it whatever you like) of 20m in the consolidated financial statements P&L (cell entered in the perimeter for no consideration paid).

Sorry to mention that again, I agree that once recognised the variation of fair value of the asset goes to OCI, but I was talking about the initial recognition of the financial assets for which you received for free for which, you can do whatever you like : https://www.cpdbox.com/free-assets-ifrs-gifts/
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Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by Leo »

So if I was you, whether I would argue firmly that cell is ring fenced and consolidate it and book a badwill to compensate the loss on disposal

or

I would book the loss on disposal and argue that I receive a free assets for no consideration, that I recognise in the P&L.

or

If it can't be found anywhere in the IFRS standard, it falls into the grey area of the IFRS, which, under IAS8, says that you can develop your own policies. So maybe you can agree with the auditors to show no impact in the financial statements ?
GLab0207
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Joined: 22 Jun 2022, 12:23

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by GLab0207 »

Thanks Leo. Appreciate the input.
Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by Leo »

If you could tell us what you agree with the auditors, that'd be great thanks !
GLab0207
Posts: 10
Joined: 22 Jun 2022, 12:23

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by GLab0207 »

Feedback on this. IFRS only allows the combination of 2 transactions leading to the loss of control if any one of the two transactions in isolation would not make the transactions viable. In such a case the transactions can be offset to account for the loss in control.

However, in our example, we will lose control of one entity and gain control of another deemed separate legal entity. These two cannot be offset and would need to be accounted for separately.
Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by Leo »

Thanks, appreciate your feedback. So it's aligned with what we said earlier right ?

So what you'll do ?
GLab0207
Posts: 10
Joined: 22 Jun 2022, 12:23

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by GLab0207 »

Leo wrote: 23 Jun 2022, 21:13 Thanks, appreciate your feedback. So it's aligned with what we said earlier right ?

So what you'll do ?
Yep, aligned to what we said earlier. Well, you should be able to see from my next post what the plan is :D Move the assets to a new legal entity (yes, some admin with setting up and licensing) and then sell off the old entity shell. Saves us a $20m loss on consolidation (hopefully).
Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Deconsolidation of Protected Cell Company, while retaining control of a cell

Post by Leo »

I doubted that it was a sequel to this post, lol so now we are in Marvel/DC of the accounting world, and we are all masked accounting avengers ?

Back to your comment, in your other post, it might be 20m gain because of the fair value revaluation.
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