Been a while since I have been around and have a question on a common control transaction that is happening and I need some help regarding this. The transaction in its simplest form looks like this:
Background information
Entity A has been paying salary of some entity B employees (operates in a country with capital controls) and accordingly passes the following entry:
Dr. Expense 100
Cr. Cash 100
Dr. Due from B 100
Cr. Expense 100
Similarly entity B records the following:
Dr. Expense 100
Cr. Due to A 100
Since entity A is not able to recover this receivable because of capital controls it impairs the receivable in its stand alone books
Dr. Provision for doubtful receivable (PL) 100
Cr. Due from B 100
Now this provision reverses on consolidation and receivable is reinstated so that it can be eliminated against Due to A appearing in entity B books. In the end the net impact on consolidated books is as follows:
Dr. Expense 100
Cr. Cash 100
Other facts are that the net assets of entity B as of 31 December 2020 amount to CU 150 and on 1 January 2021 the transaction is to occur whereby it will be transferred to entity C (see above) for nil consideration.
I want to know what will be the impact on the consolidated books now? Is it going to be 250? i.e. we will again reverse the provision on consolidation and in the consolidated books record impairment of receivable in PL of 100 and record a charge directly in equity of 150 (being net assets of B), since this transaction is a common control transaction.
Common control transaction
Re: Common control transaction
Hi Nauman, glad to see you back
I assume we're talking about consolidated accounts of A.
Yes I would show a charge of 250 to equity representing capital distribution to the shareholder. You will not see any impact on consolidated P&L of A
So effectively you should see the following impact on consolidated accounts when B i transferred to C:
CR external net assets of B: 250
DR equity 250
BTW, when recording the salary I would show increase in investment in separate FS of A (instead of expense)
I assume we're talking about consolidated accounts of A.
Yes I would show a charge of 250 to equity representing capital distribution to the shareholder. You will not see any impact on consolidated P&L of A
So effectively you should see the following impact on consolidated accounts when B i transferred to C:
CR external net assets of B: 250
DR equity 250
BTW, when recording the salary I would show increase in investment in separate FS of A (instead of expense)
Re: Common control transaction
Thanks Marek, good to be back.
Yes we are talking about the consolidated FS of A.
I know this is a very simple case of deconsolidation but a board member had me confused by saying that because we had already impaired the receivable balance in the stand alone financial statements of A by 100, that charge would not show up on equity in the consolidated FS of A upon deconsolidation.
The payment of salary is a recurring transaction that happens every month (numbers were only there for illustration) so cant really show an increase in investment every time.
Yes we are talking about the consolidated FS of A.
I know this is a very simple case of deconsolidation but a board member had me confused by saying that because we had already impaired the receivable balance in the stand alone financial statements of A by 100, that charge would not show up on equity in the consolidated FS of A upon deconsolidation.
The payment of salary is a recurring transaction that happens every month (numbers were only there for illustration) so cant really show an increase in investment every time.
Re: Common control transaction
Is it a common control transaction? If so does the same shareholders control both A and C? Entity C looks like an external party in the diagram
Re: Common control transaction
My bad, forgot to draw an arrow there. Yes, the ultimate shareholder owns both A and C.
Re: Common control transaction
I see, I would answer that this impairment charge never showed up in consolidated financial statements of A before, so it makes sense that it will have an impact now.
yes you can, this is often what happens when a parent grants its shares to employees of the subsidiary, i.e. parent increases the value of investment in subsid as the vesting period passesThe payment of salary is a recurring transaction that happens every month (numbers were only there for illustration) so cant really show an increase in investment every time.
Re: Common control transaction
I would record a P&L loss of 250 LC in A, thus the retained earnings will not vary.
Re: Common control transaction
Wow, been thinking about this for over a year?