Disposal of subsidiary

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jonyicheng
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Joined: 30 Dec 2019, 17:25

Disposal of subsidiary

Post by jonyicheng »

Hi all, i have a scenario on the below for which any input is appreciated!

Company sold subsidiary (held at cost because exempt from consolidation under IFRS 10) to a third party in August 2019. The final consideration is subject to the purchase price allocation (PPA) exercise done by the buyer and adjusted accordingly. Under IFRS 3:45, the buyer has 1 year from the date of transaction to complete this. A preliminary gain on disposal of $100m is recorded in FY19 FS (with YE 31 Dec 2019) and the buyer has paid the preliminary consideration in full in 2019 upfront first.

As at the date of issuance of the FY19 FS in July 2020, the PPA exercise had just been completed and the final consideration decreased by $20m (i.e. gain on disposal is now $80m). Should the company need to adjust FY19 FS for this event, or disclose in FY19 FS as a non-adjusting subsequent event under IAS 10 and show restated comparative figures in the FY20 FS for this $20m, or should they expense this $20m in the FY20 profit or loss as they refund the buyer of $20m?

Thank you!
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nauman
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Re: Disposal of subsidiary

Post by nauman »

I am confused, PPA exercise is from buyer perspective and is basically allocation of consideration paid to different line items within the balance sheet. Usually, seller has nothing to do with PPA allocation. This seems more like a case of contingent consideration, which should have been accounted for by the seller at the time of initial recording.
jonyicheng
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Joined: 30 Dec 2019, 17:25

Re: Disposal of subsidiary

Post by jonyicheng »

Hi nauman, thank you for your response. Perhaps to clarify further, I understand the buyer will adjust the provisional purchase price to the final price after considering certain net working capital adjustment, as part of the PPA exercise where the fair value of net assets acquired are ascertained.
pub_acco
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Re: Disposal of subsidiary

Post by pub_acco »

A typical NWC adjustment does not meet the criteria of contingent consideration because it just reflects the information at the acquisition date. But I think whether it is a contingent consideration or not isn't an issue for the seller. Because everything has to be derecognized in the end from the seller's perspective, all the seller can do is just measuring the consideration received initially using its best estimate and recognizing subsequent changes through profit or loss, isn't it?
jonyicheng
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Joined: 30 Dec 2019, 17:25

Re: Disposal of subsidiary

Post by jonyicheng »

Hi pib_acco, thanks for your input. I was leaning towards your sugestion but just wondering whether the context of IFRS3:45 would apply since the buyer would go with that accounting treatment on their end. And also given that I have the new info on the price adjustment before the issuance of the FY19 FS, does that constitute an adjusting event under IAS 10 principles?
pub_acco
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Re: Disposal of subsidiary

Post by pub_acco »

I don’t believe the measurement period provisions apply to sellers but IAS 10.9(c) sounds to apply.
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Marek Muc
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Re: Disposal of subsidiary

Post by Marek Muc »

IFRS 3 does not apply to sellers,

if part of the price is based on working capital of the disposed subsidiary, then the seller makes best estimate and then adjust it once new information becomes available, but this adjusts the selling price at the disposal date, so if new and more accurate estimate is available before authorisation of FS for 2019, then this is an adjusting event

I agree with Nauman and think that it's better not to call it 'PPA'
jonyicheng
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Joined: 30 Dec 2019, 17:25

Re: Disposal of subsidiary

Post by jonyicheng »

Thanks all - I agree that IAS 10.9c would apply from a sellers perspective. Appreciate all input on this!
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